Is Twitter’s “Secret IPO” a Loss for Investors?

“The open exchange of information can have a positive global impact,” Twitter declared on its blog back in 2011. “This is both a practical and ethical belief.” So, it seems somewhat ironic for an organization that has repeatedly espoused the value of transparency to then delay the release of financial information related to its IPO filing.

Following Twitter’s announcement of its IPO plans on Thursday, news quickly broke that the social media giant was taking advantage a controversial provision of the JOBS Act that allows companies with less than $1 billion in annual revenue to keep its early IPO filings confidential.

Although the JOBS Act — passed in March 2012 with strong bipartisan support — was aimed at boosting U.S. small-business growth by easing securities regulations, the economy doesn’t appear the biggest winner. Arguably, so-called “secret IPOs” have gotten the greatest boost. As early as May 2012, according the Wall Street Journal, the number of companies making confidential IPO filings was outpacing those submitting public filings.

And, as Mark Rogowsky writes in Forbes of the Twitter’s secret IPO, the losers are investors:

“… there’s an unfortunate downside to all this, which is that during the ‘dark period,’ only a select few see what’s going on. That’s great for the small number of institutional investors the company ends up talking to. The rules permit this through a ‘test the waters’ permission. Ostensibly, a company can’t so much market its stock as see what the appetite for it might be. But lessons from the Facebook IPO — and countless others — remind us that what goes on in those closed-door meetings often differs materially from what the public is privy to. And the Groupon IPO was a great object lesson in how the back-and-forth between the SEC and the company can be the kind of stuff investors very much ought to see: discussions of how revenue is recognized and unique accounting metrics matter a great deal.”

For its part, CFA Institute has actively argued — including in a comment letter to the SEC — that the JOBS Act removed many of the company disclosures and requirements that were implemented to protect investors after the bursting of the tech/telecom bubble a decade ago. We asked the SEC to require more prominent and broad disclosures within the body of the offering statements and interim financial statements for companies covered by the JOBS Act. Such warnings should alert investors to the potential risks relevant to an offering of this type.

As we now await proposed rules for the controversial crowdfunding provisions of the JOBS Act — which will allow companies to sell up to $1 million in equity a year to ordinary investors without having to register with SEC — we want to ensure that any efforts to expand the availability of capital to small and emerging companies also balances the need to safeguard investors.

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