This year, more companies may be going public confidentially, through a new provision created by the JOBS Act, than through the traditional, truly “public” process. At a recent Practicing Law Institute conference, Paula Dubberly, Deputy Director for the SEC’s Division of Corporation Finance, announced that confidential filings were outpacing traditional ones 3 to 2. And just who is taking advantage of the newer system, originally designed to support job-friendly entrepreneurs? It may not be who you think. According to the Wall Street Journal, several of the companies filing via the Act’s confidential provision are actually shell companies with few or no employees. In describing themselves as “emerging growth companies,” these shell entities, also referred to as “special-purpose acquisition companies (SPACS)” or “blank check” companies, hope to gain access to the many benefits afforded through this new filing option, including reduced requirements in terms of disclosures and auditors’ attestations. More specifically, they would like to be able to offer these benefits to companies they’re courting for reverse merger opportunities.
Modifying the Guest List
While shell companies are themselves not new, their appearance among the new class of confidential filers seems to fly in the face of the Act’s original intent. While a company taken under a shell company’s wing through a reverse merger may in every way qualify for the new confidential filing opportunities as other filers do, it certainly wouldn’t have to. Essentially, as long as the shell itself qualifies, it can pull in whomever it likes. If one were to picture this new system as an invitation-only event, a shell company might assume the role of the shady figure scalping tickets near the side door. This is the SEC’s quandary right now as they try to determine what to do with such filings.
The Mask’s Implication
Some companies ready to go public, that would otherwise qualify for confidential filing, will no doubt avoid this route simply because they want to avoid raising investors’ suspicion. There is speculation that although businesses choosing this path can work out issues with the SEC behind closed doors, and can also maintain their privileged status as an emerging growth company for up to five years, some may consider its covert approach an unnecessary risk.
As confidential filings rise in popularity, we may see an increase in the number of companies that choose this option. After all, the simpler process and lower cost of filing under the JOBS Act make it an attractive alternative for business growth. Keep in mind, however, that the loose definitions provided for by the Act mean that the door is open wider than many of us had originally expected. When the dance is over and the mask comes off, we may all be in for a surprise.