The monthlong US government shutdown is forcing some companies to seek alternate routes to go public while the main markets regulator is unable to greenlight IPOs.
Biotechnology companies Gossamer Bio and TCR2 Therapeutics have been exploring a little-used workaround that would let them begin trading without the usual Securities and Exchange Commission signoff, according to people familiar with the matter.
The move involves changing language in an IPO filing to make it automatically effective after 20 days. It is legal, and the SEC reminded companies after the shutdown began that the option was available.
But the Nasdaq Stock Market, where both companies are aiming to list, has balked at firms using the method over worries that such deals could be vulnerable to regulatory or legal challenge later on, according to people familiar with the matter.
Still, the exchange hasn’t ruled it out in certain cases, one of the people said. Some bankers have also been wary of such deals.
Companies can legally sell stock to the public 20 days after filing a registration statement that details required financial information and business risks. But in practice, most companies ask the SEC to trigger their filing after an in-depth review of their disclosures.
Another company, New Fortress Energy, recently launched its IPO roadshow and is pitching shares to investors. The company hopes the shutdown ends by the time it is ready to price its shares, a person familiar with the offering said. If not, it could wind up on an extended or indefinite roadshow.
The attempts to move IPOs forward while the SEC remains closed highlight a growing concern that the shutdown, with no end in sight, is hurting businesses. If they don’t opt for the 20-day workaround, companies are left with no apparent way to go public.
That is a threat to companies that need IPOs to drum up cash for their operations. Biotech firms often burn through money quickly due to the costly nature of drug trials.
At least nine other biotechnology firms including Alector have begun the process of going public on Nasdaq. Gossamer and TCR2, neither of which are profitable, responded to rounds of SEC questions about their disclosures before the government shut down, people familiar with the matter said.
Proceeding without SEC signoff could carry substantive risk, some bankers and lawyers say. If the IPO disclosures given to investors are later shown to have shortcomings, plaintiffs’ lawyers could pounce and point to the unusual way the deals were done.
“Historically, companies have taken some comfort from the SEC review of an IPO,” said Karen Garnett, a former senior SEC official who is now a partner at Proskauer Rose. “This is uncharted territory. Everyone must be figuring it out day to day, including the companies that are trying to go public.”
The SEC, once it reopens, could question whether a company’s disclosures were complete. But “we would all expect the SEC would be reasonable and practical when they review IPOs that proceeded during the shutdown,” said Lona Nallengara, a partner at Shearman and Sterling who was formerly the SEC’s chief of staff.
An SEC spokeswoman declined to comment about any particular deals.
Another downside to the automatic route is companies would need to price their stock at least 20 days in advance of trading, whereas in a traditional IPO the price is set the day before trading begins. Bankers worry the price might become stale as economic crosswinds or other factors could affect demand for the offering.
Many companies face a mid-February deadline if they want to go public early this year. Companies aiming to price IPOs in January or early February use financials through the third quarter of 2018. By mid-February, those results are stale, and the companies must provide fourth-quarter numbers. Those year-end financials require auditing, which slows things down.
Also contributing to companies’ urgency is the current backdrop for offerings. After a turbulent end to 2018, fund managers are holding more cash than usual, and they say they are willing to use it to buy shares of IPOs in a newly calmer stock market.
That is one reason New Fortress Energy chose to launch its IPO now, according to people familiar with the deal. With no other IPOs on roadshows, fund managers have time to meet with New Fortress management and learn about the company.
Some bankers fear that when the SEC reopens there could be a flood of companies launching roadshows, and it could be difficult to get in front of investors to pitch an IPO.
There is a long and robust pipeline of IPOs on tap for 2019, including Uber Technologies and Lyft. The two ride-hailing companies filed prospectuses with the SEC late last year but haven’t received any comments back from the agency, according to people familiar with their processes.
Typically by this stage, the companies and their IPO advisers would already have, or be close to receiving, a first round of comments, but they are now waiting for feedback, the people said.
The road to an IPO typically lasts months and includes significant communication with the SEC.
On average over the past two years, it took tech companies three exchanges with the SEC spanning 115 days before they could file their first public IPO-registration statements, according to Triton Research. It took another four filings and 29 days, on average, from the initial public filing to IPO, Triton data show.
As the shutdown continues, companies that would normally go public may choose other routes.
“They have to find other financing, may turn to M&A, or may have something happen in their operations so they don’t feel confident with their situation to go public,” said David Ethridge, US IPO services leader at PricewaterhouseCoopers.