This was supposed to be a big year for IPOs, but the government shutdown could ruin it

Key Points
  • There is a "large and growing" backlog at the SEC and that could impact the 2019 IPO market, says attorney Alan Denenberg.
  • That delay may not hurt big names but could hurt those like biotech medical device companies, he says.
  • They don't have the luxury of a big balance sheet and are counting on the IPO, he explains.
Unclear how SEC will prioritize backlog after shutdown, says lawyer
Unclear how SEC will prioritize backlog after shutdown, says lawyer

It's supposed to be a big year for IPOs, but the government shutdown could wind up ruining some of those plans.

The partial shutdown, now in its 19th day with no deal in sight, has sidelined a majority of the workers at the Securities and Exchange Commission. Only 285 of the 4,436 employees are on the job, according to the SEC.

However, the SEC's system where companies file for their IPOs, EDGAR, is still open, and that's causing a "large and growing" backlog, attorney Alan Denenberg told CNBC on Wednesday. Denenberg, a partner at Davis Polk & Wardell, has worked on IPOs of companies such as Twitter, Roku, Yelp, Unity Biotechnology and Akcea Therapeutics.

"This year was — is hopefully still — going to be a big IPO year," he said on "Power Lunch."

The U.S. Securities and Exchange Commission in Washington, D.C.
Adam Jeffery | CNBC

At least six tech companies have hinted at going public in 2019, with ride-hailing companies Uber and Lyft being pretty open about their ambitions. Biotech companies Gossamer and Allector have also recently filed for IPOs.

Meanwhile, the stalemate on government funding continued on Wednesday. President Donald Trump stormed out of a meeting with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, calling it "a total waste of time." The fight over spending centers on funding for Trump's border wall. He's insisting on including it and said Republicans are "totally unified" on the issue.

"With each passing day of this shutdown, the SEC is just going to be continually backed up," Denenberg said.

And while that may not hurt big names that have a lot of capital, it could hurt others, like biotech medical device companies.

"These are not companies who have the luxury of a big balance sheet. They're counting on this IPO as their next financing round to move their trials ahead, do the other things they're planning to do, make filings with the FDA," Denenberg said.

So now they are starting to think about alternatives. "They're already scrambling for Plan B, which frankly may not be that attractive and may not even be available on reasonable terms because they don't know when this shutdown will end or when they'll clear out," he added.

That could mean possibly selling the company or looking for more private financing that may be more akin to what they got in the last round, not the step up they were looking for in an IPO.

"They're forced to go at valuation lower just to get some money in the bank," Denenberg said.

— CNBC's Lauren Feiner and Jacob Pramuk contributed to this report.