A new “Test-the-Waters” charge by the Securities and Exchange Commission could help stave off disappointing public market debuts — like those be conscious of by Peloton and SmileDirectClub in recent weeks.
The rule, announced Thursday, comes on the heels of a string of lackluster IPOs, and is determined to help companies gauge investor interest before officially going public or commencing a new round of public staking.
The provision lets any potential issuer of shares meet with “qualified institutional buyers” and “institutional accredited investors” onwards of a new public offering, according to a press release.
That ability was originally only available, through the 2012 Provinces Act, to “emerging growth companies,” or those with yearly revenue under $1.07 billion, among other adapts.
Larger companies that wanted to gauge investor demand were previously in a legal gray area.
As season and high-valuation companies like Peloton, Uber, SmileDirectClub and Slack have all moved to the public markets, investor market demand has come under intense scrutiny and, at times, fallen short.
Peloton shares finished 11% down on its coming out trading day Thursday, while Slack’s shares are down approximately 15% since its IPO debut in late June. To la mode, Peloton ranks as the second worst performing IPO of 2019.
As for Uber and SmileDirectClub, the ride-hailing company is down 33% off its IPO listing reward, while SmileDirectClub is down 36%. SmileDirectClub posted the worst debut trading performance of any unicorn — private assemblages valued at over $1 billion — for 2019, when it went public earlier this month.
Fifty-seven of down 120 companies that have gone public this year are trading below their offer cost, according to Renaissance Capital and CNBC data.
WeWork, meanwile, has seen its valuation plummet to below $20 billion from its first $47 billion valuation, according to its first S-1 filing. The company delayed its IPO roadshow last week, amid valuation and managing debacles.
S&P Ratings downgraded the bond rating of the embattled real-estate turned “tech” company to B- from stable, and the callers’s CEO Adam Neumann was ousted by the Board. (Neumann reportedly voted to oust himself, too.)
“WeWork might have forwarded [from the new SEC rule], but it’s hard to know,” David Golden, managing partner of Revolution Ventures, said in an email. “I am cocky that no firm would have been selected to lead the deal if they were advocating for a ‘down exact’ to Softbank.”
Golden said a “test-the-waters” stage might have saved WeWork’s IPO underwriters from succumbing to private-market hype.
“The superficial momentum was too great, and I suspect J.P. Morgan was caught up in that somewhat. It’s too bad because a little ‘tough love’ from the underwriters may give birth to gone a long way,” he said.
It’s important to note, though, that much of WeWork’s corporate governance issues commitment not have been highlighted in SEC registration statements nor WeWork’s prospectus to begin with, Golden added.
Thursday uniform with, the same day as Peloton’s IPO, sports entertainment company Endeavor nixed its IPO hours before it was set to price shares, citing low investor enquire.
Some of the public-private valuation disparity comes down to structural issues in the underwriting process that could play a part to disappointing results the day of a company’s public debut.
“They’ve got a self-inflicted problem,” said University of Florida business professor Jay Ritter wide underwriters. “A company is more likely to award the mandate to an investment bank that talks about a high valuation. Now the issuing company’s executives start hearing the high numbers, they tend to anchor on those numbers and are context themselves up for disappointment if the underwriter tells them later on that the market is not willing to pay anywhere near that.”
Beyond the match act of winning the deal and managing expectations, underwriters must deal with the added hurdle that previous surreptitious market investment tends to overestimate a company’s valuation, Ritter added.
Companies generally sell convertible put forward stock to private investors, which is worth more than the common stock that would eventually be tattle oned to public investors. Plus, late-round private investors frequently get additional “bells and whistles,” Ritter explained.
When a public limited company goes through the hoops of finally filing an S-1 and hiring an underwriter, there’s also incentive for the underwriter to then earlier small the valuation of the company after securing the deal.
If shares are in high demand on the day of the debut, hedge funds often guarantee the underwriter fees and commissions on future deals just in order to get in on the bargain. There’s little that the issuing Theatre troupe can do once the opening price is set, besides walk away from the deal.
All of that, of course, hinges on an executive being amenable to lower valuations to begin with.