The Shutdown’s Effects on 2019 IPOs

With the partial Federal government shutdown now over (for now, at least), it will be interesting to see what happens with the slew of IPOs which were set to launch in 2019.

The 35 day partial-shutdown led to hundreds of thousands of “non-essential” federal workers being out of work, including employees of the U.S. Securities and Exchange Commission–the agency responsible for protecting investors and maintaining fair, orderly, and efficient markets.

After partially shuttering on December 27th last year, the SEC had less than 7% of its regular workforce punching in. I repeat: less than 7 out of 100 employees. To make matters worse, the skeleton crew mainly involved staff dedicated to emergency situations like market integrity and investor protection and enforcement.

While the SEC’s Electronic Data Gathering, Analysis, and Retrieval system or “EDGAR” (which enables companies to electronically file crucial registration documents for initial public offerings) remained up and running, the lack of a full staff has reportedly led to a significant backlog of filings that will likely cause delays in several IPOs and have lasting impacts on the IPO market for the rest of 2019.

Several major technology companies which took steps toward early-2019 offerings–including ride-hailing services Uber and Lyft, team collaboration service Slack, and popular online vacation home renter Airbnb–are now at risk of delay, even with the shutdown now lifted.

With nothing obviously happening for January, the backlog of S-1s for the SEC to review remains. This backlog will invariably cause other IPOs to be delayed or bunched too close together, meaning their underwriters may decide to pull them. This in turn could mean a lot of bridge financing on which some companies were depending to get them through IPO will fall apart, which then prevents other deals from moving forward. Without interim financing for operations, some companies may elect to simply take a loss for the first quarter. However, this usually makes it more difficult to raise capital at the same valuation later on.

The good news, at least for the most hotly anticipated tech IPOs, is that they are for the most part well-funded businesses with strong balance sheets to serve as a cushion in case their IPO plans go sideways.

However, for those smaller businesses set to IPO, the shutdown’s effects may be more dire, as these are normally the firms with more pressing need for capital infusion to continue operations.

Ben Bhandhusavee is the founder of BHANDLAW, PLLC, a Phoenix business and technology law firm advising early stage and established businesses on corporate M&A, technology, and finance transactions, as well as e-commerce, creative intellectual property, Internet and digital media matters. Ben can be reached at (602) 222-5542 or by e-mail at bbhand@bhandlaw.com