Etsy's IPO – A New Step For the B Corp Community?
Etsy's IPO – A New Step For the B Corp Community?
On March 4, 2015, online consumer marketplace Etsy, Inc. filed documents with the Securities and Exchange Commission in connection with its planned initial public offering and listing on NASDAQ, which would allow the company to raise up to $100 million.1 Etsy’s IPO will break new legal ground for the community of companies and investors that are focused on social and environmental performance as well as financial returns.
With a valuation of $1.7 billion, Etsy will be the largest certified B Corporation to go public. Certified B Corporations, also referred to as B Corps, are companies that have been certified by B Lab, a nonprofit organization, as having met standards of social and environmental performance, accountability and transparency.2 There are over 1,200 certified B Corps, but Etsy will be only the second B Corp to go public, following Rally Software’s IPO in 2013, which raised $84 million. Another prominent private B Corp, Warby Parker, is rumored to be approaching a $1 billion valuation and could be next in line to go public.
Will Etsy Become the First Publicly-Traded Public Benefit Corporation?
Etsy must convert to a public benefit corporation by 2017 to maintain its B Corp status under the current B Corp certification requirements. A public benefit corporation is a new legal structure that became available in Delaware on August 1, 2013 and is currently available in 26 states and the District of Columbia.3 These corporations commit to creating a material positive impact on society and the environment by identifying a general and specific public benefit purpose in their charters. The Board of Directors may take this purpose into consideration when making fiduciary decisions on the corporation’s behalf. Public benefit corporations must report biannually to stockholders on their progress in promoting a public benefit. Stockholders have a private right of legal action to enforce the corporation’s pursuit of a public benefit, though a successful suit can only force the corporation to improve its public benefit efforts and a court may not award monetary damages.
In order to convert to a public benefit corporation under Section 363 of the Delaware General Corporation Law, both Etsy’s Board of Directors and 90% of its stockholders must approve the conversion. Under current voting agreements, if Etsy’s Board of Directors approves a conversion to a public benefit corporation, any holder of more than 5% of the company’s capital stock would be required to vote (i.e., “dragged along”) in favor of the conversion. However, the voting agreements will terminate upon completion of the IPO. Thus, the Etsy Board could vote to convert even before the IPO, avoiding a stockholder vote, and become a publicly-traded benefit corporation from its first day on the NASDAQ. Or, Etsy could wait until after the IPO, up to two more years, when its new stockholders, would have the power to control the decision. Etsy stated in its filing that losing its B Corp status is a risk that could materially harm the company’s reputation. If Etsy’s Board of Directors and stockholders continue to find B Corp certification valuable to the company and its authenticity, their vote in favor of becoming a public benefit corporation would break new ground by making Etsy the first publicly-traded company operating under this new legal structure. On the other hand, if the Board of Directors and stockholders fail to vote in favor of converting to a public benefit corporation, time will be running out on Etsy’s B Corp certification, with a lapse looming in 2017.
How Will B Corp and SEC Obligations Co-Exist?
As a public company, Etsy will have to balance and harmonize its transparency and accountability obligations under B Corp certification with the periodic reporting and disclosures required by the SEC. Among other requirements, the SEC requires reporting companies to provide quarterly and annual discussion and analysis of the financial condition and operating results of the company, including a discussion of known trends and uncertainties.4 Executives often cite these reporting obligations as the source of pressure to produce short-term results for stockholders. Andrew Kassoy, cofounder of B Lab, has stated that as a result, companies “are pressured to think in a short-term way,” adding that “[B Corps certification] gives companies the protection to actually create that value in the long term [and] send that signal to investors.”5 It appears that Etsy’s CEO, Chad Dickerson is prepared to meet these short-term pressures head-on, stating in a letter included with Etsy’s filing that Etsy does not plan to give quarterly or annual earnings guidance, citing misalignment with Etsy’s long-term mission as the reason.6
An Opportunity to Align Interests
Dickerson sees Etsy’s IPO and transition to being a public company as an opportunity to align the principles of a public company with those of a purpose driven business, stating “I believe that Etsy can be a public company that holistically integrates the concerns of people and the planet, the present and the future, profitability and accountability. If we succeed, then other companies might replicate our model. We think the world will be a better place for it.”7 Etsy’s investors, stakeholders, and the B Corp community will be watching to see how Etsy navigates each of these challenges.
1 Form S-1, filed March 4, 2015, available at http://www.sec.gov/Archives/edgar/data/1370637/000119312515077045/d806992ds1.htm#sthash.ofX7qpPz.dpuf
2 The B Impact Assessment measures the overall impact of a company on its stakeholders, taking into account the company’s size, sector, and location. A company must receive a score of at least 80 out of 200 in order to receive certification. Recertification is required every two years. Additionally, 10% of B Corps are randomly selected for on-site reviews each year. See http://www.bcorporation.net/become-a-b-corp/how-to-become-a-b-corp/performance-requirements.
3 Benefit corporation legislation has been introduced in 11 additional states. See http://www.benefitcorp.net/.
4 See Item 303 of Regulation S-K.
5 “How Etsy’s IPO Could Save Cities,” full article available at http://money.cnn.com/2015/03/11/smallbusiness/etsy-b-corporation-ipo/
6 See Form S-1 at page 95.
7 See Form S-1 at page 94.