IPO

Week in Review: Government Shuts Down, Twitter Ramps Up

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Twitter, Inc. publicly filed its IPO documents on Thursday, revealing the microblogging company’s financials for the first time.  Analysts expect the seven-year-old site to be valued in the $10- to $15-billion range, although it is still unprofitable.  Rapid growth has been outmatched (for now) by accelerated expenses:  in the first half of this year, revenue doubled to $254 million but net loss increased by 40% to $69 million.  Twitter, which has chosen the ticker symbol TWTR, is still behind the pace set by Facebook.  By comparison, Facebook’s IPO sales pitch showcased a $1 billion annual profit in 2011 and 845 million active users (Twitter has 215 million).  Twitter’s co-founder and former CEO Evan Williams will expect the largest payout once the liquidity event is completed; he owns 12 percent of the company.  Co-founder Jack Dorsey owns 4.9 percent.

The federal government is paralyzed as lawmakers have failed to agree on the nation’s budgetary priorities.  Divided government in hyper-partisan Washington, D.C., has proven to be a recipe for stalemate.  While most of the coverage has focused on House Republicans’ objection to funding the Affordable Care Act, the debate will likely be viewed as a much broader battle on federal spending.  Two storms will soon converge—the current battle over a Continuing Resolution (essentially legislative authorization to write certain checks from the U.S. Treasury) and the imminent necessity to raise the federal government’s $16.7 trillion debt ceiling (to further add to the nation’s debt).  Treasury Secretary Jack Lew has estimated that the U.S. government will need to raise the ceiling before October 17th, less than two weeks away.  For lawmakers, resolving the current shutdown by passing a “clean CR” will solve little unless the deal also addresses the debt ceiling—thus, the conversation for congressional leaders of both parties appears to have shifted to a grand bargain or large-scale budget deal.  For now, Wall Street has remained mostly apathetic, but prolonged brinksmanship is likely to change the market’s attitude in a hurry.

In Keeping Secret, Twitter Plans To Go Public

By Taylor Arabian, J.D. Candidate 2016 | Posted on

The world’s third-busiest social media website appears ready to follow in the footsteps of Facebook and LinkedIn, having recently announced its intent to file for an initial public offering.

Twitter made the announcement last week via one of its trademark “tweets,” revealing only that it had filed “confidential[ly]” with the Securities and Exchange Commission. As a company earning less than $1 billion in annual revenues, Twitter qualifies under a 2012 JOBS Act provision whereby “emerging growth companies” are allowed to make their filings in secrecy.

A confidential filing will provide some benefits to the company: in addition to being able to keep its early discussions with regulators behind closed doors, Twitter can also elect to release only two years of financial statements rather than the standard three, and the company does not have to disclose all of the executive compensation details usually required of other companies. The company will still be expected to release necessary financials three weeks before it begins its investor road show.

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Private Equity Giant Blackstone Agrees to $85 Million Settlement

By Christopher Hammond, J.D. Candidate 2015 | Posted on

As the real estate market was turning sour in 2007, Blackstone Group LP was preparing to go public.  Timing was not quite perfect, however, as the world’s largest private equity firm happened to be heavily invested in property and other particularly vulnerable holdings.  While Blackstone’s IPO launched at $31 per share, market troubles and the firm’s exposure led to sharp declines within the next year–in 2008, its shares were trading at less than one-quarter of that price.  Litigation ensued, with some investors claiming that Blackstone’s executives had not properly disclosed the declining values of some of its assets during the IPO process.

After five years of litigation, the parties have reached a settlement.  A U.S. federal judge, sitting in Manhattan, must still approve of the $85 million agreement.  For more detailed coverage of the case and its developments, see Businessweek and Reuters.

The Hong Kong Stock Exchange Releases Revised Rules and Procedures to Implement New IPO Sponsor Regime

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

On 23 July 2013, The Stock Exchange of Hong Kong Limited released a large number of amendments to the Rules Governing the Listing of Securities on the Exchange, revised checklists, guidance materials and templates. Subject to certain transitional provisions, these materials will come into effect on the same date, 1 October 2013, as the amendments to various guidelines and codes released by the Securities and Futures Commission (the “SFC”) in December last year. Together, they will implement the new regulatory regime for sponsors in a listing application or initial public offer (“IPO”) conducted in Hong Kong. (more…)

SEC Fines NASDAQ Over Botched Facebook IPO

By James Kollar | Posted on

As a result of Facebook’s initial public offering (IPO) mishap last year, the SEC has charged NASDAQ with securities laws violations resulting from its poor systems and decision-making in handling the IPO and secondary market trading of Facebook shares. In order to settle the SEC’s charges, NASDAQ has agreed to pay a $10 million penalty – the largest ever against an exchange.

Exchanges such as NASDAQ have an obligation to ensure that their systems, processes, and contingency planning are adequate to manage an IPO without disruption to the market.  However, despite the anticipation that the Facebook IPO would be among the largest in history, NASDAQ failed to address a design limitation in their system that matched buy and sell orders, causing disruptions to the Facebook IPO. These disruptions then led NASDAQ to make a series of ill-fated decisions that led to the rules violations.

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From the Bench: Second Circuit denies class certification in lawsuit against J.P. Morgan

By Bonnie Watson, J.D. Candidate 2015 | Posted on

In Levitt v. J.P. Morgan Sec., Inc., 10-4596-CV, 2013 WL 1007678 (2d Cir. Mar. 15, 2013), the Second Circuit reversed a district court’s grant of class certification to a group of plaintiffs who alleged that Bear Sterns (subsequently bought by J.P. Morgan) had violated its duty to disclose when it did not notify investors of a fraudulent scheme by Sterling Foster, a now-defunct brokerage firm.

The case concerned allegations of fraud arising from a September 1996 IPO of ML Direct, a television marketing firm.  Sterling Foster orchestrated the IPO as the introducing broker, with Bear Sterns (subsequently acquired by J.P. Morgan) acting as the clearing broker.  In general, the clearing broker in a transaction owes no duty of disclosure to the customers of the introducing broker.  However, the plaintiffs sought to overcome this hurdle by establishing that Bear Sterns actively participated in the fraudulent scheme.

The district court agreed with the plaintiffs that Bear Sterns’s participation was extensive enough to trigger a duty to disclose.  However, the Second Circuit held that the plaintiffs had failed to allege “sufficiently direct involvement” by Bear Sterns.

The Second Circuit noted that providing “normal clearing services” do not give rise to a duty to disclose, even when the broker providing those services is aware of the introducing broker’s fraudulent intentions.  Rather, to trigger a disclosure duty, the clearing broker would have to actively depart from its normal passive clearing functions and affirmatively exert “direct control” over the introducing broker and the fraudulent trades.  The court found that Bear Sterns, by merely “allowing” such trades to proceed, had not assumed such a level of control.

The plaintiffs’ counsel characterized the ruling as “a sad day for investor protection,” stating that the court had “has for the first time held that a clearing firm has no duty to disclose that it is knowingly participating in market manipulation by its introducing broker.”

The court, however, carefully declined to address the legal implications of “market manipulation itself” on the duty to disclose, confining itself to its factual conclusion that Bear Sterns did not directly engage in such manipulation.  Underscoring the narrowness of the Second Circuit’s ruling, the New York district court refused to apply Levitt to a case where a defendant had made misleading statements, holding that the making of misleading statements constituted direct involvement.  The same district court has also recently observed that the question of market manipulation remains open.

SEC Charges Craig Berkman and His Lawyer over Pre-IPO Facebook Con

By Valerie Ramos, J.D. Candidate 2015 | Posted on

The SEC has charged former Oregon gubernatorial candidate, Craig Berkman, with a violation of the antifraud provisions of federal securities laws. Berkman’s fraud has been referred to as a Ponzi-like scheme where investors were promised access to pre-IPO shares in Facebook, Groupon, Zynga, and LinkedIn. The SEC alleges that John B. Kern, and Berkman’s lawyer, aided and abetted this violation.

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Professor Robert Bartlett speaks on the JOBS Act at Orrick, Herrington & Sutcliffe LLP.

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

Within a month of the Initial Public Offering (“IPO”) Task Force’s white paper, “Rebuilding the IPO On-Ramp,” Congress developed the Jumpstart Our Business Startups (“JOBS”) Act.  The legislation aims to create new companies, and ultimately new jobs.  The JOBS Act loosens security regulations, making it easier for startups to access funding and go public.  Professor Robert Bartlett recently spoke about the effects of the JOBS Act at a Berkeley Law Alumni Center event held at Orrick, Herrington & Sutcliffe LLP.

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JOBS Act Symposium: Liveblog Recap & Review

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

This post will detail the two panels from last Friday’s 2013 BCLBE and BBLJ JOBS Act Symposium:  1)  The IPO On-Ramp and 2) Crowdfunding.

Panel 1:        The IPO On-Ramp

Moderator:  Ian Peck

Robert Bartlett, Professor, UC Berkeley, School of Law

Reza Dibadj, Visiting Professor, UC Berkeley, School of Law

Martin Zwilling, Startup Professionals 

Background: Title I of the JOBS Act

Title I of the JOBS Act was originally pitched as a job creation vehicle.  Title I seeks to accomplishes this through its two provisions: (1) providing an “on-ramp” to going public for emerging growth companies (“EGCs”), a company within five years of going public, using existing principles of scaled down regulation; and (2) improving the availability and flow of information for investors before and after an IPO.

There are four­ major changes that were discussed during the panel:

1)    Creation of the “Emerging Growth Company” as a new category of issuer

2)    EGCs eligible for IPO On-Ramp enjoy significant benefits, including:

  • A reduced two-year requirement of audited financials needed in registration statements versus the standard three to five years
  • Allows communication between EGCs and qualified institutional buyers prior to filing registration statement (although there is an SEC Rule that does not allow solicitation of filing)
  • Research reports can be filed even while the EGC is making an offer

3)    EGCs have less extensive financial reporting/audit obligations (exempt from SOX)

4)    EGCs have limited executive compensation disclosures 

Moderated Q&A

When questioned about what problems exist in the IPO market and how the JOBS Act approached these problems, there was a general consensus that the worry stemmed from the dramatic decline in IPOs in the market over the past decade. IPOs going overseas, problems that came with the economic downturn, and the choice of M&A as the preferred exit strategy.  Zwilling spoke beyond the general market on how entrepreneurs, in general, want control of their company, and when they are ready to exit, M&A serves as a better exit strategy due to its lower costs and fewer regulations.

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JOBS Act Symposium: Lessons Learned from the Facebook IPO?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The panelists mostly agreed that the high-profile Facebook IPO debacle has cooled excitement for IPOs, at least within those private companies considering monetization.

Mr. Zwilling gave a brief summary.  He thinks many entrepreneurs are now saying, “I want nothing to do with this,” referring to the IPO process.  Zwilling noted, for example, Zuckerberg’s widespread criticism following the offering; he said many entrepreneurs are concerned that going public would risk losing control over important cultural aspects of his or her company.

Related to Facebook’s volatile early pricing experience, Professor Dibadj asked why there has not been more pressure (from entrepreneurs) to use a Dutch Auction format for pricing, instead of relying on the “black box” of underwriting?  Zwilling proffered that many entrepreneurs are simply naïve to the pricing system, and they don’t have much insight as to the underwriting process.  The entrepreneurs, by and large, think, “We don’t know how it works and we don’t have any control.”