In light of its growing popularity as a social media tool with more than 200 million active users, [i]Twitter announced in September of 2013 that it was ready to launch an Initial Public Offering (IPO). Twitter, which has never turned a profit in its seven years in existence, had originally set a price range of $17 to $20 per share for the IPO.[ii] Despite these earlier projections, Twitter announced in a tweet on November 6, 2013 that it priced its stock at $26 per share due to high initial demand for its IPO. [iii]
Twitter’s stock market debut is also “likely to be scrutinized [from the beginning] since Facebook went public in May 2012 and promptly flopped.” [iv] Given this enhanced level of investor interest, Twitter decided it would avail itself of the fast track IPO process which is part of the Jumpstart Our Business Startups Act (JOBS Act). Intended to address a decade of declining IPO activity, the JOBS Act is designed to facilitate IPO activity among “emerging” businesses by easing various securities regulations.[v] The JOBS Act permits emerging companies to fast track their IPOs by confidentially testing the market with institutional investors, initiating the registration process and receiving SEC comments before filing a public preliminary registration statement on Form S-1.[vi] Therefore, the main benefit a company derives from the JOBS Act is the ability to do a quiet filing of the filed registration statement with the SEC, which is viewable by the public for only 21 days prior to the launching of the IPO.[vii] Although capitalizing on the JOBS Act privacy protections may seem like the best approach for Twitter, given the backlash Facebook received for its inaccurate reporting to the SEC prior to launching its IPO, Facebook’s experience should serve as a cautionary tale for Twitter.
BACKGROUND: THE FACEBOOK PROBLEM
Investor confidence in the IPO process has been substantially eroded as a result of allegations by investors regarding certain non-disclosures made by Facebook in the course of implementing its IPO in 2012. In the consolidated class action complaint In Re Facebook, Inc., IPO Securities, and Derivative Litigation, Facebook investors allege: (1) Facebook incorrectly reported its revenue prospects from increased mobile usage to the SEC, inflating these figures, and (2) Facebook initially disclosed this negative information privately to a “select group of potential investors.”[viii] “Many [high powered] investors that received this non-public information about Facebook’s dimming revenue prospects cancelled their orders or slashed the number of shares they intended to buy, dropped the price they were willing to pay, or sold their shares immediately after the IPO.”[ix] When the media reported on this asymmetrical information sharing investors were furious, causing Facebook’s stock price to plummet.[x]
The JOBS Act was passed last year with bipartisan support.[xi] The purpose of this Act was to loosen a number of federal securities regulations in order to encourage start-up companies to enter the stock market. The problem being that through this fast-track IPO process confidential information is made available to the affiliates, insiders and underwriters but is not made part of a formal pre-registration statement to the SEC until three weeks prior to an IPO’s launch. This undercuts the pre-registration process designed to level the playing field among investors.[xii]
Furthermore, although the JOBS Act was intended to facilitate investment in small start-up companies, established companies have also benefited from the Act’s privacy standards. Emerging middle-sized to large social media companies in particular qualify under the Act because despite their high market evaluations, their advertising revenue falls below the $1 Billion threshold specified in the Act.[xiii] The intended purpose of the Act was to make the initial steps necessary to launch an IPO easier for small businesses, thereby propelling business creation and job growth.[xiv] Instead, the Act has benefited established businesses and simultaneously curtailed the SEC’s primary goal to “get corporations to provide full and complete information about what they are doing.” [xv]
The JOBS Act, as applied to social media companies with high valuations, such as Twitter, will only serve to compound the transparency problems raised by investors in their complaints against Facebook. There are multiple reasons why Twitter opted for the “secret” IPO, such as avoiding the close investor scrutiny that foreshadowed Facebook’s disastrous IPO, hiding financial details from its rivals such as Facebook and LinkedIn for a longer period, and avoiding an outside audit and submitting less financial statements than the customary amount.[xvi] However, in light of Facebook’s mistakes, Twitter’s best reporting strategy to generate a successful IPO would be to make sure it reports accurate future earnings potential, its share price correctly reflects this projected earnings potential, and this information is disclosed to the public in a transparent manner. Opting out of the JOBS Act protections would be consistent with this upfront, honest approach. On its first day of trading, Twitter closed at $44.90 a share, 73 percent above its IPO price.[xvii] Only time will tell whether Twitter’s “secret” IPO will suffer the same, disastrous fate as Facebook’s IPO.
[i] Peter Eavis, With Facebook’s Tumultuous I.P.O. in Mind, Twitter Tries to Value Its Shares, The New York Times, Sep. 13, 2013, http://dealbook.nytimes.com/2013/09/13/with-facebooks-tumultuous-i-p-o-in-mind-twitter-tries-to-value-its-shares/?_r=0
[ii]Richard Drew, Twitter Prices Shares at $26 for IPO, NBC News Business, Nov. 7, 2013, http://www.nbcnews.com/business/twitter-ipo-could-be-priced-higher-sources-8C11544386
iv Four Lessons Twitter Learns from Facebook’s IPO Mistakes, The Times of India, Sep. 14,2013, http://articles.timesofindia.indiatimes.com/2013-09-14/social-media/42061860_1_ipo-documents-sam-hamadeh-privco
v Zachary M. Seward,Will Twitter File a Secret IPO?, Quartz, Feb. 19, 2013, http://qz.com/55044/will-twitter-file-a-secret-ipo/
[viii]Complaint at 114, In Re Facebook, Inc., IPO Securities, and Derivative Litigation, 922 F.Supp.2d 445 (S.D.N.Y. 2013) (No. 12-2389).
[xi]Sarah N. Lynch, Twitters ‘Secret’ IPO Puts Investors In the Dark, For Now, Reuters, Sept. 15, 2013, http://www.reuters.com/article/2013/09/13/us-twitter-ipo-jobsact-idUSBRE98C11020130913
[xiv]Sarah N. Lynch, supra note xi.
[xvii]Twitter Stock to Begin Trading Thursday; Price Set at $26 per Share, The Times Picayune, Nov. 7, 2013, http://www.nola.com/business/index.ssf/2013/11/twitter_stock_to_begin_trading.html