At the beginning of this year, investors were anticipating a massive IPO market. Uber Technologies Inc (NYSE:UBER), the biggest IPO in years, had indicated that it planned to go public in 2019, and investors were highly interested in other tech companies such as Lyft, Pinterest, and Slack.
But this hype has been killed by the U.S. government shutdown which does not appear to be ending anytime soon. The U.S. government shutdown has stripped the SEC to its bare minimum, which has prevented the SEC from giving its approval to companies’ registration statements. Companies have been submitting registration statements, but no one is around to read them.
Without SEC approval, companies are unable to go public. And even if the shutdown was to end today, the SEC would be facing a backlog of filings which would take some time to clear out.
Alternative Approaches
Consequently, some companies are seeking alternative routes. Gossamer Bio Inc (NASDAQ:GOSS), a biotech company developing treatments for asthma and other diseases, filed for a $1 billion IPO on Thursday and indicated that it will move forward without SEC approval. Companies are allowed to do this, and the Wall Street Journal reported that the SEC had reminded companies of this alternative.
But there are risks in moving forward without the SEC. Companies taking this path must announce their planned share price 20 days before launching the IPO, which is a serious market risk. In this volatile and uncertain market, a share price 20 days old could easily be priced too high or low. Furthermore, the SEC normally helps companies dot their I’s and cross their T’s to make sure everything is legally proper. This means that any company who moves forward without the SEC is at greater risk of litigation.
These factors mean that the only companies who should take this approach are companies which need the money as soon as possible, and investors should be wary of any company in that situation. The only exception might be clinical-stage biotech companies like Gossamer since they do not have revenue and are dependent on outside funding to develop their treatment.
While some companies are adapting by moving without SEC approval, another kind of company has risen to take advantage of the current situation. According to Reuters, special purpose acquisition vehicles (SPACs) are free to go public without SEC approval. These are shell vehicles which raise cash and then acquire a company. These companies have been often ignored by investors because they are more opaque and offer smaller returns, but the shutdown could propel them into the limelight and make them more accepted.
Ultimately, these solutions are simply small alternatives which will not work for companies such as Uber or Lyft. Until the government and the SEC can resume business as usual, the IPO market will remain all but nonexistent.
The Government and Market Conditions
The SEC’s shutdown is the biggest factor hampering the IPO market, as must as it is manufactured homes, but companies looking to go public should also feel threatened by how the shutdown affects the U.S. economy as a whole. CNBC reported that J.P. Morgan economists have slashed their first quarter growth estimate from 2 to 1.75 percent, and that each week of the shutdown results in a reduction in the growth of 0.1 to 0.2 percentage points. The recent news that airports saw reduced traffic thanks to a lack of air traffic controllers is another example of how the shutdown is directly affecting our economy.
This news is particularly bad when combined with the fact that many analysts are expecting the U.S. to have a recession by the end of 2020 at the latest. Companies looking to go public face a limited timeframe, and that timeframe is being shrunk by the fact that they are unable to go public now when the economy is doing well. A smaller timeframe also means that companies will be unable to appeal to investors on their own time, and will instead be squeezed in with other companies in the same timeframe trying to attract investor interest.
Wall Street CEOs such as JP Morgan's James Gorman have called for a compromise solution to end the shutdown precisely because they have a great deal to lose from the weaker IPO market, and the American economy as a whole will get worse as the shutdown closes more and more parts of the government. But the shutdown does not appear as if it will end anytime soon, and the shutdown’s deleterious effects on the IPO market will linger even after the government reopens.