This morning’s IFR US ECM Briefing reported on another significant IPO trend—the fact that over time it has become more common for IPO issuers to appoint several co-managers. IFR cites data from Thomson Reuters, noting that, “It takes more than three bookrunners to take a company public in 2014, versus just one or two bookrunners handling the process a decade ago with a team of co-managers helping the process. In fact, five or more banks claimed joint bookrunner posts on 20% of this year’s pricings. The average IPO priced in 2014 featured 3.1 bookrunners, down from 3.5 books per deal last year.” If one looks further back, say to 2000, according to Thomson Reuters data, approximately 92% of US IPOs involved a sole bookrunner and the maximum number on any deal was four. Last year just 9% involved a single bookrunner, growing to 17% in 2014.
We will be discussing the syndicate dynamics in IPOs during the course of our upcoming JOBS Act session on September 16th, see http://www.mofo.com/resources/events/2014/09/140916jobsactipos.
An academic study titled “The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision” (Dambra, Field, and Gustafson, available through SSRN) provides an interesting analysis of the effect of the JOBS Act on IPO activity. The study catalogues certain provisions of Title I of the JOBS Act as “de-burdening” provisions (principally the disclosure accommodations available to EGCs) and others as “de-risking” provisions (confidential submission and testing-the-waters).
The study notes that in the United States, IPO volume has been 50% higher in the two years following the JOBS Act, whereas, in contrast, IPO activity in other jurisdictions has increased by only 14% over the same period. The study concludes that the de-risking provisions may be driving the increase in IPO activity, and focuses on biotech IPOs in the paper, premised on the theory that biotech companies have high proprietary costs of disclosure. The paper is accompanied by various tables that provide interesting data demonstrating that post-JOBS Act issuers generally are smaller (in the two years prior to the JOBS Act, median issuer annual revenues were approximately $80 million, and post-JOBS, median revenue is approximately $48 million). However, when compared to the late 1990s and early 2000s, there are fewer smaller company IPOs. The study also looks at whether there has been any change in analyst coverage and finds little effect as a result of the JOBS Act.
On August 8, 2014, Representatives Darrell Issa, Jared Polis, Scott Peters and Vern Buchanan, co-chairs of the House Innovation and Entrepreneurship Caucus, along with a bipartisan group of 26 other representatives, sent a letter to Chairman White of the SEC taking the SEC to task for failing to complete the crowdfunding rules required by Title III of the JOBS Act. [Polis-Issa Letter] Those rules were supposed to be effective by the end of 2012. In the letter, the Representatives wrote that “A key feature of the JOBS Act was Title III, which was supposed to reduce the burdens and hurdles for US startups and entrepreneurs to gain access to critical new sources of capital from more modest investors….Due in large part to the lack of finalized federal rulemaking, states are now leading the way, harnessing the power of new technologies to connect entrepreneurs with investors….We urge the SEC to comply with Congressional intent to build a new cutting edge infrastructure that will provide innovative funding opportunities for startups and robust investor protections for decades to come.” Unlike the confidential submission process for emerging growth companies, which was effective upon the JOBS Act being signed into law in April 2012, and appears to be wildly successful, the JOBS Act requires the SEC to promulgate rules for crowdfunding. The proposed rule was issued only in October 2013 and the comment period ended in February 2014. Meanwhile, at least seven states have enacted crowdfunding legislation and many others are considering such legislation, relying on the Securities Act intrastate exemption. The SEC continues to promise that the rules are forthcoming.
Another letter to the SEC from the Hill challenges the Regulation A+ proposal. This time, the authors question the authority of the SEC in defining “qualified purchaser” as an offeree or purchaser in a Tier 2 Reg A+ offering. The letter (available here: http://www.nasaa.org/wp-content/uploads/2014/08/Senate_Regulation-A-Letter-FINAL-08-01-14.pdf) suggests that the SEC through the approach taken in its proposal ignores investor protection concerns. This seems odd. Investor protection always has been premised on a disclosure regime. The SEC’s Reg A+ proposal sets quite a high bar for Tier 2 Reg A+ offerings, such as incorporating in the proposal:
- substantially enhanced requirements for information to be set forth in an offering statement to be reviewed and qualified by the SEC;
- the requirement to post the offering statement on EDGAR, thus making it available for review by the public;
- a requirement for issuers in a Tier 2 offering to include audited financial statements in their offering statements;
- a requirement for all Regulation A issuers to file balance sheets for the two most recently completed fiscal year ends (or for such shorter time that they have been in existence);
- ongoing reporting requirements for Tier 2 issuers;
- an update of the restrictions on issuer eligibility to exclude from Regulation A those issuers that have not filed with the SEC the ongoing reports required by the proposed rules during the two years immediately preceding the filing of an offering statement; and
- an update of the “bad actor” disqualifications to be consistent with the disqualifications under Rule 506(d) under the Securities Act.
It is difficult to reconcile the statements in the letter with the text of the SEC’s proposal. It is also unclear why the authors of the letter would take the view that the SEC’s review of an offering statement would be insufficient and that it should be accompanied by state review. Or, why the authors of the letter believe that the requirements of a national securities exchange are central to the investor protection mission. It is true that the exchanges have corporate governance requirements for listed companies; however, the exchanges do not impose particular disclosure requirements for listed companies—however, the SEC’s proposal for Tier 2 issuers would impose specific, detailed ongoing reporting requirements.
An issuer that chooses to undertake a Tier 2 Regulation A+ offering will have determined that it is prepared to incur the expenses associated with preparing the requisite offering statement and the financials, as well as the subsequent ongoing reporting. It is unlikely that an issuer that chooses to use Tier 2 of Reg A+ will be conducting a “local” offering and soliciting principally individuals in its surrounding area. That would be inefficient and is simply quite improbable. Perhaps the more important question to consider is why we would want to structure an approach that encourages issuers to rely on Rule 506, which does not include a disclosure requirement, instead of encouraging reliance on Tier 2 of Regulation A+.
Earlier this week, the SEC’s Office of Investor Education issued an Investor Alert that highlights some of the warning signs for investors that an unregistered offering may be an investment scam. The alert is available here: http://www.sec.gov/oiea/investor-alerts-bulletins/ia_unregistered.html#.U-Pk66XD9l4.
During this session, we will provide an overall update on the status of JOBS Act implementation, as well as what you can expect in the coming months. We will discuss the IPO market, recent IPO trends, and developing legal, accounting and disclosure issues. During our session, which will take place at Morrison & Foerster’s New York office on September 16th from 8:15 – 9:45am, we will discuss:
- Use of JOBS Act accommodations;
- Disclosure trends;
- Emerging accounting issues;
- Testing-the-waters practices and considerations;
- Consumer offerings and directed share programs;
- Structuring lock-ups; and
- Planning for the follow-on.
Morrison & Foerster is offering participants 1.5 New York CLE credits for attendance.
To register for the event, please email Harrison Lawrence at firstname.lastname@example.org.
The Biotechnology Industry Organization (BIO) issued a press release (see: http://www.biotech-now.org/events/2014/07/biotech-ceos-speak-out-on-jobs-act-success#), with the below infographic (reprinted from BIO) noted that this week marks a JOBS Act milestone with the 100th company to have gone public since the Act was passed. The press release includes anecdotes about some recent biotech IPOs. Biotech has been one of the most active sectors for IPOs.
Today, the US Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a half-day session on “Corporate Disclosure Reform: Ensuring a Balanced System that Informs and Protects Investors and Capital Formation.” The session, which was webcast through the Chamber’s site, included various presentations from former SEC officials, as well as from Keith Higgins, Director of the SEC’s Division of Corporation Finance. The various panels discussed their views on various alternative approaches for modernizing corporate disclosures through more effective use of company websites, streamlining of certain SEC Exchange Act forms, and a variety of other means.
Higgins urged the public to send in comments, including their suggestions, regarding the disclosure reform project. He noted that the SEC had received very few comment letters in the period leading up to the SEC’s publication of the JOBS Act-mandated Regulation S-K study. Higgins noted many of his own suggestions regarding disclosure reform, such as the need to reduce repetition in corporate filings.
The Center also published a white paper on disclosure reform, which may be accessed here:
As we previously reported, the Director of the SEC’s Division of Corporation Finance, Keith Higgins, testified before the House Financial Services Committee on a broad range of matters, including the SEC’s progress in implementing the rules required by the Dodd-Frank Act and the JOBS Act, as well as the Division’s disclosure reform initiative. Congressmen commented on the SEC’s proposed amendments to Regulation D and Form D, as well as on the SEC’s crowdfunding proposal. A few mentioned bills that had been introduced in, or had been passed by, the Committee, such as the bill that provides relief to small issuers from XBRL compliance. Various Congressmen commended Chair White and the SEC for undertaking a review of the disclosure system. Several urged the SEC to consider the recommendations of the SEC’s Forum on Small Business Capital Formation. A number expressed interest in the SEC’s Dodd-Frank Act-mandated study of the definition of “accredited investor.” Rep Hultgren pointed to the test recently adopted in the United Kingdom that permitted individuals that did not meet a net worth test to meet a financial sophistication requirement by either taking a test or demonstrating understanding as a result of their education or an advanced degree. He asked Higgins whether the Division was considering an “educational component” as part of the accredited investor definition. Higgins noted that it was one of the things that the Division was reviewing. Higgins also noted that the Division is preparing recommendations for final rules on the Regulation D, crowdfunding and Regulation A+ proposals, as well as on proposals to implement the changes in JOBS Act Title V and Title VI.
The prepared testimony can be accessed here: http://www.sec.gov/News/Testimony/Detail/Testimony/1370542357516#.U9U8naXD_FM.
Earlier this month, we commented on some statistics regarding the number of IPOs and the IPO backlog (based on public filings). Here, we offer a few more insights into recent trends in the IPO market based on various publicly available sources.
There were 70 IPOs that priced in the second quarter of 2014. Of those almost 60% priced within or above the stated price range—this is fairly consistent with the experience of the last several quarters. Perhaps it is too early to assess, but some have speculated that test-the-waters meetings for EGC IPOs are providing useful information regarding pricing and that is contributing to more deals pricing within the filing range compared to pre-JOBS Act periods. IPOs priced in the first half of the year have outperformed the major equity indices.
Sponsor-related deals continue to represent an important component of the 2014 IPOs; however, not as high a percentage as of the 2012 and 2013 IPOs. This may suggest that financial sponsors took their exit opportunity earlier in the IPO cycle. The percentage of sponsor-backed companies also may correlate to the high number of IPOs that have had a selling stockholder component. About a third of recent deals have had a selling stockholder component.
We are still not seeing a return of “smaller” company IPOs. For almost 50% of the IPOs undertaken since the JOBS Act was passed, the issuer’s market capitalization at the offering was between $150 million and $750 million. Average IPO offering sizes continue to be substantially higher than in the late 1990s and early 2000s. This suggests that Regulation A+ may still be an important “IPO alternative” for smaller companies.
We continue to see occasional variations on the traditional 180-day lock-up period for directors, officers and principal stockholders of the IPO issuer. Post-JOBS Act IPOs have incorporated a number of permutations, including, for example, staggered lock-up periods wherein the term of the restrictions varies by category of holder; lock-up periods that are tied to certain stock price levels and fall away if the IPO issuer’s stock price has performed well; and shorter lock-up periods. Also, we continue to see a number of IPO issuers coming back to market for follow-on offerings, usually comprised largely of selling stockholder shares, within the IPO period.