Recently, Snapchat’s parent company, Snap Inc., made news with an announcement that it had confidentially filed for an initial public offering (IPO). As expected, news about the company’s potential on the public markets has caused lots of chatter from a wide-ranging audience, including investors, financial analysts, entrepreneurs, business leaders and consumers – but it also put the spotlight back on the popularity of confidential IPO filings.
Almost immediately after being signed into law in 2012, this new option for “emerging growth” companies (with less than one billion dollars in revenue) to privately file papers with the Securities and Exchange Commission (SEC) under the U.S. JOBS Act became a popular path of private companies pursuing an IPO.
As the moniker suggests, a confidential filing lets a company privately file a Form S-1 registration statement for an IPO with the SEC for review, delaying the public filing until much closer to the actual IPO date. This period of secrecy enables a company to withhold sensitive information from competitors, customers, and employees until much further down the road; in some cases, it even gives the option to withdraw a registrations statement without alerting the public.
With the option of a confidential IPO filing being back in the news cycle, it’s worthwhile to examine the benefits of this approach and why so many tech companies are embracing the power that comes with being clandestine.
When considering the benefits of going the confidential route, optionality is the important word to remember. Opting to file confidentially – and under the radar – enables a company to choose to go public at a time when both the company is ready and the market is most supportive. Since there is no public knowledge of the filing, there will be no questions asked, no media or investor scrutiny, and no rush to commit to a date. Prior to the JOBS Act, the moment a company filed for an IPO, the company’s complete registration statement (which includes financial history, details on the company’s operations, and strategy, as well as business and financial risk disclosures) was available to the public – and the clock started ticking.
This flexibility is important, because choosing the best date for a company to IPO is like choosing a date for your outdoor wedding in two years, with no option for a tent. Sure, you can make an informed decision based on geography and time of year, but ultimately it is an impossible assignment to truly predict what the weather will be like.
The option to file confidentially allows you to either move the date, or get a tent. For example, during Everbridge’s confidential IPO process, we moved from the original date that we selected, to a later date of September 2016 because the market appeared to be more receptive during this later timeframe. There was optionality available to us that would have been more limited and potentially sent mixed messages to the Street had we chose the standard IPO route.
For a company that publicly files for an IPO, pushing back the date can cause a lot of detrimental speculation. Is something wrong with the company, its product, or its financials? Those are the types of whispers that might form – and follow a company around – if a company remains in public IPO limbo.
Keeping with wedding analogies, it’s similar to the period of time a couple is engaged. If a couple dated for five years, got engaged, then stayed engaged for another five to 10 years, people would question if their intention to marry was genuine.
However, if that couple had not announced to the world that they were engaged and had waited to tell everyone of their engagement closer to their wedding date, no one would have questioned their long engagement. That’s the beauty of filing under the radar – it buys you time to be better prepared for the event.
At this point, it is almost the exception rather than the rule when a business decides not to file confidentially under the JOBS Act. One alternative is that some companies issue a press release to announce the confidential filing – which may seem counterintuitive, except for the fact that by doing so, the company generates buzz that can benefit recruiting and can even attract the attention of potential investors or acquirers, without having to share their complete financial history as they would in a public registration statement. The downside to this strategy is that, similar to a public IPO filing, once the news is out, the clock starts. With a confidential filing and no accompanying press release, you have the power to control timing and public perception all at once.
It’s clear that confidential IPOs are incredibly popular among the technology industry because technology companies are highly astute and tend to make bigger bets. Confidentiality presents optionality, which is critical when making a big bet. For our company, Everbridge, this route made the most sense and we remain pleased that we decided to enter the public markets in this fashion.
Time will tell if Snapchat will have the same reaction after it ultimatelycompletes its IPO.
Kenneth Goldman is Senior Vice President and CFO at Everbridge.