Snap is a Big Deal
- Priced: March 1, 2017
- Listed on NYSE (44% of all IPOs and 48% of TMT IPOs in our database listed on NYSE from 2013-2016). In 2000, more than 95% of TMT IPOs listed on NASDAQ.¹
- According to Snap’s prospectus, it is the first U.S.-based company to issue nonvoting stock that is listed on a U.S. stock exchange in an IPO.
- Snap opened with a market capitalization of $33 billion.
- Headquartered in California and incorporated in Delaware.
Snap Took Advantage of Exemptions for EGCs
- Snap had 2016 revenues of $404 million and qualified as an EGC under the JOBS Act. 87% of TMT issuers and 81% of all issuers in our study from 2013-2016 were EGCs.
- Since 2013, five of 19 IPOs with a base deal of $1 billion+ qualified as EGCs and seven of these 19 IPOs were in the TMT sector.
- Snap initially filed confidentially; total time of 121 days from confidential submission to pricing is shorter than the average of 231 days for EGCs.
- Snap disclosed that it would take advantage of the following exemptions available to EGCs:
- No independent auditor attestation report on internal controls;
- Reduced executive compensation disclosure obligations and
- No advisory votes on executive compensation and any golden parachute payments.
Financial Statements and Internal Controls
- Snap followed the increasing trend of including only two years of audited financial statements in its prospectus, as permitted by the JOBS Act.
- Snap included non-GAAP metrics of Adjusted EBITDA and Free Cash Flow (both negative) and disclosed a GAAP net loss for both 2015 and 2016.
- Snap disclosed having a material weakness in its internal controls in 2014.
Snap is a Controlled Company with an Independent Board
- Snap separates the Chairman and CEO roles and has an independent Chairman.
- Despite qualifying as a controlled company, Snap has a majority independent board.
- Snap has nine directors on the board, seven of whom met NYSE independence standards.
- Each committee of the board is fully composed of independent directors.
- Unlike a significant majority of controlled-company IPO issuers in 2016, Snap does not have a classified board.
The shares that were issued in the IPO have no voting rights
- Snap has multiple classes of common stock, consistent with 16% of IPOs in our 2017 study.
- Class C shares are held by co-founders and have 10 votes per share. Based on outstanding amounts, founders have total control of the company.
- Class B shares are held by pre-IPO investors and employees. Holders of Class B shares have 1 vote per share.
- Class A shares were offered to new investors in the IPO. Holders of Class A shares have no voting rights.
- Snap notes that because the Class A shares are non-voting, holders will receive less information in the future.
- Significant stockholders of the company, other than founders, officers and directors, will not be required to file Section 16 ownership reports and will not be subject to short-swing profit rules.
- While not generally required to file proxy statements or information statements, Snap indicated that it intends to provide information that would otherwise be available in these documents to Class A stockholders through Exchange Act reports.
- Snap has also indicated that, although not required, it would invite Class A stockholders to all meetings of other stockholders and permit them to ask questions of management in the same manner as other stockholders.
- The co-founders will maintain Class C shares and related rights even if they are no longer employed by Snap.
- Class C shares held by each co-founder convert to Class B shares only upon the death of such founder or if such co-founder’s holdings of Class C shares falls below 30% of shares held at time of IPO. If either of the co-founders’ Class C shares are converted to Class B shares, the other co-founder will be able to exercise voting control over the company.
Holders of Class A common stock have no voting rights. As a result, holders of Class A common stock will not have any ability to influence stockholder decisions. – Snap IPO Prospectus
SEC Comment Letter Analysis
- Snap received 41 comments in its first SEC comment letter and 17 comments in its second comment letter, both of which were higher than the averages overall (26 and six, respectively) and the averages for TMT issuers (30 and eight, respectively) in our 2017 study. Furthermore, Snap received five total comment letters, higher than the average of four. The higher number of comments and letters may be due to greater scrutiny by the SEC given the high profile of the IPO and the company’s unique capital structure.
- Similar to other TMT issuers, Snap received comments on its non-GAAP disclosure and its revenue recognition policy. Of all TMT issuers, 44% and 76%, respectively, received comments in these two areas. However, unlike other TMT issuers, Snap did not receive any market positioning claim or back-up support comments. Of all TMT issuers, 41% and 77%, respectively, received comments in these two areas, each of which was the highest of any sector.
- Several SEC comments focused on Snap’s use of operating metrics, particularly daily active users, and the rights (including lack of voting rights) associated with its Class A shares.
- Snap added disclosure on the securities law implications of having no voting rights for its Class A shares (e.g., no Schedule 13D/G or Section 16 filings by large shareholders, no proxy or information statement filings and no shareholder proposals under Rule 14a-8) following SEC comments on the issue.
- Snap stated that it did not engage in testing-the-waters, which is not unexpected given the anticipation for, and high profile of, its IPO.
- Lock-up arrangements
- Insiders have a lock-up period of 150 days, which could end up being as short as 120 days depending on the timing of Snap’s earnings release, compared to most IPOs with 180 days (66 of 67 IPOs in 2016).
- Approximately one-quarter of the shares offered in the IPO are subject to a one-year lock-up controlled by the company.
- Included a Directed Share Program (DSP) for up to 7% of the offering.
- Snap’s IPO included selling stockholders with 73% of the base deal consisting of primary shares and 28% of the base deal consisting of shares from the selling stockholders. Management sold in the IPO, with 16% of the base deal being sold by the two co-founders, representing 58% of selling stockholder shares.
¹ Source: Dealogic: SEC registered IPOs with initial deal value greater than $50mm+ and excludes BDCs, BCCs/SPACs and REITs.