Twitter’s profits, revenue and executive salaries—all closely guarded secrets—will be exposed to the world as part of its planned initial public offering. But you’ll have to wait for those details.
Twitter, which announced its IPO filing on Thursday, is taking advantage of an 18 month-old law that lets certain companies conceal their financial information during much of IPO process. It is a big departure from recent history, when businesses had to reveal their secrets from the get-go.
The change, ushered in last year by the JOBS Act, has proven to be immensely popular. Nearly 250 companies have filed for IPOs in confidentiality including online real estate site Trulia, the Manchester United soccer team and textbook rental service Chegg.
But Twitter, the online messaging superstar, is the most prominent company yet to make a confidential IPO filing—even if it did so in an unorthodox fashion. It announced the filing in a tweet, undermining some of the potential secrecy and setting off a media frenzy.
Only “emerging growth companies”—those with less than $1 billion in annual revenue—qualify under the law. The threshold is so high, however, that around 90% of all IPO filers are eligible, according to PriceWaterhouseCoopers. Many companies don’t even fit the image of young fast-growing innovators. Some like MGM Holdings, the Hollywood studio, which ultimately delayed its IPO, are the oldest of the old school.
Whatever the case, companies submit their initial paperwork in confidentiality—sometimes hundreds of pages—to the Securities and Exchange Commission for review. The entire process typically takes several months.
The ultimate goal is encourage more IPOs by small companies and to thereby lift employment. Secrecy is supposed to be a big inducement. Executives can gauge investor appetite for an IPO without risk of embarrassment if they decide to abandon their plan. Concealing filings also helps to protect trade secrets. Rivals get access to sensitive information much later in the process.
The JOBS Act also eases accounting requirements for IPOs to help cut costs and reduce the complexity. Eligible companies can provide two years of financial data in their filings instead of the usual three, for example, although some have chosen to stick with tradition for fear of raising investor suspicion.
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Bill Gurley, a venture capitalist with Benchmark Capital, an early investor in Twitter, praised the JOBS Act for taking some of the anxiety out of the IPO process. He declined to speak specifically about Twitter. But in general, he said that making initial IPO filings public can unnecessarily “tar” a company if regulators ask for changes. Gurley pointed to Groupon, the online coupon site, which suffered a black eye when regulators asked that it remove accounting from its IPO prospectus that showed its business as being stronger than in reality. “There’s always going to be editing,” Gurley said. “But this way, it’s done behind the scenes and what the public sees is a more mature final document.”
Most companies eligible for filing confidentially ultimately decide to do so. In the second quarter this year, 82% of qualifying companies that carried out an IPO had initially filed in secret. The secrecy isn’t indefinite, however. Companies must make their filing public at least 21 day before regulators can declare it effective and executives can kick off the usual investor road show.
Whether three weeks is enough time for potential investors to pour over financial details is subject to debate. Critics have said the law increases the likelihood of investors making bad decisions or being fleeced because they have too little time to evaluate a company’s weaknesses. Bob Ackerman, founder of the venture capital firm, Allegis Capital, disagreed. “By and large, the investors you’re talking to are very sophisticated and three weeks is more than enough time to go through the numbers,” he said. “If it’s not, don’t buy. Nobody is forcing anyone to buy a stock.”
Both he and Gurley said that they’d support lengthening the amount of time filings are public from the current 21 days, if need be. For now though, it’s too early to say whether more time is necessary, they agreed.
If anything, speculation about Twitter’s financial performance has increased in the wake of the company’s IPO filing. Many analysts are trying to fill in the blanks. For example, Twitter’s revenue is expected to more than double this year to $582.2 million, according to eMarketer. By filing confidentially, Twitter at least confirms one financial detail, if only vaguely: Its annual revenue is less than $1 billion.