Legal Perspective: Twitter IPO…Bull Market or Just “Bull”?
In case you were living under a rock or simply ignore financial news, you might have heard that Twitter made its long-awaited and much hyped debut on the New York Stock Exchange (NYSE) last Thursday. The micro-blogging company responsible for introducing the “#hashtag” phenomena to the English lexicon and creating the dreaded celebrity Tweeting wars raised over $1.6 billion USD over one trading day as its shares jumped from its initial offering price of $26 per share to nearly $50 per share at its intraday highs, finally settling at $44.90 per share at the closing bell. The phenomenal performance of the Twitter IPO recalled the heady days of the dotcom bubble of the late 1990s and almost made weary investors forget about Facebook’s faulty IPO last year.
The undeniable truth is that IPOs or Initial Public Offerings are back in a big way. Years after the market has battled through depressed stock prices and financial crises, we can safely declare that investors have become bullish once again and are on the hunt for the next big thing. According to Renaissance Capital, some 230 companies will go public this year – making it the busiest year for IPOs since 2000 and this phenomena, is certain to continue. As we’ve recently reported the JOBS Act, passed in 2010, has not only made it easier for private companies to go public but has also cleared the way for investors, including friends and family, to get in on the train earlier.
This surprising nod and shift towards laissez-faire economics is even more striking in the face of the implementation of stronger regulatory schemes such as the Dodd-Frank Act, the Consumer Financial Protection Bureau, and the Justice Department’s recent prosecution of major banking and trading institutions such as JP Morgan and SAC Capital. Additionally, it also follows a recent turbulent period in the markets marked by the financial crash of 2008 and recent scandals such as the manipulation of LIBOR interest rates and the dissolution of MF Global. The question then is what is at the root of this thriving IPO market and will it sustain?
In a legal context, there is no denying that the JOBS Act marks a change in laws designed to ease the process of start-up companies to raise capital and go public. One major change is that companies are now able to file their plans to go public confidentially. Prior to the JOBS Act, firms looking to file were required to comply with mandatory disclosures that could make or break their IPO. With confidential filing, companies are now afforded more control over the timing of their announcement and they are free to withdraw the offering without alerting investors.
This recent IPO revival is clearly what the JOBS Act was designed to do. The legislation provided for “emerging growth” companies (firms with annual gross revenues of less than $1 billion) reduced regulatory and reporting requirements under the Securities Act and the Exchange Act. The law also increased oversight and transparency and relaxed the rules to boost crowdfunding of start-ups.
The good news is that hiring typically follows companies as they go public. According to one study by the Kaufman Foundation, emerging growth-sized issuers grew employment by 135 percent in the five years following their IPO, which is the length of the IPO “On-Ramp” in the new law. Remarkably, they found that 92 percent of a company’s total job growth occurs after its IPO.
If the report is to be believed, the equation follows that more successful IPOs leads to more jobs and hence a better and more vibrant economy. This is certainly positive news for the struggling US economy (or at least those enjoying the frothy bubble of this latest recovery), but it also leads one to consider whether the recent IPO craze could simply be another scheme to benefit deep pocketed underwriters such as Goldman Sachs and Morgan Stanley at the expense of the typical retail investor. First, the strict IPO rules in place before the JOBS Act were designed to limit get-rich-quick schemes and to protect mom and pop investors who did not have sufficient information or resources to jump on the IPO train as easily as venture capital firms and investment banks. Secondly, the major beneficiary of these IPOs tend to be “Select Clients” of the big firms (who subsequently collect fat commission checks) underwriting these IPOs who have first dibs at the table and who can more easily take advantage of the IPO at the opening stock price and sell their shares once the stock hits a record high. In a sense these IPOs simply become a vehicle to maximize profits for those who can get to the party first–and those who are likely, already in control of throwing the party to begin with. An additional problem is the likelihood that the mania for these IPOs will not be driven by sound economic principles but rather by hype and access to media (see the recent share prices of Groupon and Zynga, which had well publicized offerings but whose shares are still well below their opening highs). This point is particularly relevant because Twitter has yet to even make a profit and would have to expand its revenue exponentially by 2016 to even justify its low opening price. In a more opaque comparison, Twitter is currently valued higher than twice the stock price for a share of Ford Motors and traded seven dollars higher than Coca-Cola (and this is all on a promise of future performance!).
Nonetheless, the new age of IPOs is here to stay thanks to the JOBS Act and a slowly reviving economy. This new age brings with it a burst of activity and Champagne dreams as Wall Street chases new opportunities and more investors enter the market in diverse and growing industries such as IT, biotech, renewable energy, fracking, and global entertainment. Whether the party will go on and will be open to everyone is anyone’s guess. But nonetheless, as Twitter’s recent IPO confirms, in this new age of blockbuster IPOs, it’s time to go big or go home.