WeWork, rebranded as The We Company earlier this year, officially withdrew its IPO registration statement on September 30, 2019. The company has had an unusually rocky ride from its August 14, 2019 public filing to an outcome that few, if any, would have predicted from one of the most high profile unicorns to seek capital in the public market. As the company moves forward with new co-CEOs, the abandoned (or delayed) IPO serves as a case study of the issues that private companies face under the scrutiny of regulators and public investors. As companies stay private longer, the challenges of shifting from the flexibility and control afforded private issuers to the transparency required by public issuers have been exacerbated. Taking a step back, we are breaking down some of the notable items raised by WeWork's proposed offering in a series of blog posts that highlight areas of focus for anyone planning to start down the road to an IPO.
The first issue that WeWork appears to have addressed with the SEC staff seems quaint in retrospect—garden variety gun-jumping.
As others dug into WeWork's IPO filing in August to take a peek into the company's financials, profitability (or lack thereof) and future prospects, those of us in the securities bar noticed that certain media reports seem to have caught the attention of the SEC staff. As noted in a risk factor included in the IPO prospectus, WeWork's CEO was quoted in two news reports published in May 2019. At that time, WeWork was in the "pre-filing period"; it had confidentially submitted its Form S-1 with the SEC but had not yet made a public filing. At this stage in the process, the company is "in registration" and securities laws limit the types of communications that companies are allowed to engage in. In a nutshell, you are not allowed to make offers to sell securities (a concept that is broadly defined) before you have publicly filed a registration statement.
How do companies manage running a business without running afoul of these rules? The SEC has provided some useful tools:
- Rule 169 provides a non-exclusive safe harbor for regular communications of factual business information that are intended for use by an audience other than investors.
- Rule 163A provides a separate, non-exclusive safe harbor for communications more than 30 days before the filing of the registration statement. Rule 163A was intended to give all issuers a bright-line time period during which they can communicate freely without risk of violating the gun-jumping rules.
The trick is that, in order to qualify for these safe harbors, you have to meet certain conditions. Key among the conditions is a prohibition on any reference to an offering of securities. WeWork made statements to media outlets, including investor publications, at a time when its confidential submission of a Form S-1 was public knowledge and, importantly, those statements included discussion of the potential offering. WeWork disputes that it violated applicable securities laws but included a risk factor (presumably prompted by the SEC staff) alerting potential investors that such violations, if proved, would give investors a right to put their shares back to WeWork at the original price.
WeWork apparently ranked the gun-jumping risk a low one, based on its placement at the tail end of the Risk Factors included in the IPO prospectus, but it is a helpful reminder to companies to remain mindful of the downside of publicity during the offering process. These risks are heightened (and the pressure to speak to the media intensified) in a high-profile offering like WeWork's, but the staff is consistent in its review of recent press in the context of its IPO review. Here's WeWork's risk factor:
If our involvement in online news articles published about the Company were held to be in violation of the Securities Act, we could be required to repurchase securities sold in this offering. You should rely only on statements made in this prospectus in determining whether to purchase our shares.
In May 2019, Axios and Business Insider published online news articles that included quotes from Adam Neumann, our Co-Founder and Chief Executive Officer, and Artie Minson, our Co-President and Chief Financial Officer, regarding our business strategy and results. In addition to these articles, there has been substantial additional press coverage regarding our business and this offering during the offering process, including coverage of the timing of this offering, the underwriters involved in this offering and the "analyst day" that we hosted in connection with this offering as well as coverage of our concurrent debt financing.
In making your investment decision, you should only rely on the information contained in this prospectus. Articles and other press coverage about our company present information in isolation and do not contain all of the information included in this prospectus, including the risks and uncertainties described in this section. You should carefully evaluate all of the information included in this prospectus.
We do not believe that our involvement in the May 2019 online news articles or other news articles constitutes a violation of Section 5 of the Securities Act. However, if our involvement were held by a court to be in violation of the Securities Act, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price, plus statutory interest from the date of purchase, for a period of one year following the date of the violation. We would contest vigorously any claim that a violation of the Securities Act occurred and could incur considerable expense in contesting any such claim.
Since WeWork has withdrawn the registration statement and abandoned the IPO for now, we will not see the back and forth that WeWork had with the SEC staff in its comment letters and responses. It does serve as a reminder that, despite moves to liberalize the IPO process, companies should always tread carefully with public disclosures once they start the IPO process.
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