Pre-IPO companies like Uber and Airbnb could 'test the waters' with investors sooner under new SEC proposal


  • The Securities and Exchange Commission is taking new steps to help pre-IPO companies like Uber and Airbnb get feedback from institutional investors.
  • A new rule proposed Tuesday would let larger private companies consult with institutional investors before filing IPO paperwork with the SEC.
  • Currently, the rules let emerging growth companies talk with such investors about pricing and demand. But this excludes most companies with revenue over $1 billion, including many of the most valuable companies in Silicon Valley.

New rules proposed by federal regulators will let mega-startups like Uber and Airbnb seek early feedback about investor appetite for an initial public offering. 

On Tuesday, the Securities and Exchange Commission proposed a new “test the water” reform which would allow all pre-IPO companies to consult with qualified institutional buyers before filing paperwork to go public. 

These meetings give startups the chance to see if investors are actually interested in buying their stock before going through the work of filing with the SEC. And it helps institutional investors like Fidelity and T. Rowe Price the chance to see what’s coming up in the IPO pipeline while setting the tone on valuation and price. 

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It makes the process more informed,” said Edwin O’Connor, a capital markets lawyer at Goodwin. “So when [companies] are ready to go to market, they have heard the investors’ concerns and have the time to address it.”

Currently, the privilege to chat with investors only extends to the smaller emerging growth companies, which excludes most companies with annual revenue over $1 billion. These so-called EGCs, which make up the vast majority of IPO registrants, have been able to get feedback on price and demand since 2012, when the Jumpstart Our Business Startups Act, known as the JOBS Act, was signed into law.

Larger private companies with revenue of more than $1 billion, however, must file an S-1 registration statement in order to be allowed to seek feedback from institutional investors. That would change, if the proposed rules become law.

Everyone’s been waiting for this,” said Anna Pinedo, a securities lawyer at Mayer Brown. “It’s been much anticipated, so it’s great to see it out.”  

An outsized impact on tech

Such reform could have an outsized impact in tech, Pinedo said, where startups are waiting longer and growing larger before tapping the public markets.

Ride-hailing service Uber, which is expected to go public this year, brought in $11.4 billion in revenue in 2018. Airbnb, another 2019 IPO prospect, announced that it brought in more than $1 billion in revenue in one quarter alone in Q3 2018. Both have too much revenue to count as an EGC.

While Uber and Lyft would not directly benefit from the new rules, as each has already confidentially filed IPO paperwork with the SEC, the new rules could come in handy for other startups reportedly weighing an IPO, such as Airbnb and Palantir. Depending on how the 60-day public comment period goes, the new rules could take effect as soon the end of April. 

This reform won’t just impact pre-IPO unicorns, according to O’Connor. The proposal also gives public companies more flexibility when it comes to issuing new shares.

Currently, executives at public companies can chat with investors about raising more capital. But the banks underwriting these offerings can’t. The reform would change that to allow authorized representatives to “engage in oral or written communications with potential investors.” 

“[The reform] probably won’t move the needle much on IPOs because for private companies, most won’t need this,” O’Connor said. “But I think it will help companies raise money after they’re public. It might incrementally increase capital raising activity in the public markets.” 

Though the SEC will take comments for 60 days before making the reform official, both Pinedo and O’Connor said they don’t expect to see any opposition prevent this from happening.

“Lawyers’ industries groups and trade associations have been talking about extending the ‘test the waters’ for a couple of years now,” Pinedo said. “I doubt that there will be any opponents or natural critics for this.”

If one were too oppose to reform, it would be on behalf of the investors themselves. And while many SEC regulations are designed to prevent investors from being mislead by the companies issuing securities, the new reform only impacts institutional investors.

“These are sophisticated investors,” O’Connor said. “They can fend for themselves.”

SEE ALSO: $1 billion video conferencing startup Zoom has picked banks but is sitting in SEC purgatory ahead of a planned IPO

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