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Equities Market Update

Authors: Jerusan Jegatheeswaran Co-VP Education/Research, Dragos Cada Co-VP Education/Research, Helen Feng Research Analyst, Bilal Lodhi Research Analyst

Impacts of U.S. Government Shutdown: Companies Seek Roundabouts to Traditional IPOs

Recent Development

As of Jan. 25th, 2019, Trump signed a spending bill to reopen the government. However, this bill excludes funding for the border wall, and is a temporary bill that will only fund the government for the next three weeks. Trump has stated that he is not afraid to shut down the government again, and all this uncertainty remains a threat to companies looking to IPO this year.

U.S. Government Shutdown

For over a month, the U.S. government was under a partial shutdown, due to the failure between U.S. Congress and President Trump to establish a bill that would provide funding for government operations in fiscal 2019. The Securities and Exchange Commission (SEC) remained largely shut down since December 27th, 2018, unable to approve of Initial Public Offerings, with only 285 of its 4,436 employees on the job. Many companies, especially Biotech firms who burn through money quickly due to expensive drug trials are feeling the threat of the shutdown hurting their business. Furthermore, as there were 47 IPOs in first quarter 2018, investment banks and law firms are losing potential business opportunities.

Potential Notable 2019 IPOs at risk due to U.S. Government Shutdown

As a result, companies are considering workaround methods to start selling their stock without SEC signoff. This process is possible by changing the language in an IPO filing, making it legal to for the company to start public trading automatically 20 days after the filing is submitted with required detailed financial information. SEC has been reminding companies of this option since the shutdown. However, the NASDAQ Stock Exchange is not in favour of this approach, due to worries that deals done through this method are more vulnerable to regulatory or legal challenges later on.

Another impact of the government shutdown is a potentially prolonged roadshow. Energy company New Fortress Energy LLC recently launched its IPO roadshow, but if the shutdown continues when it is ready to price its shares, the roadshow would be extended for an indefinite period of time.

While it is possible to IPO without requiring the SEC’s approval, this alternate path presents several risks. If at a later time, it is found that the initial IPO disclosures were not sufficient, the firm could face lawsuits pointing to the unusual way the deals were done. After reopening, the SEC could also question the completeness of a company’s information. Another worry is that because companies need to price their stock at least 20 days prior to the beginning of trading, macro and microeconomic changes may occur during that period of time, causing the initial offering price to no longer accurately reflect the most recent information. The demand for the offering could also change.

Many companies have scheduled for IPOs in 2019, including big tech companies such as Uber, Lyft, and Pinterest. As the shutdown continues, “they have to find other financing, may turn to M&A, or may have something happen in their operations so they don’t feel confident with their situation to go public,” said David Ethridge, U.S. IPO services leader at PricewaterhouseCoopers.

IPO Timeline

On average, it takes tech companies over 100 days from first filing with SEC until trading starts.

Source: Triton Research

Alternatives Methods to IPO

There are a variety of options available when it comes to IPO. The following is a list of some “Plan B” options for companies that may not be able to complete an IPO in time due to the shutdown.

Source: IPOhub

Final Thoughts

For the next three weeks, the U.S. government has been reopened, providing some breathing space, however, given the volatile nature of U.S. political climate, it is uncertain to say if another shutdown will occur or a conclusive agreement will finally be reached.

An IPO is a big step for firms, one which requires tremendous time and energy. For firms seeking immediate funding, the risk of another potential shutdown complicates matters and creates uncertainty around the listing timeline.

Ultimately, firms have a variety of alternatives available at their disposal regarding raising capital and the next three weeks can play a crucial part in determining the IPO activity level in 2019.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.