Cosine IPO: Still On Hold

Four months after the company filed for an IPO, Cosine Communications, which makes virtual private network (VPN) services equipment, is taking its time to go public.

So what’s the holdup? Sources in the industry say the Securities and Exchange Commission may be looking more closely at situations in which potential customers of a company are investors or have received pre-IPO stock. Others theorize that Cosine is waiting until the market firms up a bit before going public. Either way, Cosine’s debut won’t be happening anytime before mid-September.

Cosine listed six potential customers in the S-1 it filed with the SEC on April 28, 2000. Two of the customers have contributed $3.5 million in revenue that the company reported for this year, while the other four were expected to generate revenue later in the year, according to the S-1. All six of those customers had some stake in a successful Cosine IPO, either by being a direct investor or by accepting pre-IPO stock (see Cosine Spreads the Wealth).

The company also issued preferred stock to the officers who work for several of their customers. “Officers of Qwest and The Anschutz Corporation, a Qwest affiliate, participated in our series D preferred stock financing. Nissho Electronics, Internet Initiative Japan and officers of AduroNet and of several potential customers participated in our series E preferred stock financing,” says the S-1.

"It’s my understanding that the SEC is being very persnickety about who these companies have given pre-IPO stock to,” says Gina Sockolow, an analyst at Brean Murray & Co. Inc.. “They’re taking a harder line on those whose customers are tied to contracts of similar value booked as revenue."

An SEC official, recently asked whether the government agency was looking into the distribution of pre-IPO equity to customers, said there was "currently no investigation under way." However, it's possible the topic has been raised in comment letters that are exchanged between the SEC and the company during the filing period. These documents are not available to the public, and the SEC official would not say if such an exchange had been made with Cosine.

The networking industry has been increasingly aggressive in its exchange of equity with potential customers. For example, recent IPOs for Avici Systems (Nasdaq: AVCI), Corvis Corp. (Nasdaq: CORV), and ONI Systems Inc. (Nasdaq: ONIS) all distributed equity or pre-IPO stock to potential customers. But with all six of its customers participating in the IPO, Cosine appears to be the most aggressive in its equity-sharing approach.

“There is potential for the appearance of impropriety when executives in service-provider companies are getting stock in the companies,” says Chris Nicoll, director of infrastructure Analysis for Current Analysis. "It’s really a question of who is getting the stock -- the company or individuals who can make purchasing decisions.”

Other analysts say that Cosine’s long lag time is not unusual, especially considering the current market conditions. The companies with extraordinary debuts this summer have been those in hot markets such as optical networking or wireless (see Avici and Corvis Make Stunning Debuts). Steven Tuen, director of research for the IPO Value Monitor, says that Cosine's infrastructure segment isn't quite ready.

“This is a very finicky type of environment for investors,” he says. “Avici and Corvis had the benefit of being associated with optical networking, and that may have led investors to feel these companies were more attractive sooner rather than later.”

Cosine officials said it’s still working with the SEC and the company is still registered to go public. It denied that there were any concerns over customers receiving pre-IPO stock.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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