Is The JOBS Act Twitter’s Key to IPO Success?

It was not too long ago—on May 18, 2012 to be exact—that the infamous “Facebook IPO Flop” occurred.  An IPO, or initial public offering, occurs when a privately held company wishes to issue shares to be traded in public markets, such as the New York Stock Exchange.  Companies generally decide to issues shares in order to raise capital so that the company can continue to grow.  Recently, news has been buzzing that Twitter, an online social media and blogging service, will follow in Facebook’s footsteps and attempt to become a publicly traded company.  In the face of Facebook’s disastrous IPO and serious investor concerns involving social media companies’ abilities to raise revenue, will a Twitter IPO be successful?  Maybe.

A huge criticism of the Facebook IPO was that there was too much media hype which lead to high investor expectations that were largely not unmet.  In late 2011, news reports valued Facebook at about 100 billion dollars, generating approximately 4 billion dollars in annual revenue.  It seemed as though all media outlets and investors were dying to learn of about Facebook’s financials.  Comments, such as the following, added to media speculation and investor’s high hopes:

“I actually believe that to the extent that there’s any bubble in technology at all it’s really a bubble around Facebook in the sense that there’s a huge amount of pent up demand amongst retail investors for access to Facebook equity.  That’’s where you’re seeing a lot of the valuations and a lot of these other IPOs that are basically leveraging off of Facebook.”

In the months leading up to its IPO, Facebook received pressure from investors to tackle mobile advertising, which at the time Facebook had little involvement.  Rumors swirled that Facebook was “overvalued” and its revenues could not continue to grow at such an accelerated rate.  Ultimately, Facebook’s stock closed at $38.23 per share, and it was not until August 2013 that Facebook’s stock rose above $38 per share.

Turning back to Twitter: Will a Twitter IPO crash and burn like Facebook’s?  If a Twitter IPO does fail, it will likely not occur in the same fashion as Facebook’s due to the “Jumpstart Our Business Startups Act” (JOBS Act).  The JOBS Act allows emerging growth companies with annual revenues totaling less than $ 1 billion dollars to keep much of its financial information under wraps for most of the IPO filing process.  Though the JOBS Act allows total secrecy in filing up to 21 days before the “road show” per Securities Act Rule 433(h)(3), Rule 135c(a) of the Securities Act does not bar Twitter from announcing its future offering at an earlier time.

How might this help Twitter?  For starters, it would allow Twitter to get a taste for investor demand before committing to an actual public offering.  It would allow Twitter to go over all of its financial records to properly value the company, and set a reasonable, conservative IPO stock price without revealing its financial information early on.  This can help combat high investor expectations and more accurately tailor investor expectations to Twitter’s actual value.  While it may not totally erase media speculation as to what Twitter’s financial standing really is, the JOBS Act at least allows Twitter to keep the information confidential, without which media speculation will hold little water.

It is important to note that there may be some drawbacks to announcing a future offering while filing confidentially.  Because Twitter announced earlier this month it had filed an S-1 with the Securities and Exchange Commission, via a Tweet of course, it is hard to see what benefit confidently filing may have.  The media is already abuzz trying to deduce Twitter’s annual revenues.  Additionally, some investors may want concrete details found in the filing so that they can better analyze the company’s financial vitals.  It could, in effect, lower Twitter’s IPO price because of the risk associated with little information.  Nevertheless, the market should adjust to the true intrinsic value of a company, so any price reduction due to speculative risk will likely be short-lived.

Perhaps the JOBS Act is overly paternalistic in trying to protect emerging growth companies from publicizing their financial data too soon before entering public capital markets; nevertheless, emerging growth companies certainly take advantage of it.  For example, Trulia, an online real estate site for homebuyers, was one of the first companies to take advantage of the confidential filing process and its stock prices has increased nearly 186% since it went public.  In the end, filing confidentially may or may not be advantageous for Twitter. Nevertheless, if Twitter takes this opportunity to look hard at its value as a company, it may help the company avoid a Facebook IPO disaster.

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