In this article, we’ll explore what confidential filing is, its benefits, how it works, and more
Confidential filing is a process in the stock market that allows companies to submit initial public offering (IPO) documents to regulatory authorities without making them immediately public. This approach has gained popularity, especially among emerging companies and startups, as it provides several strategic advantages. In this article, we’ll explore what confidential filing is, its benefits, how it works, and its implications for investors and the broader market.
What is Confidential Filing?
Confidential filing is a method by which a company can file its IPO paperwork with regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, without disclosing the details to the public. This means the company’s financial statements, risk factors, and other critical information remain private until a later stage in the IPO process.
Historical Background
The concept of confidential filing was introduced in the United States under the Jumpstart Our Business Startups (JOBS) Act of 2012. The JOBS Act aimed to encourage the growth of small businesses by making it easier for them to access capital markets. One of its key provisions allowed “emerging growth companies” (EGCs) to file for an IPO confidentially.
An EGC is defined as a company with less than $1.07 billion in total annual gross revenues during its most recently completed fiscal year. This status is maintained for up to five years after the IPO or until the company reaches certain thresholds, such as surpassing $1 billion in annual revenue.
How Confidential Filing Works
1. Initial Confidential Submission
A company prepares its IPO documentation, including the registration statement (Form S1 in the U.S.), financial statements, and other required disclosures.
These documents are submitted to the regulatory authority confidentially. At this stage, the public is unaware that the company is planning to go public.
2. Review and Feedback
The regulatory authority reviews the submission and provides feedback. This may involve several rounds of questions and clarifications to ensure all regulatory requirements are met.
The company responds to these queries and makes necessary adjustments to its documents.
3. Public Filing
Once the regulatory authority is satisfied with the documentation, the company files an amended registration statement publicly.
This public filing must occur at least 15 days before the company’s IPO roadshow, during which it promotes its offering to potential investors.
4. IPO Roadshow and Pricing
The company conducts its roadshow, presenting its investment case to institutional investors.
After the roadshow, the company and its underwriters determine the final IPO price and allocation of shares.
5. Trading Begins
The company’s shares begin trading on the stock exchange.
Benefits of Confidential Filing
1. Privacy and Control
By keeping initial filings confidential, companies maintain control over sensitive information. This is particularly important for startups and emerging companies that may have competitive or proprietary information.
2. Flexibility
Confidential filing offers flexibility in timing. Companies can work through the regulatory review process without the pressure of public scrutiny, allowing them to choose the optimal time for their IPO.
3. Reduced Pressure
Public scrutiny can be intense and distracting for companies preparing for an IPO. Confidential filing helps mitigate this pressure, allowing management to focus on business operations and addressing regulatory feedback.
4. Testing the Waters
Companies can gauge investor interest and market conditions without committing to a public offering. If conditions are unfavorable, they can delay or withdraw their IPO plans without negative publicity.
5. Regulatory Efficiency
The confidential review process can lead to a more efficient dialogue between the company and regulatory authorities, potentially speeding up the approval process.
Challenges and Considerations
1. Investor Transparency
One of the main criticisms of confidential filing is the lack of transparency for investors. Public investors have less time to scrutinize the company’s financials and business model before deciding to invest.
2. Market Reaction
When a company eventually goes public, the sudden release of information can lead to volatile market reactions. Investors may react strongly to new information that was previously undisclosed.
3. Complexity and Costs
Preparing confidential filings requires significant legal and financial expertise. The process can be complex and costly, particularly for smaller companies with limited resources.
4. Limited Duration
Confidentiality is temporary. Eventually, all relevant information must be disclosed to the public. Companies need to be prepared for this eventual transparency and its implications.
Impact on the Market
Confidential filing has had a notable impact on the IPO market. It has encouraged more companies, particularly those in the technology and biotechnology sectors, to consider going public. By reducing the risks and pressures associated with public disclosure, confidential filing has made the IPO process more attractive and accessible.
Case Studies
1. Snap Inc.
Snap Inc., the parent company of Snapchat, filed confidentially for its IPO in 2017. The company was able to work through the SEC review process without public scrutiny, eventually going public in March 2017. The confidential filing allowed Snap to manage its narrative and market expectations more effectively.
2. Uber Technologies
Uber used confidential filing for its IPO in 2019. This approach gave Uber the flexibility to choose the right time to go public, considering market conditions and internal readiness. The company went public in May 2019, raising $8.1 billion.
Future Trends
The trend of confidential filings is likely to continue as companies seek greater control over the IPO process. With regulatory authorities in other countries also adopting similar provisions, confidential filing could become a standard practice globally.
Conclusion
Confidential filing offers a strategic advantage for companies planning to go public. It provides privacy, flexibility, and reduced pressure, making the IPO process more manageable and less risky. However, it also raises concerns about investor transparency and market reactions. As the practice becomes more widespread, both companies and investors will need to navigate the balance between confidentiality and transparency in the evolving landscape of the stock market.
By understanding the intricacies of confidential filing, companies can make informed decisions about their IPO strategies, and investors can better comprehend the potential impacts on their investment choices. As the stock market continues to evolve, confidential filing will remain a critical tool for companies seeking to optimize their entry into the public markets.
