Why Twitter’s Confidential S-1 Filing Is A Good Thing

Did you know Twitter is going public? Of course you did – it’s all the mainstream media could seem to write about last week after the now infamous twitter tweet about it.

After all the speculation about valuation, who owns what, what it’ll price at, how much money will be made, is Twitter growing or shrinking, what is a tweet after all, will their stock symbol be TWIT?, and all the other nonsense that seemed to consume the business press, I noticed a perplexing thread from some people expressing how indignant they are they Twitter is going public in secret.

I watched it play out and tried to understand what people were reacting to. Eventually, I realized it was two things. The first is a misinterpretation of the JOBS Act and what a confidential S-1 filing actually is. Somehow there was the view that there wouldn’t be the normal public disclosure prior to Twitter going public, which is just incorrect. The second was some weird reaction to Twitter suddenly being “secretive” and a view that this was in fundamental philosophical conflict with what Twitter is.

After four days of chatter about this, Dan Primack wrote the first definitive article I saw that made sense of all of this titled Twitter’s IPO will not be done in secret. As is typically the case, Dan wrote a super clear and fact based article about what was going on with the confidential filing, how it would work, and why – in Dan’s words – “Twitter’s decision to file confidentially is neither bad nor good. It’s largely irrelevant.”

I won’t repeat Dan’s awesome article – go read it if this topic interests you.

Having been involved in numerous IPOs, I can tell you that the JOBS Act confidential filing process is a great thing and improves the overall process of taking a company public. Anyone who has been through taking a company public knows that there are numerous steps between the first S-1 filing with the SEC and the final filling where the SEC says “ok – you are ready to go public now.” This process is almost never smooth, is unpredictable in terms of timing, and often ends up being an bizarre and byzantine interactions between the SEC, accountants, lawyers, investment bankers, and management team members who scratch their heads and realize that the process isn’t really making anything any clearer, it’s just racking up massive fees for the lawyers and accountants.

The end result is a fully vetted S-1 filing. When a company has this cleared by the SEC, it is ready to go public. Prior to the JOBS Act, you made your first filing before any feedback from the SEC and then spent the next three to six months wrestling with the SEC – on their time frame and their rules – to get the filing finalized. If you didn’t time it right, you’d have to do new financial disclosure. If the SEC was slow because they had a backlog, it would take longer. If the SEC didn’t agree with your auditors on revenue recognition, you’d end up in a crazy escalating set of discussions. And – each amendment to the S-1 (basically a new filing) was done in public, so everyone – including your competitors – got to see everything that was going on. And dissect it. And criticize it. And analyze it. And act on it. And say anything they wanted about it.

During this time, you were in a “quiet period” so you couldn’t say anything in response. Your competitors attack you based on data in your S-1 filing through a plant in an article in the WSJ – nope, you can’t say anything. The NY Times writes a long article and misinterprets a bunch of the data – nope – silence. A blogger tears you apart for something buried on p.123 of the S-1 which ends up getting changed in a future filing anyway – nope silence.

Or worse – for some reason the IPO window closes and you don’t go public. You withdraw your filing. But the public data is still out there for everyone – especially your competitors and customers to see. Oops.

Under the new rules you do all of this work to get to a final filing in confidence. You make it public three weeks before you go on the roadshow. You make all the documents public, but the only one that really matters is the final one. The sausage got made in private and now you are ready to go public. All the expected articles come out. Everyone dissects all the data. But you are ready for this since you are now ready to go public.

I’m glad Twitter used the new confidential filing process. We’ve already used it for companies in our portfolio, and will continue to. In a few years, the process of taking a new company public will be much cleaner as a result. And while there will always be a huge amount of noise around the process, especially for high profile companies like Twitter, at least there will be a clearly defined timeframe for all the pre-IPO noise.

  • David

    The “sausage making” isn’t really private… post IPO, all correspondence with the SEC is published via EDGAR filings. Frankly it makes for interesting reading that I think few people outside of lawyers are aware exists. The correspondence is private *during* the process, but not after. That’s a small but important nuance and it would be a mistake for people to assume this stuff is private, at least permanently.

    • http://www.feld.com bfeld

      I think I made that point in the post.

      “You make all the documents public, but the only one that really matters is the final one. “

  • http://startuplawblog.com/joewallin Joe Wallin

    Great post. Yeah, it struck me the other day how incongruous the SEC’s proposed Reg D/Form D rules were with the JOBS Act thinking about this process. Congress did a great thing in the JOBS Act allowing companies to file S-1s confidentially. But then the SEC turns around and for small startups says they are going to have to file public Advance Forms D before raising any money.

    • http://www.feld.com bfeld

      We’ll presumably see what the “final final” rules are next week. I hope the SEC backs of the insanity in the proposed rules.

      • http://startuplawblog.com/joewallin Joe Wallin

        Brad, have you heard that the SEC will take action on the proposed rules next week? I was sort of thinking that after the comment period closed that they would then have to consider all of the the comment, then either note a meeting to adopt the rules in final form, or perhaps re-issue the regs in proposed form again for further comment, and that this process might take a few months.

        Would love to hear what you have heard, if anything. Thanks!

        • http://www.feld.com bfeld

          I don’t really know. I keep hearing that next week is a big deal but we will see.

          • http://startuplawblog.com/joewallin Joe Wallin

            Alright. We will see!

  • http://www.startupmanagement.org/ William Mougayar

    That makes a lot of sense. Dick Costolo is doing a great job managing Twitter’s evolution.

  • EquityZen

    I always recommend that investors/startups look into SEC filings for newly debuted public startups, it offers a fantastic glimpse into the business and operations of VC-backed companies. You can even get info on non-public startups that have opted to file their financials publicly (like LendingClub). Wish more people knew about it.

  • mlstotts

    Yes, Twitter availing itself of JOBS Act is a good thing. But its an application to IPO, not a filing. If approved by the SEC, it becomes a public filing.

  • BB

    Can you still raise capital through a Private Placement Memorandum when a confidential S-1 is filed?

    • http://www.feld.com bfeld

      I don’t know. But I expect you can – all you would need to do is amend the S-1. But check with your securities counsel.