Amanda Lang: WeWork a reminder buying a new public company can be risky
WeWork is drawing scrutiny from the U.S. Securities and Exchange Commission over whether the co-working company violated financial rules in the run-up to its failed initial public offering, according to two people with knowledge of the matter.
The agency’s enforcement division is reviewing WeWork’s business and its disclosures to investors amid a number of news articles that highlighted potential conflicts of interest and the company’s aggressive fundraising, the people said. WeWork has retained Andrew Ceresney, a top Wall Street lawyer who previously headed the SEC enforcement unit, according to the people.
The SEC’s inquiry is preliminary and may not lead to any allegations of wrongdoing, said the people who asked not to be named because the review isn’t public.
A WeWork spokeswoman declined to comment, as did Ceresney, who’s now a partner at Debevoise & Plimpton in New York. An SEC spokeswoman also declined to comment.
The scrutiny adds to what has been a tumultuous year for WeWork. The company at one point was worth an eye-popping US$47 billion before it fell out of favor with investors and needed a bailout from Softbank Group Corp., the Japanese conglomerate that has a majority stake. In September, WeWork ousted charismatic Chief Executive Officer Adam Neumann and withdrew its IPO. The company is now valued at less than US$8 billion.
A spokeswoman for Neumann declined to comment.
It’s not unusual for the SEC to kick the tires when corporations endure public and high-profile meltdowns. The agency is often quick to reach out to a company to make sure potential evidence, such as emails and documents, are preserved.
It couldn’t be determined whether specific WeWork business decisions or transactions prompted the review. Still, much about the company has raised eyebrows on Wall Street.
When WeWork issued its S-1 -- a regulatory filing that precedes an IPO -- the company disclosed heavy losses that were growing in lockstep with its sales, or sometimes faster. Investors also say they were concerned by a long list of perceived conflicts laid out in the filing.
For instance, Neumann profited as a private landlord by leasing space in his buildings to WeWork. When the company changed its name to We Co., it bought a related trademark for “we” for US$5.9 million from We Holdings LLC, an entity that Neumann controlled. And WeWork’s corporate governance was unusual. For the company’s succession plan, WeWork listed Neumann’s wife, Rebekah as one of three people on a committee with power to pick a replacement CEO.
WeWork also is known for using unconventional accounting metrics, such as “community-adjusted Ebitda,” which the company says captures the profitability of an individual WeWork location. The benchmark, widely questioned by analysts, first came up in financial documents tied to a 2018 bond sale and was included in early drafts of the company’s S-1 before being pulled from the final version.
WeWork told bondholders this week that it had $2 billion of cash at the end of September. But the company had accelerated spending earlier in the year as a way to show potential investors in the IPO that its growth was strong, according to people with knowledge of the matter. As a result, WeWork was poised to run out of money as soon as November, which prompted the Softbank rescue.
Being private doesn’t shield companies or executives from penalties if the SEC concludes that investors were misled, and the agency has stepped up scrutiny of unlisted firms in recent years amid the emergence of several Silicon Valley unicorns.
In April, Daniel Mattes, the former CEO of Jumio, agreed to pay more than US$17 million to settle SEC claims that he overstated the private mobile payment company’s revenue. Mattes didn’t admit or deny the allegations. Perhaps the most well-known SEC case tied to a private company involved ex-Theranos Inc. CEO Elizabeth Holmes. She paid US$500,000 in 2018 to settle SEC allegations that she raised hundreds of millions of dollars while lying about the blood-testing company’s technology. She didn’t admit or deny the claims.
--With assistance from Ben Bain and Gillian Tan.