Risk & Compliance

Budget Fight Threatens IPO Pipeline

If the federal budget impasse leads to a government shutdown, companies may have to wait a long time to go public.
Sarah JohnsonApril 7, 2011

Among the multitudes who are anxiously awaiting the outcome of the budget showdown on Capitol Hill are the finance chiefs of companies waiting to go public. Should lawmakers fail to agree on a fiscal 2011 budget by the Friday night deadline, the federal government would largely shut down — and so would the pipeline for initial public offerings.

It’s still unclear which offices of the U.S. government would have to close in the event of a shutdown. But CFOs and the attorneys who help them file their paperwork with the Securities and Exchange Commission are preparing for possible delays. The SEC’s staff may be reduced to a skeleton crew, unable to provide feedback and give the go-ahead on IPOs. “It will likely materially, adversely affect the timing of initial public offerings because the SEC will likely not have the staff to review those filings,” says Richard Truesdell, head of the capital markets practice at law firm Davis Polk & Wardwell.

Moreover, a pause in the SEC’s routine business could lead to a deeper backlog of IPOs when the agency resumes operating at full strength.

After a company files an S-1 form to register its securities with the SEC, the agency can take up to 30 days to respond with questions. The ensuing back-and-forth between regulator and company typically lasts between 10 and 12 weeks, says Truesdell.

So far the SEC has not revealed its contingency plans for dealing with a possible shutdown. A union for SEC staffers has said that only about 100 to 250 of the regulator’s more than 4,000 employees would be able to work, while the rest would be furloughed without pay. (Companies that have filed S-1 forms are in a quiet period; those contacted for this story declined to comment.)

A shutdown would be especially critical for the 24 U.S. and global IPO-ready companies that have gone through the SEC’s deep reviews and are in the middle of marketing their shares and printing their final prospectuses, says Linda Killian, principal at IPO research firm Renaissance Capital. Those companies — including rental-car company Zipcar and Arcos Dorados Holdings, which operates McDonald’s restaurants in Latin America — would still need the final OK from the SEC, says Killian.

For each quarter over the past year, between 230 and 330 companies have filed S-1 forms, according to SEC Watch Inc. Not all of those forms are being reviewed by the regulator, as some companies may be holding off on pursuing an IPO for various reasons.

The IPO market is already in an uncertain state, particularly for companies based in the United States. In 2010, 124 U.S. firms made IPOs, the highest number since 2007, when 207 U.S. companies went public, according to Thomson Reuters. In the two-year span of 2008 and 2009, only 83 companies did so.

In a memo sent to clients earlier this week, Gibson, Dunn & Crutcher recommended that SEC registrants wire funds to their accounts with the regulator if they anticipate having to pay any filing fees in the near future. The law firm believes that Edgar, the SEC’s electronic filing system, will continue to be able to collect and display 8-Ks, 10-Qs, and other filings.

To be sure, while corporate lawyers have spent some time in recent weeks preparing their companies for possible disruption in their dealings with the SEC, the contingency planning could be for naught. “If there’s a budget deal or a continuing resolution passed, these issues go away until the next budget stalemate happens,” says David Westenberg, senior corporate partner at WilmerHale.