Omaha.com: Twitter Raises Debate Over IPO Secrecy

Although Twitter 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 SEC for a planned IPO," Twitter said Sept. 12 in a message sent on its own network.

The news of the paradoxically secret IPO 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 law also 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 the IPO nondisclosure provision is the most widely used part of the law so far.

It became law April 12, 2012, in the middle of a tight presidential campaign. President Barack 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," Obama said during a signing ceremony in the Rose Garden.

"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 IPO 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.

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 IPO Task Force, which played a role in the formulation of the legislation.

Under the nondisclosure provision, the financial secrets must eventually be revealed. Companies that offer shares to the public must make an open IPO 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. 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 IPOs 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."

The provision gives them several advantages, she said: They can begin the initial offering process without tipping their competitors to their entire strategy; they can discuss issues that may crop up with the SEC 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. In Twitter's case, backing out now would not be a secret, but it was the company's choice to speak publicly.

"It's not clear that a company as big as Twitter needs that kind of protection," said Linda R. Killian, manager of the Global IPO fund Renaissance Capital in Greenwich, Conn.

Twitter's revenue this year has been estimated as nearly $600 million, growing to $950 million next year, close to the $1 billion limit.

With an estimated 2,000 employees, Twitter 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 IPO. Yet they're not giving us the information that investors need to understand their business."

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