We (Don’t) Work: The Fallen Angel Not Working for the IPO Market

By Carlos Micames

WeWork has been in the news quite a lot recently, and not for the most flattering reasons.[1] At the beginning of 2019, the office-sharing company was touted to be the star of what was expected to be a historic year for the Initial Public Offering (“IPO”) market.[2] Following the disappointing IPOs for Lyft, Uber, Smile Direct Club, and others, investors were hopeful that WeWork could usher in change.[3] However, the company experienced an unfortunate twist, with its valuation dropping from $47 billion in January to less than $8 billion, only saved from Chapter 11 bankruptcy thanks to a last ditch capital injection from SoftBank.[4]

WeCo, the parent company of WeWork, ended its IPO plans in September following a series of doubts regarding its valuation and capacity to turn a profit.[5] In 2018, WeWork had $1.61 billion in losses.[6] A week later, Adam Neumann, WeWork’s eccentric founder, stepped down as CEO amidst Board pressure and increasing revelations of drug use, “supershares”with ten votes per share, and possible conflicts of interest.[7] The SEC also pressured Neumann by questioning the accounting methods utilized in the company’s S-1 filing, a required disclosure document for all companies going public.[8] The S-1 attempted to hide We’s losses by using non-GAAP (generally acceptable accounting practices) metrics, using terms such as “community adjusted EBITDA” in its registration statement and revised prospectus prior to commencing its roadshow.[9] WeWork later changed the term from  “community adjusted EBITDA” to “contribution margin,” attempting to satisfy the SEC.[10] The SEC requested that the company remove such terms to avoid misleading investors.[11] The WeWork scandal caused such an uproar, it is likely to impact the potential for other private companies to access the public markets.[12]

Previously, many companies aspired to go public to access the seemingly endless sea of public capital available.[13] Companies can use this capital however they see fit, by reinvesting it into the company for growth, to fund research and development, or to pay off debt.[14] There are also advantages such as increased publicity for the company.[15] However, the rise of private equity and venture capital has made the private market just as attractive and private companies are going public later, or sometimes avoiding going public all-together.[16] Further, many private companies, particularly in the tech sector, have prioritized growth over profit, which can lead to inflated valuations as seen with Uber, Lyft and WeWork.[17]

WeWork’s creative accounting practices presented an image of profitability and success for the company when traditional accounting methods would have presented an alternative story.[18] The SEC caught on and warned Neumann that containing this financial information in his registration statement would likely mislead investors.[19] In a way, the SEC actually may have preemptively saved WeWork from further disaster.  Proceeding with the IPO while maintaining this information would have likely exposed WeWork to liability under §11 (omission or misstatement in the registration statement) or §12(a)(2) (omission or misstatement in the prospectus) of the Securities Act of 1933.[20] Under either of these provisions investors would have the right of rescission. WeWork would have to buy back all the IPO shares at the set price, thereby eliminating any potential profit they would have made from the offering.[21] This also doesn’t include the catch-all 10b-5 anti-fraud provision in the Securities Exchange Act, which allows investors to recover the lesser of their out of pocket damages (the loss in share value) and losses caused by the fraud. [22]

WeWork’s fall from grace may not be an isolated incident, but a symptom of the private market as a whole.[23] Recent IPO performances have foreshadowed the possible overvaluations of private companies and how creative accounting practices can disguise capital losses as profits and inflate growth estimations.[24] This will likely incentivize the SEC to ramp up investigations into the private market and these accounting practices to ensure companies are not misleading investors.[25] Further, the risk of anti-fraud liability private companies expose themselves to by utilizing these sophisticated metrics could impair the IPO market for future companies.[26] For example, the SEC might be required to undergo a more extensive assessment of the issuer’s prospectus and registration statement.[27] The SEC has remained reserved in the midst of this wave, but if valuation issues arising from non-GAAP accounting metrics continue to arise, it may force the regulatory agency to take action to ensure that faith in the public markets remains intact.[28]

[1] See Gabriel Sherman, You Don’t Bring Bad News to the Cult Leader: Inside the Fall of WeWork, Vanity Fair (Nov. 21, 2019), https://www.vanityfair.com/news/2019/11/inside-the-fall-of-wework; Rebecca Aydin, The WeWork Fiasco of 2019, Explained in 30 Seconds, BusinessInsider (Oct. 22, 2019; 11:12 AM), https://www.businessinsider.com/wework-ipo-fiasco-adam-neumann-explained-events-timeline-2019-9; Raini Molla & Shirin Ghaffary, The WeWork Mess, Explained, Vox (Oct. 22, 2019; 12:51 PM), https://www.vox.com/recode/2019/9/23/20879656/wework-mess-explained-ipo-softbank

[2] See Preston Bewer, ANALYSIS: Three Decades of IPO Deals (1990-2019), Bloomberg Law (Jan. 9, 2020; 2:32 PM), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-three-decades-of-ipo-deals-1990-2019 (finding that IPOs have declined 63% since 1990); see also Ben Winck, The IPO market is rebelling against many of 2019’s money-losing unicorns. Here’s what’s scaring investors away — and what it means for the future, BusinessInsider (Oct. 2, 2019; 8:16 am), https://markets.businessinsider.com/news/stocks/ipo-market-outlook-trends-why-investors-rebelling-against-unicorns-implications-2019-9-1028570687 (explaining that major IPOs like Uber, Pelaton, and Lyft have lost hundreds of millions of dollars in market value on their opening days).

[3] See Elizabeth Shulze, Nasdaq executive is ‘bullish’ on WeWork and hopes the company will go public eventually, CNBC (Oct. 22, 2019; 10:19 AM), https://www.cnbc.com/2019/10/22/nasdaq-executive-is-bullish-on-wework-and-hopes-for-ipo-eventually.html (expressing hope that WeWork could boost investor hope in an IPO market that has disappointed with Uber and Lyft); Paul R. La Monica,  Uber and Lyft both hit all-time lows and continue to struggle since their IPOs, CNNBusiness (Sep. 5, 2019; 8:06 AM), https://www.cnn.com/2019/09/04/investing/uber-lyft-ipo-market/index.html (reporting that as of September, Uber and Lyft shares were more than 30% below their IPO price, with Uber trading at $30 compared to an IPO price of $45 and Lyft trading at $45 compared to an IPO price of $72).

[4] See Aaron Holmes, WeWork’s valuation could reportedly slip below $8 billion as part of SoftBank’s proposed bailout of the embattled company, BusinessInsider (Oct. 19, 2019; 11:21 AM), https://www.businessinsider.com/wework-valuation-could-slip-below-8-billion-softbank-bailout-report-2019-10 (stating that WeWork’s bailout plan would value WeWork at $8 billion versus a previous valuation of $47 billion).

[5] See Reeves Wiedeman, The Sun Sets on We, Intelligencer (Sept. 30, 2019), https://nymag.com/intelligencer/2019/09/what-happened-at-we-why-wework-postponed-its-ipo.html (detailing the thinking behind WeWork’s decision to postpone their IPO).

[6] See Ruth Reader, WeWork Reported Nearly $2 billion in losses in 2018, Fast Company (Mar. 26, 2019), https://www.fastcompany.com/90325201/wework-reported-nearly-2-billion-in-losses-in-2018 (detailing that WeWork reported a $2 billion loss for 2019 despite increasing revenues); Rebecca Aydin, WeWork isn’t even close to being profitable — it loses $219,000 every hour of every day, BusinessInsider (Jul. 3, 2019; 2:52 PM), https://www.businessinsider.com/wework-not-close-to-profitable-loses-hundreds-thousands-every-hour-2019-7 (showing that while revenues doubles to $1.9 billion, so did WeWork’s losses to $1.8 billion in 2018).

[7] See Meghan Morris, Adam Neumann gives up most of his voting power and steps down as WeWork’s CEO, saying intense public scrutiny of him was a ‘distraction.’ 2 execs will permanently replace him, BusinessInsider (Sept. 24, 2019; 1:04 PM), https://www.businessinsider.com/wework-co-founder-adam-neumann-is-stepping-down-as-ceo-2019-9 (detailing issues surrounding Neumann such as ownership of companies that leased property to WeWork, claims of drug use while working, and ownership of “supershares” that gave him 10 votes per share).

[8] See Jean Eaglesham & Eliot Brown, WeWork Was Wrestling With SEC Over Key Financial Metric Just Before It Scrapped IPO, WSJ (Nov. 19, 2019; 5:30 AM), https://www.wsj.com/articles/wework-was-wrestling-with-sec-over-key-financial-metric-just-before-it-scrapped-ipo-11573381800 (reporting that the SEC had requested clarification of WeWork’s financial metrics multiple times after the prospectus had been filed and weeks before WeWork was expected to go public).

[9] See Wiedeman, supra note, 5 (reporting that several WeWork executives were concerned with the information compiled in the S-1 form); Dan Primack, Digging into WeWork’s new financial metric, Axios (Apr. 26, 2018), https://www.axios.com/digging-into-weworks-commun-1524754857-0233de83-9b8f-4645-b594-a4298ca8c5f4.html (providing WeWork’s financial information including “community adjusted EBITDA”); Eliot Brown, A Look at WeWork’s Books: Revenue Is Doubling but Losses Are Mounting, WSJ (Apr. 25, 2018; 8:00 AM), https://www.wsj.com/articles/a-look-at-weworks-books-revenue-is-doubling-but-losses-are-mounting-1524657600 (“[WeWork] called the fully adjusted number ‘community adjusted Ebitda,’ by which it subtracted not only interest, taxes, depreciation and amortization, but also basic expenses like marketing, general and administrative, and development and design costs”).

[10] See Eaglesham supra note, 8 (stating that WeWork used an alternative method of calculating profitability they called “contribution margin” after the SEC requested they remove the previous measure they called “community-adjusted EBITDA”).

[11] See Eaglesham supra note, 8 (reporting that the SEC had made multiple requests to WeWork calling them to clarify the financial metrics used in their prospectus).

[12] See Emily Bary, What does the ‘WeWork effect’ mean for IPOs in 2020?, Market Watch (Dec. 31, 2019; 7:00 AM), https://www.marketwatch.com/story/what-does-the-wework-effect-mean-for-ipos-in-2020-2019-12-31 (stating that investors are becoming more wary of investing capital in companies that are not yet profitable).

[13] See Kesavan Balasubramaniam, What are the Advantages and Disadvantages of a Company Going Public?, Investopedia (May 24, 2019), https://www.investopedia.com/ask/answers/advantages-disadvantages-company-going-public/ (explaining how going public can be an efficient way for companies to raise capital for their operations)

[14] See id.

[15] See id.

[16] See Dan Conner, The Increasing Wait for Promising Companies To Get Public, Equities (Jan. 09, 2020; 2:29 PM), https://www.equities.com/news/the-increasing-wait-for-promising-companies-to-get-public (“[T]he proliferation of private equity dollars over the past 30 years means that one of the best investment strategies is to influence founders to keep their companies privately held for considerably longer”); see also Begum Erdogan, et al., Grow fast or die slow: Why unicorns are staying private, McKinsey & Company (May 2016), https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/grow-fast-or-die-slow-why-unicorns-are-staying-private (finding that on average tech companies tend to wait 11 years before an IPO compared to 4 years in 1999, right before the 2000 tech bubble); but see J.P Mangalindan, Why it’s bad for investors when companies like Uber wait too long to go public, Yahoo Finance (May 31, 2019), https://finance.yahoo.com/news/bad-for-investors-when-companies-like-uber-wait-too-long-to-go-public-143820861.html (stating that tech companies are depriving investors of high returns by waiting until they have already obtained massive growth before tapping the public market for more capital).

[17] See Polina Marinova, When a Company’s ‘Path to Profitability’ Turns Out to Be a ‘Dirt Road to Doom:’ Term Sheet, Fortune (Sept. 30, 2019; 9:25 AM) https://fortune.com/2019/09/30/term-sheet-monday-september-30/ (finding that “unicorns”, private tech companies valued in excess of $1 billion value growth over profits, and frequently burn through their cash quickly).

[18] See Eaglesham, supra note, 8 (detailing that WeWork’s use of “community-adjusted EBITA excluded “costs to such an extent that it flipped WeWork’s bottom line for 2018 from a net loss of about $1.9 billion using standard accounting, to a $467 million profit”).

[19] See id. (requesting the company to “Please explain to readers and tell us how your assumed workstation utilization rate of 100% is realistic”).

[20] 15 U.S.C. § 77k (1933) (imposing liability on issuers for “untrue statements of fact or material omissions of fact within registration statements at the time they become effective”); 15 U.S. Code § 77l (1933) (imposing liability on material misstatements or omissions in the prospectus).

[21] See 15 U.S.C. § 77k(e) (finding right of rescission for establishing measure of damages).

[22] 17 CFR § 240.10b-5 (1934) (defining damages as the difference between the actual stock price and what the price would have been absent the fraud).

[23] See Aparajita Saxena, WeWork, And The Problem With High Valuations in Tech, Entrepreneur (Sept. 26, 2019), https://www.entrepreneur.com/article/340040 (reasoning that venture capital investors are throwing capital at tech startups without properly analyzing their business model or assets, leading to excessive valuations that are eventually written down if the company goes public); See also Study: Tech Unicorns Overvalued By Nearly 50 Percent, PYMNTS (Jan. 22, 2020),

Study: Tech Unicorns Overvalued By Nearly 50 Percent
(citing CEO of Goldman Sachs David Solomon stating that investors tend to “overvalue growth and undervalue the future value of earnings that a company may provide”).

[24] See Saxena, supra note, 23 (suggesting that tech startups are generally valued higher than their balance sheet worth).

[25] See Nicolas Morgan & Brian Kaewert, Private Companies: Beware of SEC Scrutiny, CFO (Apr. 22, 2019),

Private Companies: Beware of SEC Scrutiny
(finding that the SEC is increasing their oversight and enforcement activity over private companies, particularly those considering an IPO).

[26] See id.

[27] See id. (“Officers and employees of privately held corporations, particularly those at startups with high valuations and an eye toward a public offering, would be wise to heed the lessons from the SEC’s recent private company enforcement actions and investors’ suits related to statements by private companies”) (providing instances where the SEC brought enforcement actions against private companies using dubious accounting methods).

[28] See Nicolas Bolton, SEC enforcement is not just a public company concern: What private companies need to know, Willis Towers Watson (Nov. 18, 2019), https://www.willistowerswatson.com/en-US/Insights/2019/11/sec-enforcement-is-not-just-a-public-company-concern-what-private-companies-need-to-know (clarifying that the SEC can bring enforcement actions against private companies under 10b-5 for “false or misleading statements they may make as part of the offering process”).

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