The longest government shutdown in history and the corresponding stagnation at the SEC has stalled the IPO market. Although the government has reopened, the threat of a reinstated shutdown on February 15th means that its impact on the IPO market remains an open question.
The road to an IPO typically lasts months and involves extensive communication and coordination with the SEC. Over the past two years, it took tech companies an average of three rounds of exchanges with the SEC, spanning 115 days before they could file their first public IPO-registration statements. Then, it averaged an additional four filings and 29 days from the initial public filing to IPO.
How the Shutdown Affected the SEC
The shutdown severely limited the SEC staff to a skeleton crew that could only respond to certain critical matters, which precluded timely review and response to IPO registration documents. The anticipated cumulative delays for reviews have soared. The SEC even released a statement warning that the shutdown would create a complex calculus for any company considering going public in January.
Compounding the issue is that, even though the shutdown has been temporarily lifted, the SEC staff has a mountain of backlogged work to plow through. Further, it remains to be seen whether the shutdown will go back into effect on February 15. In an interview with the Wall Street Journal, President Trump cited the odds at 50/50, and reaffirmed that another shutdown is “certainly an option.”
The extended government shutdown forced some companies to seek alternate routes to public registration of their securities, such as digital securities offerings (“DSOs”). DSOs provide a viable exemption to the public registration requirements, enabling companies to raise unlimited capital through the traditional Reg D. private placement exemption. Further, digital securities offer the promise of liquidity – a concept foreign to the traditional private placement markets. Biotechnology companies such as Gossamer Bio Inc. and TCR2 Therapeutics Inc. have been exploring this option, which requires changing the language in the prospectus to make it automatically effective after 20 days. This bypass is completely legal, and after the shutdown the SEC reminded companies that it is an alternative option.
Tokenized securities are digital representations of ownership in an asset, company equity, debt, or other securities that are cryptographically stored on the blockchain. They are commonly also referred to as Security Tokens. Digital securities allow for fractional ownership, increased transparency, sovereignty in asset ownership, and an online, secondary market trading opportunity. This is not a revolutionary idea, but rather the evolution of the traditional securities landscape.
Regulated trading platforms such as tZERO and Open Finance Network are designed for the trading of tokenized securities. These platforms streamline the compliance process for secondary market trading, allowing companies and individuals to buy, sell, manage and research digital securities all in one place. Direct integration with financial institutions such as broker-dealers, custodians, and transfer agents provide a bridge to the on-chain crypto capital markets.
In some regards, the shutdown came at a particularly inopportune time for the emerging digital securities market. On the other hand, the regularly protracted procedure of SEC filings coupled with the annual inability of the SEC to fulfill its duties altogether may push companies to pursue digital securities offerings and circumvent the fitful, cumbersome IPO process altogether. Such a move would spark innovation and diversify the pool of entrepreneurs by facilitating opportunities that would otherwise be reserved for the wealthy and well-connected.