The 2018 class of initial public offerings (IPOs) looks especially vulnerable to the impact of an extended government shutdown, thanks to an arcane rule requiring recent listings to wait for regulatory approval before raising cash in a follow-on offering.

President Donald Trump told reporters on Wednesday that Congressional Republicans are unified behind continuing the shutdown, which he previously warned could last for months, or even years. While the shutdown prevents companies from moving forward with new IPOs, those that have already listed face their own set of challenges.

“The dynamic for follow-on offerings might be even more problematic than for delayed IPOs,” says Dave Sabow, head of Silicon Valley Bank's life science and healthcare practice.

Well-performing IPOs typically bring another equity offering within a year of listing in order to provide liquidity for investors and raise more cash at a stronger valuation. But because of the companies' short reporting history, they must wait for the SEC to reopen so that it can review their filings to sell more stock. Soaring 2018 IPOs such as Dropbox Inc., Elastic NV, Pluralsight Inc., Smartsheet Inc., and HUYA Inc. will have to delay any plans for equity financing until the government reopens, or else they will have to find an alternative source of cash.

In a phone interview from the sidelines of the JPMorgan Healthcare Conference, Sabow said those alternatives could include private debt financing, partnerships, out-licensing agreements, or geographic licensing arrangements.

“There are things beyond equity that can finance innovation,” he said. “The importance of those alternatives increases as this shutdown goes on.” But those options might not work for every firm in every sector.

“There are not a lot of options,” says Carter Mack, president and co-founder of JMP Group LLC. “If you were planning on raising equity, you want to raise equity.”

Since the government shutdown began last month, just three follow-on offerings have raised a total of $811 million in the U.S. through Wednesday afternoon, according to data compiled by Bloomberg. Over the same period last year, 13 deals raised nearly $6 billion.

Other companies with market caps above $700 million, or those that issued $1 billion in debt over the past 3 years, can raise equity during the shutdown without SEC review because they qualify as a so-called “Well Known Seasoned Issuer.” That designation was created by the SEC in 2005 to make it easier for larger, more familiar firms to bring offerings. But these companies also have fewer reasons to raise cash in a shutdown, as acquisitions and drug trials remain in limbo.

Sabow says most companies remain optimistic that the shutdown will not last much longer: “I think people are heavily discounting any scenario where this becomes an intermediate- to long-term shutdown. If that happens, I wouldn't be surprised if we see a different sentiment out there.”

From: Bloomberg

Instant Insights /

Recent IPOs Seeking Cash Are Frozen Out by Shutdown

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