IPOs in 2019 have raised more capital across a smaller number of deals, as we have previously blogged. EY’s recent Trends in US IPO Registration Statements report notes that the US Securities and Exchange Commission (“SEC”) has prioritized increasing access to the public capital markets in an environment where more companies are staying private longer. EY cites an SEC Division of Economic and Risk Analysis 2018 study that reported that companies raised almost $2.6 trillion more capital through the US private markets than through registered offerings from 2010 to 2016. The SEC has worked toward this goal by, among other things, changing the definition of a smaller reporting company, extending “testing-the-waters” provisions that were formerly only available to emerging growth companies (“EGCs”) to non-EGCs, and allowing non-EGCs to submit IPO registration statements for confidential SEC review. According to the report, EGCs have accounted for almost 90% of IPOs in the first three quarters of 2019.
Created by the Jumpstarting Our Business Startups (“JOBS”) Act, an EGC may elect to make scaled disclosures in its IPO registration statement, as well as confidentially submit its registration statement. Citing the SEC’s Annual Performance Report, EY’s report notes that the SEC issued initial comments to confidentially submitted registration statements in an average of 25.5 days in 2018. In 2018, a median of 125 days elapsed from initial submission to IPO date for both EGCs and non-EGCs.
Among the scaled disclosures available to EGCs, between 2014 and 2019, 98% of EGCs opted for reduced disclosure of executive compensation, 74% opted for two years of audited financial statements (instead of three), and 28% opted for the adoption of new accounting standards using private company effective dates. The report noted that 64% of EGCs in the first nine months of 2019 elected to use private company effective dates for new accounting standards. Compared to 51% in 2018, this increase is likely attributed to EGCs wanting an additional year to adopt new accounting standards, such as new accounting standards on leases and credit losses, which become effective in 2020.
The report also mentions that 4% of companies that conducted an IPO in the first three quarters of 2019 reported one or more restatements of their financial statements in their registration statements. About 40% of companies in the first nine months of 2019 have voluntarily disclosed material weaknesses in their registration statements. The top three material weaknesses disclosed included (1) lack of personnel with appropriate experience in US GAAP or SEC reporting; (2) financial statement close process; and (3) information technology general controls.