The once-promising initial public offering (IPO) market has hit a rough patch this year, and now faces an even greater obstacle in the form of a potential government shutdown.
The Securities and Exchange Commission (SEC), responsible for overseeing IPO registrations, has announced that it will halt the processing of IPO filings and other relevant documents if Congress fails to pass an appropriations bill by the end of September.
According to the SEC's contingency plan released in July, a lack of funding would render the agency's corporate finance division unable to process filings, offer interpretive advice, or issue no-action letters. Consequently, all new or pending registration statements and applications for relief would be put on hold, regardless of their current review status.
This impending hiatus comes at a challenging time for the IPO market, given the underwhelming performance of recent offerings like Arm Holdings (ticker: ARM) and Instacart (CART) (officially known as Maplebear). If the SEC's operations are suspended, anticipated deals involving notable companies such as Birkenstock, Smith Douglas Homes, and VNG Ltd., a computer game maker, may face further delays.
Riley Mullin, an equity analyst at Renaissance Capital, a renowned IPO research firm, expressed his skepticism towards pursuing an IPO under such circumstances. "It makes no sense to forge ahead with an IPO when there is an imminent government shutdown," Mullin stated. He recalled that no companies managed to complete IPOs during the monthlong shutdown in December 2018.
Given the uncertainty looming over the IPO market, industry players must navigate these challenges with caution and adapt their strategies accordingly.
The Potential Impact of a Shutdown on the IPO Market
The window for IPOs this year could shrink uncomfortably if a shutdown occurs and extends close to the IPO's normal holidays around Thanksgiving and year-end, warns Mullin. The potential consequences of a shutdown on the IPO market are significant.
Increasing IPO Activity
Despite the looming uncertainty, the IPO market has seen a robust increase in activity. According to Renaissance, there have been 78 IPOs priced this year for companies with at least a $50 million market capitalization. This represents a noteworthy 22% increase compared to the same period in 2022.
Growing Number of IPO Filings
Furthermore, there have been 130 IPO filings recorded so far this year, exhibiting an 18% increase when compared to the figures from 2022. Among these filings is the well-known company Birkenstock. Unfortunately, we were unable to obtain an immediate comment from the company, and its securities attorneys declined to provide any information.
Caution in the Market
Although federal securities law permits firms to proceed with an IPO without explicit signoff from the SEC, Mullin doubts that any companies will test this provision, particularly in light of recent underperforming large deals like Arm's. Arm's initial offering price of $51 per share experienced a 25% surge, only to relinquish those gains subsequently.
Given the shaky nature of the IPO market following these bellwether deals, a potential shutdown would further exacerbate the volatility.