Twitter's use of a new type of confidential filing to test the IPO waters makes clear how changes to U.S. securities laws have given companies more control of their initial stock sale -- yet have also resulted in less transparency for retail investors.
The decision to use its own service to announce it filed the secret registration document -- but not disclose its financials -- is also a bit ironic, given that Twitter's technology has the potential to provide greater transparency on public companies.
The confidential filing does nothing for investors except to stoke the IPO hype machine, even as it accomplishes two key things for Twitter.
First, it allows executives of the San Francisco-based company to begin talking to big-money investors about its potential stock sale.
Second, Twitter can get feedback from securities regulators regarding how it reports revenue and expenses outside the media spotlight that typically falls on high-profile tech IPOs.
This can spare the company some embarrassment -- and help it maintain credibility with investors -- if those regulators should find problems with Twitter's accounting. Many initial IPO filings made by upstart tech firms contain such errors.
For example, Groupon was forced to amend its S-1 filing three times in the run-up to its IPO, executed in November 2011, after the Securities and Exchange Commission rejected the way it accounted for revenue.
If changes to the IPO process enacted as part of the 2012 Jumpstart Our Business Startups (JOBS) Act had been in place then, investors would not have known the company's top executives were including the payments that Groupon makes to merchants in the company's revenue figures. That was key information, because it showed that the company's business wasn't as large as many had believed during the time when Groupon's shares were being bid up in private markets, before its IPO.
Even with the revisions to revenue, the Groupon offering was a disaster for IPO investors, who watched the stock surge more than 40% on its first trading day -- then lose 80% of its value during its first year of public trading.
Other mistakes by high-profile tech firms have been less weighty, yet have still delayed the IPO process.
In early 2004, regulators at the SEC required Salesforce .com to change how it accounted for commissions paid to its sales staff, before they would let the software company's initial stock offering proceed. (continued...)
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