Initial Public Offerings: Dealing with the Disclosure Dilemma

Abstract

The “going public” process is under strain, as the characteristics of companies going public, and the investor base investing in those companies’ IPOs, has changed. In addition to companies going public with more unformed business models, many of these companies market themselves to prospective investors through incomplete and sometimes misleading disclosures summarizing the quantity and quality of users, subscribers, or customers they have, and other related metrics, in addition to more conventional accounting metrics. The rules that govern IPO-related disclosures, though, reflect a different era, and as disclosures become more bloated, they are also becoming less informative. In this paper, we aim to remedy these issues, balancing the costs of disclosure to companies against the benefits they can provide to investors. We argue that one way to make disclosures more informative, while also slimming them down, is to tailor disclosure requirements to the company type. We also advocate for triggered disclosures, where claims made by “going public” companies on their value, ranging from potential market size to user/subscriber numbers, trigger a more standardized collection of “base disclosures” specific to those claims.

Keywords: disclosure, customer metrics, initial public offerings

JEL Classification: M41