The rise of confidential IPOs: Manchester United on deckAugust 9, 2012: 12:05 PM ET
Investing in IPOs is risky enough when a company dots all of its i's and crosses its t's.
But ever since the Jumpstart Our Business Startups, or JOBS Act, was signed into law in April, companies with less than $1 billion of annual revenue can file for confidential IPOs.
The law was supposed to make it quicker and easier for smaller so-called emerging growth firms to go public since confidential IPOs only require an auditor to sign off on two years of financial statements, not three, among other exemptions.
And this week, one of the most well-known emerging growth firms under the JOBS Act, 134-year-old storied British football (soccer) team Manchester United, will make its debut.
Manchester United will start trading on the New York Stock Exchange (NYX) Friday under the ticker "MANU."
The billionaire Glazer family, which owns Manchester United, showed investors three years of audited financial statements, but they're taking advantage of a provision under the JOBS Act that gives companies five years to prove their financial controls comply with Sarbanes Oxley.
"The Glazers have really shielded this operating company from investors, so the confidential nature of the IPO is particularly concerning in this case," said Francis Gaskins, President of IPO Desktop. "They're the poster child for what's wrong with this law."
Manchester United carries a heavy debt load of $663 million and nearly 98% of its voting power is concentrated in the hands of the Glazer family because of a dual class structure. Investors get roughly 40% of the company's stock but virtually no say in Manchester United's corporate governance.
Since the JOBS Act went into effect, the number of companies filing confidential IPOs has outpaced the number filing for traditional ones, according to Renaissance Capital. The IPO research firm further estimates that 90% of all IPOs have historically had revenue below $1 billion.
Online real estate site Trulia; MGM Holdings, the owners of movie studio Metro-Goldwyn-Mayer; and Workday, a cloud computing competitor to SAP (SAP) and Oracle (ORCL), and Fairway are among the more well-known firms to have recently filed confidential IPOs, according to Renaissance Capital. Workday is expected to be the biggest IPO since Facebook (FB).
The JOBS Act has opened the door for these companies to test the waters since they also don't have to follow the quiet period and can now hold meetings with mutual funds and other potential investors to gauge their interest. And because the filings aren't made public, investors often won't know if a company has decided to scrap its plans.
"Some companies take comfort from the fact that there's no public disclosure that they're thinking of going public," said Colin Diamond, a partner at the law firm White & Case that specializes in IPOs. "[But] I'm not sure it creates a larger number of IPO ready companies, because the fundamental requirements to be a public company haven't changed."
Confidentially filed IPOs only show financial statements to the public three weeks before they start their roadshow to sell investors on the company's merits. In a typical IPO, investors see the back and forth with the SEC via updated financial statements. Remember Groupon's (GRPN) quirky accounting gimmicks?
It's hard to tell whether there will be any uptick in overall IPOs because of the JOBS Act. Filings are down slightly year-to-date from 2011 but up from 2009 and 2010.
There's also less visibility about how many companies are coming to market because the public pipeline only goes back about three weeks. Renaissance Capital says it will take until roughly April 2013 to see whether the JOBS Act did in fact create more IPOs, since the pipeline is obscured by these confidential filings.
"We probably won't see more companies overall, but some companies that might have waited will probably do it faster," Diamond said.If the market keeps ticking upward and CNNMoney's Fear and Greed Index keeps showing greedy investors, it could be a busy Fall for IPOs.