US companies looking to sell shares publicly for the first time face an extra obstacle now: the rising potential for US government shutdowns.
The ouster of Congressman Kevin McCarthy as Speaker of the House has only increased the chances of the government shutting down as early as Nov 17. Any such closure would leave the US Securities and Exchange Commission with just a skeletal staff, making it unable to vet share sale filings or declare pricings on new listings effective.
The initial public offering market, which has been deathly quiet for most of 2023, had shown signs of opening up last month. But now corporations hoping to go public this year have to choose between completing their deals in the next month and a half or potentially waiting for much longer. Birkenstock Holding Plc, a footwear maker, launched a roadshow on Monday for a US$1.6 billion offering, one of about a dozen or so fourth-quarter IPO candidates that also include car-sharing business Turo Inc.
Some of these deals have been in the works for years during the market correction. But for at least some companies, it might make sense to wait, said Richard Truesdell Jr., a partner at law firm Davis Polk & Wardwell.
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“People are reluctant if they can’t see a clear path to being able to do the deal to file publicly and bring the scrutiny it brings and divulge all the information they need to,” Truesdell said.
September saw three marquee IPOs: Arm Holdings Plc, a chip designer; Maplebear Inc., the parent of grocery-delivery company Instacart; and Klaviyo Inc., a marketing and data automation provider. Those transactions helped lift US IPO volume this year to US$21.6 billion, nearly mirroring the US$22 billion raised last year through Oct 6. But 2023 is still lagging behind the more than US$265 billion raised at this point in 2021, marking a roughly 92% plunge.
Uncertainty has generally been climbing in the US stock market, at least as measured by a common fear gauge, the Cboe Volatility Index or VIX. With questions swirling about the market’s direction, Microsoft-backed cybersecurity software-as-a-service company Rubrik Inc. delayed filing for an IPO, originally slated for Tuesday, until further notice, people familiar with the situation said. It cited market conditions.
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Issuers are being forced to think carefully about the risk of the government closing, said Kati Penney, a corporate transactions lead at CrossCountry Consulting. While companies face multiple risks, “more contingency planning is now coming into play with a potential government shutdown,” Penney said.
60 Days
The longest shutdown in modern US history was 35 days in 2018 to 2019. No IPOs were approved during that time.
While EDGAR, the electronic filing system for submission of documents would remain open, the SEC is closely involved in companies’ filings for IPOs. It typically takes about 60 days for the commission to review and comment on initial IPO document drafts, financial information and subsequent revisions — but there’s rarely just one revision. Any IPOs filed toward the end of October would probably have their pricing veer close to Nov. 17, the date of a potential shutdown, leaving investment bankers and issuers little margin for error.
SEC staff needs to look at just about everything, at every stage, said Samir Gandhi, a partner at law firm Sidley Austin LLP.
“Does that mean that issuers are going speed up their timeline?” he said. “They could potentially, while the SEC is available.”
Not only would fourth-quarter deals be affected, but companies set to launch IPOs in January may also feel the heat if the SEC faces backlogs after a shutdown. Preparatory work may be delayed for the duration of a shutdown, or even longer.
Burning Daylight
Companies that are already publicly traded face less of a threat here. They often have “well-known seasoned issuer” status, giving them an automatic shelf registration to proceed with share offerings without further SEC approval. Companies with US$700 million in publicly traded shares and that have issued more than US$1 billion in primary debt offerings can achieve this status.
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It’s the smaller, private companies that could be hit disproportionately hard by any shutdown, said Curt Creely, a partner at law firm Foley & Lardner LLP.
“They’re the ones that usually don’t have a registration shelf,” Creely said.
The process of finding a new House speaker could take a long time, leaving markets on edge for weeks, said Paul Christopher, head of global investment strategies at the Wells Fargo Investment Institute. That kind of doubt could put the IPO market, and US stocks in general, on edge for weeks.
“In January, it took 15 tries to have the speaker elected. How many times will they take this time?” he said. “They’re burning the daylight. It is a real challenge that they set themselves up for.”
