Difference Between Confidential IPOs and Normal IPOs

Confidential IPOs and normal IPOs are two different approaches companies can take when going public. Here are the key differences:

What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company offers shares to the public for the first time, transitioning from a privately-held entity to a publicly traded company. This process involves filing documents with the regulatory body—like the Securities and Exchange Commission (SEC) in the United States—to provide transparency to potential investors.

There are two types of IPO processes: Confidential IPOs and Normal (Traditional) IPOs. Below, we'll explore the differences, pros, and cons of each type to understand why companies may choose one over the other.

Confidential IPO vs. Normal IPO: A Quick Comparison Table

Feature	Confidential IPO	Normal (Traditional) IPO
Filing Process	The company files a draft registration statement confidentially with the SEC, keeping details private until closer to the public offering.	The company files a public registration statement with the SEC, making all information immediately available to the public.
Public Disclosure Timing	Details are disclosed to the public shortly before the IPO, typically 15 days prior to marketing the shares.	All information is available to the public immediately upon filing.
Control Over Information Release	Greater control over the timing of information release; changes can be made without public scrutiny.	Less control over timing; all changes are visible to the public from the outset.
Regulatory Review	SEC reviews the draft confidentially, allowing changes without public disclosure.	SEC review is public, making any back-and-forth visible to investors.
Market Testing	Allows for better market testing and feedback without public exposure.	More challenging to adjust strategy based on market feedback once filing is public.
Risk of Public Scrutiny	Lower risk; scrutiny begins only when the filing becomes public closer to the IPO date.	Higher risk of scrutiny from investors and the media as soon as the filing is made public.

What is a Confidential IPO?

A Confidential IPO, also known as a stealth IPO, is when a company submits its initial registration documents to the SEC confidentially. The details of the company’s finances, strategy, and operations remain private until closer to the date of the public offering.

This process was popularized after the 2012 Jumpstart Our Business Startups (JOBS) Act, which allowed companies to file confidentially if they met specific criteria, such as having less than $1 billion in annual revenue.

What is a Normal (Traditional) IPO?

In a Normal IPO, a company files a Form S-1 or similar document with the SEC, which immediately becomes available to the public. The filing includes detailed information about the company’s financial performance, business model, risks, and more. Investors, analysts, and the media can scrutinize these details throughout the IPO process.

Key Differences Between Confidential IPOs and Normal IPOs

1. Timing of Information Disclosure

• Confidential IPO: Keeps information hidden until 15 days before the public roadshow. This gives the company time to adjust and refine its business model or financial outlook without outside pressure.
• Normal IPO: Information is public from the moment of filing, leading to greater transparency but also exposing the company to early criticism and scrutiny.

2. Control Over the IPO Process

• Confidential IPO: Allows more flexibility. Companies can make changes and adjustments in response to SEC feedback without any public reaction until the final filing.
• Normal IPO: Less flexibility as any adjustments or revisions made during the filing process are visible to everyone, potentially affecting the company’s reputation or stock valuation.

3. Regulatory Review Process

• Confidential IPO: The SEC’s review process is conducted privately, allowing companies to address concerns and revise filings without public embarrassment or negative media attention.
• Normal IPO: SEC reviews are public. If there are issues with the filing, investors will be aware, potentially influencing the market's perception of the company.

4. Market Testing and Feedback

• Confidential IPO: Better market feedback and testing without the risk of damaging public perception. This allows companies to gauge investor interest and adjust strategies accordingly.
• Normal IPO: Any market feedback comes after the information is public. Adjustments made during the public process can be interpreted as a lack of preparation or confidence.

5. Risk of Public Scrutiny and Media Attention

• Confidential IPO: Reduced risk of negative press or speculation during the early stages. This is especially beneficial for high-risk or highly innovative companies that might face skepticism.
• Normal IPO: From the moment of filing, companies are under public and media scrutiny, which can lead to premature judgments or influence market sentiment.

Why Choose a Confidential IPO?

Pros of Confidential IPOs

1. Flexibility: Companies have the freedom to tweak their filings based on SEC feedback without any public impact.
2. Reduced Pressure: Delaying disclosure minimizes early public and media scrutiny.
3. Confidential Market Testing: Companies can gauge market conditions without committing to an IPO publicly, allowing them to withdraw or postpone without reputational damage.
4. Time Management: Easier to manage the timing of an IPO, ensuring it aligns with favorable market conditions.

Cons of Confidential IPOs

1. Less Transparency for Investors: The delay in disclosure may make some investors cautious, as they have less time to review and analyze the company's information.
2. Uncertainty: Investors have limited visibility into the company's financial health until just before the IPO, which might impact trust.

Why Choose a Normal IPO?

Pros of Normal IPOs

1. Transparency: Information is available to investors from the beginning, building trust and confidence.
2. Market Engagement: Public filings can generate buzz, potentially increasing investor interest and hype leading up to the IPO.
3. Investor Access: Retail investors and analysts have more time to study the company, leading to better-informed investment decisions.

Cons of Normal IPOs

1. Higher Pressure: Immediate public disclosure means scrutiny begins as soon as the filing is made.
2. Limited Flexibility: Any updates to filings are public, which can impact market perception if changes are seen as significant.
3. Risk of Negative Press: If there are any issues or surprises in the filing, negative press can emerge early, influencing the IPO’s success.

When to Choose a Confidential IPO vs. a Normal IPO?

The choice between a confidential and a normal IPO largely depends on the company’s needs, market conditions, and strategy:

• Confidential IPO: Suitable for companies that want more control over the timing and disclosure of information. It’s often chosen by tech startups, high-risk companies, or businesses wanting to avoid early scrutiny.
• Normal IPO: Ideal for companies confident in their financial health and ready for public examination. It’s preferred when transparency and investor trust are priorities, especially in well-established sectors.

Conclusion

Both Confidential IPOs and Normal IPOs offer unique advantages and challenges. A Confidential IPO provides a private, low-pressure environment to finalize details before going public, while a Normal IPO emphasizes transparency and investor confidence from the outset. Companies must carefully weigh the benefits of flexibility against the need for investor trust when deciding which approach suits their goals.