Shopify Shows How Silicon Valley Corporate Governance Structures Spread and Become the Norm

Shopify IPO documents outline corporate governance strategies with concentrating voting for insiders.

Shopify filed for an IPO.  It is raising around $100 million (a placeholder figure), but it is too early to know exactly how much of the company this represents.

Shopify Logo
Shopify IPO reveals dual class voting structure.

We do know that Shopify is implementing a dual share voting structure similar to many other tech companies.  While corporate governance activist types decry these types of arrangements, even a Canadian company knows how to protect the voting rights of its insiders.  Proponents say these structures allow for longer term thinking and innovation.

Currently, officers and directors control about 56.5% of the voting rights, with CEO Tobias Lutke holding 14.62%.  The 56.5% number is skewed because this includes investor nominees to the board, including Bessemer Venture Partners (30.3%).

The voting rights will be split up between Class B shares with 10 votes per share and the publicly held Class A shares with 1 vote per share.  The prospectus outlines the risk of concentrated voting.  However, it is not really a risk.  It is the point.

“In addition, because of the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares, the holders of our Class B multiple voting shares, collectively, will continue to control a majority of the combined voting power of our voting shares even where the Class B multiple voting shares represent a substantially reduced percentage of our total outstanding shares. The concentrated voting control of holders of our Class B multiple voting shares will limit the ability of our Class A subordinate voting shareholders to influence corporate matters for the foreseeable future.”

 

 

More Big Tech Companies Stay Private, Or Wait Longer To Go Public

The Wall Street Journal took note that many companies with high valuations prefer to stay private these days.  Mostly, it is talking about the types of tech companies that went public much earlier in their life cycle in the late nineties.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

The article mostly deals with how investment bankers more used to IPOs are dealing with large companies that prefer to raise money privately.

For most people, the woes of investment bankers struggling to meet changing business conditions is not particularly interesting.  However, what I find interesting is the assumption that these companies would necessarily want to go public.  If you don’t have to, why would you subject yourself to periodic reporting, plaintiffs’ lawyers in the securities bar, Sarbanes-Oxley, etc…?

In addition, the universe of investors for private companies is expanding.

Banks trying to woo more private-placement clients said they provide a needed service. Companies are staying private longer partly because the number of investors interested in private deals has expanded significantly, they said.

Many of these companies are also less dependent on funding from the public markets.

“What’s changed is that companies are getting so quickly from startup to real traction,” said Dan Dees, global head of technology, media and telecommunications banking at Goldman. “You can’t just wait for the IPO pitch.”

And yet, this is what critics used to complain about for IPO companies:  they were too immature for the public markets.

To me, it still comes down to an essential question for the issuer:  Why do you want to go public.  Because ‘go’ is only a part of it.  ‘Being’ public is the long-term expense and obligation.

SEC Issues Stop Order For “IPO”

Here’s something you don’t see everyday.

Typically, when going through the SEC registration process, you file a registration statement, the SEC comments, you respond and file an amendment, lather, rinse and repeat until all comments are resolved and the issuer is ready to go effective.

However, the SEC can issue a stop order to prevent the use of a registration statement if the registration statement is somehow deficient. This brings us to Counseling International, Inc.

Counseling International originally filed a Form S-1 in August 2012. It filed various amendments through June 2013. There does not seem to be an order declaring it effective, and the comment letters and responses are not yet posted on EDGAR (which occurs some time after effectiveness).

It seems to be a stretch to call this an IPO as the Form S-1 covers the resale of the shares by selling shareholders, there is no underwriter, there is no securities exchange listing and the company’s assets consist of about $21,000.  However, it is the initial filing by a non-reporting company.

On August 22, 2013, the SEC issued a stop order after it determined that the registration statement contained false and misleading information, identified by the SEC as:

  • failure to disclose the identity of control persons and promoters; and
  • false description of the circumstances of the departure of the former chief executive officer.

The prospectus provides the following language, which we guess missed some crucial details:

“The Company was founded by Layla Stone, who served as the director and chief executive officer of the Company until she sold all of her equity interest in the Company to Maribel Flores on October 19, 2012, and resigned from such positions on the same date. On October 19, 2012, Ms. Flores became the sole director and officer of the Company.”

Until the comment and response letters are posted, it will be difficult to know exactly what went on, but it must have been a serious situation for the SEC to take this drastic measure. How drastic, you ask?

First, the registration statement had a typical delaying amendment, so it would not have gone effective without SEC action in any case.

Second, Counseling International agreed to penalties, which include ineligibility to conduct a Rule 506 offering for five years or occupy any position with, ownership of or relationship to the issuer enumerated in Rule 506(d)(1). [Ed. Note: This second clause seems to apply to an individual, but the “Respondent” described in the stop order seems to be limited to Counseling International. Please let me know in the comments if I just missed something, but I had trouble making sense of this. It may be a boilerplate clause, but it is difficult to tell from the stop order document alone. The press release only refers to the ineligibility for the use of Rule 506 as a penalty.]

The SEC had the following to say, which highlights how they viewed the situation:

“Rarely do we have the opportunity to prevent investor harm before shares are even sold, but this stop order ensures that Counseling International’s stock cannot be sold in the public markets under this misleading registration statement.”

Links:
Most recent amendment to Form S-1
Stop Order
SEC Press Release

Winklevoss Twins (Of Facebook Fame) To Create A Bitcoin ETF

The Winklevoss Twins, best known for their supporting role in the early Facebook saga, have filed a fascinating registration statement. The Winklevoss Bitcoin Trust has made a filing with the SEC to register around $20 million of Winklevoss Bitcoin Shares.

The point of this investment will be to reflect the performance of the “Blended Bitcoin Price” of Bitcoins. This price is the weighted average market price of Bitcoins on Bitcoin exchanges chosen by the Winklevosses.

The Winklevosses intend for the Trust to hold Bitcoins “using the Trust’s proprietary Security System,” whatever that means for a digital asset.

While this is sort of novel and interesting in its own way, what I found most fascinating is the fact that the financial statements filed with the Form S-1 were blank. Completely blank.

While initial registration statement filings often contain blanks, I’ve never seen “Form of Financial Statements” before. Financial statements may change over the course of a filing history, such as in response to SEC comments. However, it will be interesting to see if the SEC sends the Winklevosses a bedbug letter for this filing.

Best line from The Social Network.