The New York Times: With a Tweet, Twitter Starts a Debate
BY JEFF SOMMER
“LISTEN, do you want to know a secret? Do you promise not to tell?"
The Beatles put those coy words on vinyl half a century ago. When the song "Do You Want to Know a Secret" went to the top of the charts, any intimate secrets it may have contained were shared with millions of people, but no one seemed to care. It was a charming love song.
Now Twitter is showing that an updated version of the old Beatles playbook can be an effective P.R. strategy, at least for a while. While the company has come under some criticism for being coy, it has managed to spread the news of its initial public offering of stock without revealing much about its plans or its finances. In the process, it has become the most prominent example of a company making use of bipartisan legislation enacted during the 2012 presidential campaign season with promises that it would spur job creation by small businesses.
"We've confidentially submitted an S-1 to the S.E.C. for a planned I.P.O.," Twitter declared publicly on Sept. 12 in a not-so-secret message sent on its own network. And it added some boilerplate: "This Tweet does not constitute an offer of any securities for sale."
The news of the paradoxically secret I.P.O. went viral.
The company has made no other public comments about the offering, although it has reportedly engaged Goldman Sachs to serve as an underwriter. Except for that one tweet, Twitter has taken advantage of the cone of silence offered by the "Jumpstart Our Business Start-ups Act," commonly known as the JOBS Act, the 2012 law that also takes innovative approaches to small-business issues other than I.P.O.'s.
The law, for example, includes provisions intended to encourage the crowdfunding of small businesses. And starting this week, it is scheduled to allow hedge funds to advertise to the general public for the first time. But regulations for many of its provisions are not yet in place. The I.P.O.'s nondisclosure provision is the most widely used part of the law so far.
It became law on April 12, 2012, in the middle of a tight presidential campaign that often revolved around the state of the economy and a glaring shortage of jobs. President Obama signed the bill with the explicit promise that it would henceforth be easier for many companies to go public. "That's a big deal because going public is a major step towards expanding and hiring more workers," Mr. Obama said during a signing ceremony in the Rose Garden. The bill would be "a game changer," he said.
"It's a big deal for investors as well," he added, "because public companies operate with greater oversight and greater transparency."
In the initial stages of going public, though, many companies have been using the JOBS Act to limit transparency. That's because the law allows what it terms emerging growth companies to file an I.P.O. without publicly disclosing details about the business. That's the provision Twitter used. It defines emerging growth companies as those with annual revenue of less than $1 billion, which is a very broad interpretation.
As of April, on the law's first anniversary, 63 percent of all companies filling I.P.O.'s during the new law's life used the confidentiality provision, according to a survey by Ernst & Young. Nearly all companies that have had I.P.O.'s in the last 30 years would have been able to use the provision, had it been in place.
From 1980 to 2012, 94 percent of American companies that have gone public had revenue of under $1 billion when they filed for I.P.O.'s, according to data compiled by Jay Ritter, a University of Florida professor who is a leading expert on initial offerings. "Under that criterion, most I.P.O. companies would be classified as 'emerging growth companies' worthy of special help," said Professor Ritter, who opposed the enactment of the JOBS Act.
THIS part of the legislation was intended to protect tender entrepreneurial firms from prying eyes that might deter them from going public and growing to maturity, said Kate Mitchell, a former chairwoman of the private I.P.O. Task Force, which played a role in the formulation of the legislation. She is also a former chairwoman of the National Venture Capital Association, which lobbied heavily for the measure. "For better and for worse, I helped draft that bill," she said in an interview.
Under the nondisclosure provision, the financial secrets must eventually be revealed. Companies that offer shares to the public must make an open I.P.O. filing to the Securities and Exchange Commission - typically, 21 days before they begin a public-relations campaign to drum up support for their impending offering - that will be visible to all investors before they buy shares. Ms. Mitchell said the law was intended to help small, struggling companies expand and have an easier "on-ramp" to an offering.
At $1 billion, the revenue limit was set relatively high, she acknowledged. "We did that because we wanted I.P.O.'s to succeed," she said. Had the limit been lower, she said, "it might have given smaller companies an incentive to rush to take advantage of it too soon, before their revenues had grown and, maybe, without a business plan that worked."
It's not surprising that most companies would use the provision, she said, because it gives them several advantages: they can begin the initial offering process without tipping their competitors to their entire strategy; they have the ability to discuss issues that may crop up with the S.E.C. privately and straighten them out without damaging publicity; and they can quietly decide not to go ahead with an offering if they test the waters and find them not to their liking. Of course, in Twitter's case, backing out now would not be a secret, but it was the company's choice to speak publicly.
"Doing what Twitter has done - opting not to disclose the details of its I.P.O. and then announcing that they're doing it - is obviously silly," said Linda R. Killian, manager of the Global IPO fund of Renaissance Capital in Greenwich, Conn. "And it's not clear that a company as big as Twitter needs that kind of protection."
Because Twitter has yet to disclose its revenue publicly, we don't know how big it really is. Its revenue this year has been unofficially estimated as nearly $600 million, growing to $950 million next year, which is close to the $1 billion limit.
Institutional investors - large asset managers of all kinds - have made it clear that they may not favor initial offerings from companies that use some of the other provisions of the JOBS Act, Ms. Killian said. Her firm performs investment research for institutional investors.
Qualifying companies, for instance, are now permitted to provide only two years of audited financial data, instead of three, but very few recent I.P.O.'s have taken that route, she said. They are also permitted to delay producing an audited opinion on the quality of their financial controls. "For a sizable company like Twitter, the market just won't accept it," she said. "We want more information, not less."
And Ed Ketz, an accounting professor at Pennsylvania State University, said: "Given all the fuss we made about Enron and other firms with all their shenanigans in the early 2000s, and after passing Sarbanes-Oxley to control some of it, it seems curious to be repealing these things. I think it's a very bad step."
The I.P.O. market is enjoying something of a boom at the moment, but Ms. Killian says it has little to do with the JOBS Act. "The I.P.O. market always is stronger when the overall stock market is stronger and when volatility is low."
Renaissance Capital statistics show that there have been 137 I.P.O. pricings so far this year, with a total return of 36 percent through Thursday, compared with 20.8 percent for the Standard & Poor's 500-stock index. Two hundred I.P.O.'s are likely to come to market this year, the firm estimates, a number last reached in 2007.
The poor initial performance of Facebook's offering in May 2012, which plunged from its first-day price of $38 to a low of $17.73 that September, has often been blamed for a weakening of the I.P.O. market last year.
"Facebook didn't help, but fundamentally it was the overall stock market, all the crises it's had," Ms. Killian said. "That's what moves the I.P.O. market." Facebook rose to a new high last week, along with the overall stock market.
Ms. Mitchell generally agreed with this analysis but said the JOBS Act may well help some deserving companies anyway. "If the market is strong and the I.P.O. window is open and companies can use it, that's wonderful," she said. "But it's good that the JOBS Act is there to help if needed."
It's possible that the JOBS Act will bolster employment in the United States, once its various provisions are in effect, but it's unlikely to have the outsize effect that was originally suggested by some of its advocates. The Venture Capital Association and the I.P.O. Task Force have both said repeatedly, for example, that about 90 percent of the job creation by companies that go public occurs after their I.P.O.'s, which, thus, play an extraordinarily important role in job creation.
There is a problem with that number, however. Mark Lauritano, a vice president at IHS Global Insight, said that 92 percent figure was based on an IHS study of a small subset of the I.P.O. universe - the 1970 to 2005 performance of the 200 largest surviving publicly traded companies financed by venture capital firms. "It's a small sample, and there's survivorship bias," he said, meaning it didn't take into account the dismal job creation records of hundreds of I.P.O.'s whose companies no longer exist. "It's not an overall estimate."
By contrast, a May 2012 Kauffman Foundation study of all initial offerings from June 1996 through December 2010 found that 45 percent of job creation by those firms happened after their I.P.O.'s. Martin Kenney, professor of human and community development at the University of California, Davis, was one of the authors of that study. In an interview, he said his research had confirmed that I.P.O.'s were important, "but they're not as important as some people might lead you to believe."
Ms. Mitchell said in an interview that she had used higher estimates without conducting research of her own, and she conceded that they may be flawed. "The overall argument doesn't change," however, she said. "I.P.O.'s are important for job creation. And I'm glad we've got the JOBS Act to help spur it on."
Twitter, with an estimated 2,000 employees, remains the most intriguing example of the JOBS Act's contribution to job creation, and it has received some harsh criticism. "It is contrary to the spirit of the JOBS Act, which after all is really all about jobs," said Jeff Corbin, chief executive of KCSA Strategic Communications. "Twitter's done nothing technically wrong, but they're not really a small emerging-growth company. They're big. They're successful. They don't need this to go ahead with an I.P.O. Yet they're not giving us the information that investors need to understand their business."
That revelation will presumably come several weeks before Twitter decides to start formally promoting a public offering, assuming it eventually does.
"Twitter's gotten a lot of publicity," Mr. Corbin said. "but I'm not sure that all of it is good."
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