In just a one month span between December 2017 and January 2018, two late-stage unicorns (privately held companies that have a valuation of over $1 billion) have submitted confidential registration filings with the SEC: Spotify and Dropbox. Others are expected to follow soon. And it’s recent changes to the 2012 Jumpstart Our Business Startups Act (JOBS Act) that could be one reason for these moves.
The federal government enacted the JOBS Act to encourage small business and startup funding by easing regulations and allowing a larger base of individuals to become investors. The JOBS Act also made initial public offerings (IPOs) easier for smaller companies, in part by allowing early correspondence between companies and the SEC to be done in private, avoiding public scrutiny by the media and competitors. This past July, the SEC changed that rule to allow all companies, not just small businesses, to file early regulatory documents confidentially. The plan was to encourage later-stage companies to file for public offerings, and it may well be working.
In late 2017, Spotify, the world’s largest paid music-streaming service with over 60 million paying subscribers filed plans for a direct listing on the New York Stock Exchange (NYSE). A direct listing essentially allows private stakeholders to trade their shares on a public exchange (such as the NYSE). This option avoids costly expenses such as underwriting fees while also eliminating dilution to current equity holders and allowing executives to sell their shares immediately rather than being subject to the typical lock-up provisions provided for in IPOs. Valued at $15 billion, Spotify is the largest company to attempt a direct listing, but it is not the first tech giant to attempt a unique entry into the market (See Google’s Dutch-auction IPO in 2004).
In addition to Spotify’s late 2017 announcement, reports show that cloud-computing storage giant Dropbox confidentially filed for a 2018 IPO just a few days ago. Dropbox has raised billions of dollars in venture funding throughout its time as a private company and is expected to list at a valuation of $10 billion.
Other tech giants are expected to join Spotify and Dropbox soon. In 2017, AirBnB reported that it will be ready to file for an IPO in 2018 (but is not certain it will actually file), and Uber’s CEO Dara Khosrowshahi confirmed the company’s “target” is to go public in 2019, departing from the vision of his predecessor, Uber cofounder Travis Kalanick, who put off an IPO as long as possible. Many founders over the past decade have had similar mindsets to Kalanick, which is proven by a downward trend in annual public offerings. This leads to the question, why are all of these tech companies seeking to enter the public market now?
Though it is certainly not only because of the JOBS Act and amendments thereto, those changes in the law have played a role. SEC Chairman Jay Clayton has emphasized that “[the SEC is] striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.” While the SEC’s next steps are unclear, it is likely we will continue to see additional rules and rule amendments in the realm of securities law to encourage more companies, and particularly technology giants like Spotify and Dropbox, to file public offerings.
Ernest D. Holtzheimer is an attorney at law firm Montgomery McCracken in the Philadelphia office. He provides transactional and business advisory services to clients, including individuals, mid-sized and emerging companies, multinational corporations, and investors on a wide variety of matters. He is a frequent contributor to the firm’s corporate blog and has written for Technical.ly Philly.
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