If you saw Twitter’s IPO announcement last Thursday and found yourself feeling left out or scratching your head, you’re surely not alone. In the brevity of a tweet, Twitter said that it had confidentially filed an S-1 with the SEC for a planned IPO and followed up with a quick disclaimer. With references being made to Facebook’s inept IPO and millions of dollars on the line, perhaps you’re wondering if you should get in on all the action.
Before you get too excited, there are a few things you need to know.
What is an IPO?
An initial public offering (IPO) occurs when shares of a company stock are being sold to the public for the first time. Through this process a private company becomes a public company, hence the term “going public”. Simply speaking, the owners of the company are giving up part of their ownership to the general public, in order to help the company raise more capital for expansion and to open the doors for other financial opportunities.
The owners and early investors benefit because they stand to rake in millions, and since their financial statements are being made public and they company is now under SEC regulation and scrutiny, they get better rates when issued debt because inherently there should be less risk and uncertainty for the lending parties. New stockholders win because they get to lay stake to a company they believe in, can vote for board members or subsequently sell shares to make a profit.
The Process of an IPO
A company hires underwriters to help them do a whole host of things, including valuing their shares, allocations and other details of their planned offerings. The SEC also requires that a company disclose information—a prospectus—to potential purchasers in advance of the actual date of the IPO with part of their filing. This part of the IPO is rather risky because it lets competitors see what the company is doing and puts the company under extreme scrutiny without the ability to respond to criticisms; the company is essentially leaking its own information while under a gag-order.
Twitter is doing things a little differently—they’re filing confidentially. Under one of the provisions of the Jumpstart Our Business Startups (JOBS) Act, companies with less than $1 billion in annual revenue do not have to disclose their financial documents to investors until 21 days before their road show—when the company owners will go around the world and talk to current and potential investors. In contrast, Hilton Worldwide Holdings filed an IPO on the same day as Twitter but their filing is public, as their annual revenue is around $7.4 billion annually.
NerdWallet, Should I Invest?
If this would be you first foray into investing the answer is no; even if you have a typical portfolio in investing, the answer is still mostly likely no. Buying stocks before an IPO is tricky and extremely risky, so much so that the SEC has regulations against a normal person, like you or me, (and not an accredited investor—someone with a net worth of over $1 million or an income over $200,000 in each of the two most recent years), from buying stock until after it is already trading on the stock exchange.
I’m Not Average Joe and I Want to Get In on the Twitter Action!
If you do have bit more income to spare, are an individual investor and you value the Twitter product here are a few things you should know:
- First and Foremost, Answer This Question—Do you think Twitter will become a financial powerhouse? Right now Twitter isn’t exactly a profit machine, but do you think that they have the means to develop more revenue? If you’ve sketched out a positive and reasonable scenario, and don’t mind the risk, then by all means.
- You’ll Have to Play the Waiting Game—Because details are scarce, a good investor knows that they will just have to wait.
- Call Your Broker—Your brokerage will be getting information in the coming months and often have dealings with the underwriters in the IPO process that will entitle them to get a certain number of allocations. Let your broker know you’re interested.
- Read the Prospectus—Attend a roadshow. Watch a roadshow. Do whatever you can in the 21 days before the IPO to make sure you are informed.
So while it may be exciting and tempting to get caught up in the frenzy, for most people investing in an IPO is not for you. Just congratulate Twitter—preferably with a tweet—and be on your way.
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