Salad chain Sweetgreen Inc. and eyewear company Warby Parker both confidentially filed paperwork this week to go public through an IPO.
What is a confidential IPO?
Last year was a boom year for IPOs, with 407 U.S. companies filing to go public, many of them through confidential IPOs.
The option of filing confidentially started in 2012 as part of then-President Barack Obama’s Jumpstart Our Business Startups (JOBS) Act. Originally, companies with less than $1 billion in annual revenue could file their S-1 IPO paperwork confidentially. The option was then opened up to all businesses in 2017.
When a company files for an IPO confidentially, all of the paperwork it files with the SEC is kept under wraps until 15 days before the IPO takes place.
In traditional IPOs, a company looking to go public will file its S-1 form with the SEC typically about 90–120 days before going public.
Advantages of a confidential IPO
One of the biggest advantages of a confidential IPO over the traditional IPO is that it gives companies more flexibility and control over their eventual public offering. A company can file the S-1 form with the SEC without having to determine how many shares it plans to sell and what price those shares will be.
Another advantage is that companies can keep sensitive information away from the eyes of their competitors. Paperwork filed in a traditional IPO can include financial information like revenues and losses, possible risks, and company goals, which is then made available for public view on the SEC website. It’s a great tool for investors to look at when deciding whether to invest in the company, but it also lays bare everything for a company’s competition to see.
Companies that file confidential IPOs also have more flexibility in when they go public, if at all. Instead, the company could decide to withdraw its IPO or pursue a merger with a SPAC.
Stopping a traditional IPO from moving forward after the paperwork is filed is harder to do. Traditional IPOs also open a company up to more scrutiny that could have a negative impact on its eventual offering.
Disadvantages of a confidential IPO
Cost can be a big factor in whether a company decides between a confidential or traditional IPO. Traditional IPOs are usually less expensive than confidential filings. Delaying a confidential IPO can result in additional legal and accounting costs.
The short 15-day window before a confidential IPO goes public also limits the time a company can garner investor interest before the offering hits the market. In a traditional IPO, which takes months to go public, companies have more time to attract the interest of potential investors.