Some couples just don’t make sense, especially in D.C. Back in the day, the romance between James Carville and Mary Matalin had us shaking our heads. We didn’t see the bromance between Trump and Emmanuel Macron coming either. But here’s the latest one we just don’t get: the SEC and the tech industry.
Sure, the romance between them seems to be blossoming. The SEC and its Chairman, Jay Clayton, have been unabashed in their desire for all companies, including tech firms, to hit the public markets. Before his confirmation, he bemoaned the decline in U.S.-listed companies and said that regulators should be doing more to attract IPOs. If such sweet nothings weren’t enough, he followed them up with action. Clayton’s SEC has decided to let all companies file for IPOs secretly and, most recently, softened financial disclosures that must accompany draft registration statements.
Whether or not these overtures are the reason, the consensus is that we’re about to see a boom in tech listings. Anticipation is building for IPOs by the likes of Uber, Airbnb, Pinterest, and Lyft — not to mention Chinese music streaming colossus Tencent Music, which could be worth more than $25 billion.
But it’s worth asking: what do these tech companies really see in the SEC? Yes, the agency has made the filing process easier. But once the SEC gets tech companies to commit, it’s a bit of a different story. In fact, on two issues of primary importance to tech companies, the SEC has staked out positions that are unfriendly to the industry.
Take the issue of corporate control, one that tech firms hold dear. The leaders of many tech companies have gone to great lengths to retain control of their enterprises, even after going public. Snap was the boldest in this regard; it famously gave shareholders no voting rights at all when it opened on the NYSE last year. Others have created different classes of stock, structuring them to dilute the voting power of the masses. That’s all well and good, except that in February, SEC Commissioner Robert Jackson Jr. came out strongly against the practice. Those statements were part of a backlash so strong that the S&P 500 has said that it will not include stocks with multiple classes in its index. Such stocks will therefore not get picked up by index funds tracking the S&P, thus denying them a major benefit of going public in the first place.
A second issue is revenue recognition. Investors want to know how much money Instagram and YouTube make, but tech firms Facebook and Alphabet prefer to keep the results from those business units under wraps, hidden within the company’s overall financial results. This has become a source of considerable tension between tech companies and the SEC, which takes the investor perspective. While the SEC seems to have lost its fight to get numbers from Alphabet about YouTube and Amazon about its Amazon Web Services business, it tried hard to get them — and could revive its effort again.
Why risk all that headache? It could be as simple as the recent Dropbox IPO, the success of which indicated pent-up demand for tech investment and, therefore, a viable exit strategy. The answer, in other words, could be a tale as old as time — a story about lovers in it for the money.