The business world has been buzzing about Chamath Palihapitiya’s attempts to orient Social Capital Hedosophia as vehicle for acquiring tech firms, and in the process ease entrepreneurs’ access to public markets. Business Insider reports that the mogul has launched a new “blank-check” company in partnership with London-based VC firm Hedosophia as the acquisition vehicle:
Social Capital Hedosophia has filed paperwork for a $500 million IPO although it makes no products, has no customers, and owns nothing … yet. It plans to raise the money first and then go out and buy stakes in private tech companies, ranging from minority stakes to controlling interests to full ownership.
The idea is to give these tech companies the benefits of being a publicly traded company – like easier access to capital – with fewer drawbacks, like the “distraction” of doing the actual IPO and the bother of the quarterly, short-term view of investors, Social Capital Hedosophia explained in the documents it filed with the SEC.
I have a couple of off-the-cuff thoughts and queries about the deal, assuming it goes off without a hitch:
- What’s in it exactly for the entrepreneur? So instead of doing an IPO where a company can cash out for hundreds of millions of dollars, you negotiate a sale of some of the equity in your business. What additional “fee” or equity compensation is taken by Social Capital Hedosophia in providing the bridge to capital markets?
- How much net disclosure (and time of busy management) is really reduced for early acquired companies? Possibly not as much as one would think. Only once Social Capital Hedosophia’s holdings increase to scale could the individual holdings become less “material” to the operations of the whole. And even after acquiring varying companies and lines of business, under U.S. law, even developments that have a di minimis impact on revenues can still be deemed material (and require disclosure) if they play a significant role in a company’s business. Still, I suppose there could be economies of scale in the legal department–but that then could raise questions about the correlation of investments and (uh oh) materiality of even small business segments.
- Then the big policy question: To the extent to which these deals are successful, and achieve the goals of the promoters, do they diminish the need for further legislative or regulatory reforms governing IPO? The JOBS Act was based at least in part on the idea that investors should public investors access to the wealth being created by well-performing private tech companies. This provides a deal structure that ostensibly is aimed at achieving the same results. All the while, companies conceivably stay “private” longer to the extent to which they escape individual, firm-level disclosures.