In the last four months, the average number of monthly filings fell 41% compared to the first quarter of 2012. Compared to a year ago, average monthly filings are off 70%. What’s more, the backlog of deals – the “IPO pipeline” – is shrinking. It’s down to about 150 companies from 200 at the start of the year.
Forget an IPO freeze. What we’re witnessing is the impact of new legislation. Specifically, the Jumpstart Our Business Startups (JOBS) Act signed into law on April 5. Among its many components is a provision that allows “emerging growth companies” – start-ups with less than $1 billion in annual revenue – to file secret S-1 forms with the SEC.
The IPO prospectuses are eventually made public, of course. But not until 21 days before the company begins its IPO roadshow, compared to the traditional 90 to 180 days. So the provision is creating the possibility for a “shadow inventory” of IPOs. And that’s precisely what’s developing …
All signs point to the shadow IPO inventory growing, too. As Jeffrey Vetter of Fenwick & West says, “Most of our clients who are talking about proceeding with an IPO are looking to take advantage of confidential filing.” Many pundits deride this strengthening trend because it results in less transparency. So is this yet another case of new legislation hurting rather than helping? Actually, no! And here’s why …
The main thrust of the JOBS Act, as it pertains to IPOs, is straightforward. It aims to remove some of the cumbersome, time-consuming and expensive reporting requirements currently preventing smaller companies from filing for an IPO.
That being said, politicians “screwed the pooch” by setting the revenue threshold so high. Historically, 90% of IPOs have less than $1 billion in revenue. Meaning virtually all companies qualify to file confidentially, not just startups. So it’s no surprise that companies are taking advantage of the opportunity.
1. Thinning the Herd. The new legislation promises to weed out the fundamentally weakest IPOs for us. How so? Well, by filing in confidence a company can gauge institutional interest in the deal first. If it doesn’t exist – or isn’t strong enough – the company can withdraw its filing without the public ever being the wiser.
Given that many companies try to come to market too early, and ultimately fail, this pre-screening works in our favor. Not to mention, if an IPO can’t pass muster with institutions, we don’t want to bother with it, either. We need their support in the aftermarket to underpin our investment.
2. An Un-Level Playing Field. The shortened window to review IPOs actually gives Wall Street Daily readers a competitive advantage. You see, we have a proven, straightforward and easy-to-apply system for evaluating an IPO that only takes about 15 to 30 minutes to complete (see here). The average investor does not.
By the time they slug through multiple IPO prospectuses (each more than 100 pages long) to find the most attractive opportunities, shares will already be trading in the aftermarket. And since the early bird gets the worm, any “delayed” purchases are going to help push up share prices – and, in turn, our profits.
3. Inefficient Market Theory. Although it’s too early to prove it yet, less time to review an IPO should lead to deals being more attractively priced. Why? Because it prevents investors from being completely informed. And less efficient markets always lead to additional profits.
Not only that, but the shortened review period also limits the amount of time hype can build surrounding an IPO. And less hype translates into more attractive prices, too.
Bottom line: The headlines suggest the IPO market’s withering away. The truth is, companies are going underground with their intentions. In the process, the stage is set for a new round of IPO profits for switched-on investors.
Rest assured, I’m monitoring the filings every day, in search of the most compelling shadow IPOs. As always, I’ll be in touch immediately if any warrant your consideration.