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Twitter's stealth IPO: Less info for investors?

(MoneyWatch) With a single tweet, Twitter announced it had filed for an IPO and at the same time left many people wondering exactly where the micro-blogging company goes from here.

This unusual approach to beginning the process to go public, a result of the JOBS Act of 2012, is available to any company with annual revenue under $1 billion. These so-called emerging growth companies can file the traditional paperwork with securities regulators, known as an S-1 registrations, but keep it private until 21 days before they start their "roadshows" to win over potential investors.

Among other things, the new IPO rules mean Twitter won't have to be as forthcoming in disclosing details about its business as a Facebook (FB) was ahead of its 2012 offering.

In changing the IPO registration process, the JOBS Act were supposed to help startups more easily tap the capital markets for the money they need to grow, and presumably create jobs. However, exempting smaller companies from fuller disclosure can make it more difficult for investors to evaluate their prospects. Meanwhile, the inevitable hype around a high-profile like Twitter, whose IPO is already making headlines, raises risks for investors.

When Groupon (GRPN) first filed its S-1 before eventually launching its IPO in 2011, public criticism by the SEC over the company's accounting definitions and practices offered important red flags to anyone who was paying attention. By taking a more confidential route, Twitter can privately address any SEC misgivings, concerns or corrections. Although the initial S-1 and all amended versions are ultimately made public, there's less time for analysts, journalists and investors to compare all the documents and direct attention to possibly questionable issues.

There are other reduced requirements, as well. The S-1 does not need to share any information about a company's executive compensation, which says a lot about a company's management and how it intends to use shareholder money. The company only needs to provide two years of audited financials.

Additionally, many types of communications once prohibited for companies in the IPO process are now possible. For example, Twitter might be able to advertise its shares on the Internet or in newspapers so long as sales are restricted to institutions and high-worth individuals known as accredited investors.

But the shares sold during the IPO quickly are resold more broadly. Broad advertising could help stoke the hype.  That can result in situations like Facebook's astronomically high initial valuation, which quickly came plummeting to earth, causing many to lose significant amounts of money.

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