Could the Government Shutdown Affect IPOs?

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Wharton's David Zaring and James Cox from Duke University discuss the impact of the government shutdown on the SEC and IPOs.

The federal government has now been shut down for a record 26 days, as the impasse between President Trump and congressional Democrats over building a $5 billion wall along the U.S.-Mexico border seems no closer to being resolved. Last week, Fed Chair Jerome Powell said short-term government shutdowns typically don’t affect the economy but also cautioned that the country has never seen a prolonged impasse. If there’s an extended shutdown, it “would show up in the data pretty clearly,” he added.

One potential impact the shutdown would have on Wall Street is the delayed filing of initial public offerings — especially the much-anticipated tech offerings this year from hotshots such as Uber and Lyft — because the Securities and Exchange Commission (SEC) is largely out of commission. The SEC overseas securities offerings and guides companies planning to go public, among other duties. Since the shutdown, only 285 out of 4,400 SEC employees are on the job, and they mostly work in law enforcement.

There is “almost nobody from the Division of [Corporation] Finance, which would review these IPOs,” said David Zaring, Wharton professor of legal studies and business ethics on the Knowledge@Wharton radio show on Sirius XM. (Listen to the podcast at the top of this page.) “In prior government shutdowns, the SEC has had some access to emergency funding of its own, which means it could be operating while other government agencies couldn’t. That is not the case this time.”

The shutdown means the SEC is not available to guide companies planning to go public. Companies can still choose to go public without the SEC’s input on whether the IPO preparation was done properly, but that’s riskier. “The consequence of not getting that feedback from the SEC … [is] almost an invitation on their registration statement [saying], ‘sue me,’” said James Cox, law professor at Duke University specializing in corporate and securities law, who joined Zaring on the radio segment. “That’s how it could be read by the aggressive class-action plaintiff” attorney.

Typically, the SEC would issue detailed “comfort letters” spanning 15 to 25 single-spaced pages with reviews and comments on a company’s registration statement, which it must file to go public. The registration statement provides IPO details and explains why the company is going public. Cox said the shutdown at minimum “screwed up the schedules of the Airbnbs and Ubers of the world” and pushed their potential IPOs further out to potentially even more uncertain market conditions since the economy is seeing increased headwinds.

Not a Big Deal?

But David Erickson, a finance lecturer at Wharton who was co-head of Barclays’ global equity capital markets, said in a separate Knowledge@Wharton interview that he doesn’t see much of an impact on IPOs even if the shutdown lasts one or two months. “I don’t think it’s a big deal if it goes on a little bit longer,” he said. “The market conditions don’t really support new IPOs.”

According to Erickson, market conditions have been “very difficult” over the past six to 10 weeks, and IPOs that debuted in the past month and a half have posted mixed results. “[The shutdown] just delays the ability for companies to potentially access the IPO market. But given that market conditions right now don’t support IPOs anyways, I’m not sure they’re missing much.”

However, if the shutdown lasts six months or longer, “then you’re talking about a more challenging situation” for companies that might not be able to access financing during that period, Erickson said. In particular, companies that need to raise money from the capital markets “desperately” might find the impasse troubling. But for the rest of the IPOs that can wait six to nine months for market access, the shutdown “shouldn’t really have an impact.”

Zaring pointed out that delayed IPOs would be harder on less established firms. “Uber is an existing business with a strong balance sheet that has shown an ability to get a ton of private financing,” he said. “The smaller tech companies … that we don’t know as well, that don’t have access to that kind of financing, may need to go to market and their backers might need them to go to market, and they just can’t do it.”

Lost Profits

Zaring pointed out that investment banks and law firms could lose business from IPOs as the impasse continues. “It’s definitely not good news for bankers who can help companies go public and lawyers who can steer them through the process,” he said. “Those guys are going to have to wait until the agency opens before they [can help] companies … go public, and then companies might be skittish about doing so.” Uber’s CEO, Dara Khosrowshahi, has said that the company has a strong balance sheet so it doesn’t have to go public this year. Cox added that an IPO is “very profitable” for investment banks, lawyers and accountants. “That’s money in the economy that’s not happening right now.”

Venture capitalists and other investors seeking to exit their investments through IPOs would also face delays, Cox said. “Many VC firms have stakes in those [startups] and are anxious to realize their value and redeploy that cash.” While they could always sell their holdings privately to another investor, they will miss out on the higher premium from selling it in an IPO, he noted. “An IPO removes some of the drag [from] selling securities of a nonpublic company.” Added Zaring: “There are people backing these companies that would like to get their money out and can’t.”

Finally, economic activity could take a hit the longer the government is closed. “We’re going to see a noticeable impact on the economy, and all those headwinds we thought we saw earlier are then going to be moved forward,” Cox said. “This makes it more likely that the economy will slow down [at] a more pronounced rate than what was initially suggested. And it’s bad news. It’s certainly not good for the American economy.”

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