The Return of Stealth Mode


Josh Kopelman of First Round Capital yesterday wrote The Death of Stealth Mode. Here’s his intro:

A pre-launch, stealth-mode company just closes a seed round of funding. Three weeks go by, and the news of the company’s funding starts appearing in VentureBeat, peHUB and Venturewire. The story is then picked up by mainstream tech bloggers and press.The CEO starts getting phone calls from journalists.I then receive frantic, angry phone calls and emails from the CEO that go something like this: “Dude! Did you announce the funding? We wanted to stay under the radar…”

I want to reply, “No. I didn’t announce the funding. Your lawyer did.”

What Josh is talking about, of course, is an SEC requirement that companies falling under Regulation D exemptions must submit a brief filing after raising capital. It should include the company’s name, business description, executive officers, significant shareholders, placement agents, amount of capital raised and what the capital will be used for. These are called Form D filings, and are what I regularly use to sniff out unannounced deals and fundraisings (when doing so, I cite “regulatory filings”).

Now Josh correctly asserts that these filings make it more difficult to keep a company in stealth mode. He also laments the fact that issuers soon will be required to submit Form D filings electronically, which will make them far more public than the current system of paper filings and reference room scouring. In other words, every blogger and their cousin will be able to “out” stealth mode companies. No need to have a colleague in DC.

But let me make a counter argument, which I’ll call The Rebirth of Stealth Mode.

What all of these Form D newbies are about to find out is that there can be more than 100 Form D filings in a single day. The majority of those have little to do with venture capital. Instead, they are capital raises from hedge funds, REITs, energy exploration companies and banks. Or small-time businesses that got $50k from Uncle Al (you can spot these quickly, because they’re often hand-written instead of typed). In other words, it takes lots of time to separate the wheat from the chafe.

Making matters worse, there are a lot of issuers that file for small Series A funding rounds that may or may not have institutional VCs behind them. I currently can identify the “real” ones because the company must list its significant shareholders. But the revised SEC restrictions remove that requirement, which means that my job is about to become much, much more difficult. For every one VC-backed deal I find via the SEC, there are another five companies I ignore because there does not appear to be institutional backing. Now the only way I can make the distinction will be through shoe-leather journalism. Not complaining about having to work hard, but pointing out that I’ll be unable to identify nearly as many deals as I do now.

The result, of course, is that more companies may slip through the cracks and remain in stealth mode. Yes there will be more people looking, but I think the change still favors secrecy. This is particularly true if/when clever lawyers tell their clients to make up bogus holding company names, so that the jazzy Web 2.0 startup funded by Sequoia now becomes Maple Holding Co. funded by anonymous. Unless I recognize the executive’s name, I’m probably skipping over it. So will most everyone else.