The government shutdown is starting to get the IPO markets nervous.
There is a robust pipeline for initial public offerings in 2019: Already, 160 companies have filed to go public with the SEC, according to Argus, including big names like the ride-hailing companies Uber and Lyft. There is also a backlog of companies that decided not to go public during the market tumult in the fourth quarter of last year.
The good news: EDGAR, the SEC’s filing system, is still open, and companies are continuing to file for IPOs, including several biotech companies in the last week.
The bad news: If the partial government shutdown, now in Day 26, continues into the end of January, a substantial IPO backlog will likely develop.
Even if the shutdown ends soon, there is already likely some collateral damage: “I could easily see this pushing back everyone by at least 30 days, and it’s possible now you will not see a substantial IPO market until March,” Pat Healy, who runs Issuer Network, an IPO advisory service, told CNBC
David Franasiak, a securities lawyer at Williams & Jensen, told CNBC he has numerous clients who have already seen delays: “You can do a filing, but no one is reviewing it.”
The delay involves more than just a lack of staff at the SEC. There are legal issues involved in filing for an IPO. To move forward with a traditional IPO, a registration statement has to be filed with the SEC and declared “effective,” that is, the SEC must approve the application.
Thomas Gorman, a securities lawyer and an expert on SEC enforcement, said this requirement makes it difficult for companies to go public with the government shut down: “Since the agency is not open for regular business the staff cannot review and declare effective any registration statements,” Gorman said in an email.
This delay could come at a very bad moment for IPO hopefuls. After a rocky fourth quarter, equity markets have stabilized in January (a necessary prerequisite for the IPO market) and the IPO ETF, a basket of roughly 60 of the most recent IPOs, has rallied 10 percent this month, far outperforming the S&P 500, indicating investor appetite for IPOs is returning.
In a sense, this shutdown came at a perfect moment for the IPO market. Not many companies go public in the first weeks of January, but more importantly the market volatility at the end of last year was a major problem for IPO hopefuls.
Charles Dolan, managing member for Global Markets Advisory Group, which advises clients on regulatory issues, told CNBC that market timing is critical to IPO hopefuls: “The IPO pipeline was healthy last year, up until November, when they fell off a cliff on the market volatility. Everyone wants to top-tick the market when they go public, so there’s not just companies looking to go public now, but there is also a backlog of companies from 2018.”
Still, some companies are trying to forge ahead. Several biotech companies filed to go public last week. And one company that had already filed — New Fortress Energy, an integrated gas-to-power company — announced terms for its IPO on Monday. That’s significant. The company is already out on its “road show” and, theoretically, could go public next week if the SEC makes the registration “effective.”
“The question is, is there anyone at the SEC to declare the registration effective while they are closed?” asked Kathleen Smith from Renaissance Capital.