Securities Law Blog

Personal letters from founders, chairpersons and CEOs to prospective investors have been inserted in IPO prospectuses since Google’s IPO in April 2004, and most recently have appeared in the final prospectus for Lyft, Inc. (March 28, 2019) and the preliminary prospectus for Uber Technologies, Inc. (April 11, 2019). Generally, these letters have appeared in the prospectuses of high-profile technology company IPOs. Over the past several years, companies such as Ceridian HCM Holdings Inc. (April 2018), SailPoint Technologies Holdings, Inc. (November 2017), Switch, Inc. (October 2017), Blue Buffalo Pet Products, Inc. (July 2015), Planet Fitness, Inc. (August 2015) and Twitter, Inc. (November 2013) have used these IPO letters like provocative introductory road show comments to discuss everything from their unique core beliefs, “karma” and sustainability to their revolutionary business model that will disrupt an entire industry. But, as a group, IPO letters have consistently addressed two major themes by new issuers – first, the tension between profits and the company’s social mission (or the proper purpose of the corporation) and second, the pressure between the market’s short-term expectations and the company’s long-term, aspirational vision (known as short-termism).

From an SEC rules perspective, the inclusion of IPO letters is an anomaly. The Securities Act of 1933, Form S-1 instructions and Regulation S-K disclosure items certainly don’t require issuers to supply these letters, though the rules also don’t prohibit them. In some ways, IPO letters are analogous to an issuer’s free writing prospectus because the letters don’t meet the form and content requirements of statutory prospectuses, but as part of the registration statement, unless protected as statements of opinion under the Supreme Court’s Omnicare, Inc. decision, are subject to Securities Act Section 11 liability, as well as various anti-fraud provisions of the securities laws.  

Some lawyers and commentators have suggested the IPO letter is pretentious because its disclosure is essentially duplicative of the company’s general business description but in a folksy style (think Warren Buffett’s annual Berkshire Hathaway shareholder letter and at its extreme, Garrison Keillor’s Prairie Home Companion) or, if not entirely duplicative, any additional information about the company could just as easily be included in the boxed prospectus summary section of the prospectus. Other lawyers and commentators have suggested that the concept of the IPO letter goes even beyond the normal company overview and, in many cases, outlines how the purpose of the corporation is to benefit society and not just to maximize shareholder return, and somehow this message is appropriate in a personal letter and not necessarily suitable for the rigidly-structured SEC prospectus. For example, in a letter titled “Our Life’s Work,” the co-founders of Lyft addressed their view of the company’s societal role:

Every day, millions of people connect in Lyft rides, helping demonstrate that people from all backgrounds, neighborhoods and walks of life can come together — even when just for a short trip. This happens when a rider who had a tough day is comforted by their driver’s kind words. It happens when a driver and rider with opposing political views meet on common ground. And it happens when someone gets a safe ride home, a ride to the doctor or a ride to a job interview.

Uber’s Chairperson of the Board also addressed the company’s commitment to serve the needs of society in his letter, noting that Uber’s board will balance the risks of growing its business while “maintain[ing] a high bar for sustainability, ethics and corporate citizenship.” Switch’s founder, in his letter, stated that the company’s “mission is to enable the advancement of humanity” by creating sustainable infrastructure solutions and, following a set of core beliefs, they have been “empowered . . . to be good global citizens.”

In the same vein, IPO letters have also focused on another currently debated topic – short-termism, or their need to avoid the market’s myopic pressures created by quarterly earnings reports, in favor of their own idealistic long-term vision, which for fledgling companies typically means investing for future growth. In that regard, Lyft’s co-founders cautioned investors:

If we told you we were building the world’s best canal, railroad or highway infrastructure, you’d understand that this would take time. In that same light, the opportunity ahead requires continued long-term thinking, focus and execution. In order to best deliver long-term value, we will . . . prioritize the long-term health of the business, over day-to-day reactions of the markets.

Based on our review of publicly available SEC comments, the SEC has frequently remarked in its comment letters that IPO letters need to serve a supplementary purpose that is meaningful to investors and directly relevant to the public offering. Given that the SEC’s prescriptive disclosure regime is designed to capture all material disclosures necessary for an investment decision, the SEC staff appears to have carefully reviewed the content and bounds of IPO letters. Without specific rules applicable to such letters, however, the SEC appears to look primarily to the closest regulatory guidance, which is Item 503 of Regulation S-K. Item 503 requires a brief, clear and plain English business overview for the prospectus summary and risk factors touching on the most significant aspects of the company’s business and the offering.

In its reviews of IPO filings, the SEC has commented that IPO letters should be limited to a discussion of the company’s current business (particularly if the issuer is in its preliminary stage of development) and the risks of investing in the offering. The IPO letter must present a balanced summary of the business including, if presented, its current financial condition, future prospects and challenges. The SEC staff has often been called upon to direct issuers to:

• dial back or provide the basis for unsupported business “hype” in the letters (e.g., position in a market segment),
• correct inconsistencies in the IPO letter with disclosures in other prospectus sections, and
• augment the core sections of the prospectus such as “Management’s Discussion and Analysis,” “Business” and “Certain Relationships and Related Party Transactions” to include material information otherwise only introduced in the IPO letter, especially if only briefly noted.

The staff has also directed issuers to balance out certain disclosures such as selected positive financial metrics with less impressive related financial measures presented in the financial statements, and to clarify why the company considers such metrics to be important for investors in evaluating its performance.

The SEC has made clear that the proper placement for IPO letters is after the forepart of the prospectus (i.e., the “Prospectus Summary” and “Risk Factors”), and it is typically placed between “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Business” section.

The IPO letter may be a mere symbolic gesture by founders, chairpersons and CEOs to “lead the parade,” but nonetheless the letter provides an insight into the zeitgeist of today’s newest IPO companies, with the SEC closely monitoring the bounds of this informal disclosure. Nowhere else do we see such a candid look at what leaders of these companies are now actually thinking.

As IPO letters have increasingly become a ritual in the largest “unicorn” IPOs, it will be interesting to see if they will also be included in the IPOs of small and mid-cap companies in the near future.