Foreign issuer IPOs have been increasing recently as foreign issuer activity continues to improve since a marked decline in 2011 and 2012. This decline resulted in part from market volatility in the aftermath of the financial crisis and the perception that the regulatory burdens of being a U.S. reporting company (including restrictions imposed by the Sarbanes-Oxley Act and the Dodd-Frank Act) were significantly higher than the regulatory burdens imposed by foreign jurisdictions and markets. One defining characteristic of this decline was the decrease in the number of Chinese issuers going public (only 3 Chinese issuers in 2012 compared to 17 Chinese issuers (out of 34 foreign issuers) in 2011 and 40 Chinese issuers (out of 60 foreign issuers) in 2010). However, the number of Chinese issuers has increased recently, with 12 of the 44 foreign issuer IPOs thus far in 2014 involving Chinese issuers. (Source: IPO Week in Review, August 25, 2014)
The recent rise in foreign issuer IPOs has also been brought about in part by the accommodations afforded foreign issuers under the Jumpstart Our Business Startup Act (“JOBS Act”), which took effect on April 5, 2012. For example, in 2013, there were a total of 222 IPOs with 37 of those involving foreign issuers (30 involving foreign issuers that qualified as EGCs), compared to 128 IPOs with 21 of those involving foreign issuers (12 involving foreign issuers that qualified as EGCs) in 2012. (Source: Renaissance Capital, US IPO Market, 2013 Annual Review)
12 foreign issuer IPOs have been completed thus far in the third quarter of 2014 and 44 foreign issuer IPOs have been completed thus far in 2014 (raising approximately $10.3 billion in aggregate proceeds), compared to 38 foreign issuer IPOs in 2013 (raising approximately $7.0 billion in aggregate proceeds) and 23 foreign issuer IPOs in 2012 (raising approximately $5.6 billion in aggregate proceeds). The geographic diversity of the recent foreign issuer IPOs has also been significant, with 16 countries serving as the jurisdiction of incorporation thus far in 2014, compared to 18 countries in 2013. Among those countries, the Cayman Islands is the most prominent (thus far in 2014, 15 Cayman companies have completed their IPOs). The next most prominent countries are China (with 12 issuers), Israel (with 7 issuers) and the UK (with 6 issuers). In addition, countries that do not typically contribute to the U.S. IPO market, such as Belgium, Chile and Switzerland, have contributed issuers thus far in 2014. Furthermore, nine foreign issuers are currently in the registration process (including issuers from Malaysia and Denmark, which have not contributed to the U.S IPO market since 1998), thus ensuring a robust pipeline of foreign issuer IPOs for the remainder of 2014. (Source: IPO Week in Review, August 25, 2014)
Biotech IPO market activity has recently returned to levels not seen since before the financial crisis. This has been brought about in part by the accommodations afforded issuers under the Jumpstart Our Business Startup Act (“JOBS Act”). Under the JOBS Act, issuers that qualify as “emerging growth companies” (“EGCs”) can take advantage of a number of IPO on-ramp accommodations, including (1) confidential SEC staff review of draft IPO registration statements, (2) scaled disclosure requirements (e.g., only two years of audited financial information (rather than three years) and reduced disclosure requirements for executive compensation), (3) an extended transition period to comply with new or revised accounting standards, (4) no restrictions on testing-the-waters communications with qualified institutional buyers and institutional accredited investors before and after filing a registration statement, and (5) an exemption from the requirements under Sarbanes-Oxley Act Section 404(b) to have an auditor attest to the quality and reliability of the issuer’s internal control over financial reporting. Companies electing EGC status come from many industries, although the largest groups of EGC IPO issuers are from the biotech, technology, real estate, energy and healthcare industries. Since April 5, 2012, when the JOBS Act took effect, 112 biotech IPOs have been completed.
15 biotech IPOs have been completed thus far in the third quarter of 2014 and 61 biotech IPOs have been completed thus far in 2014 (raising approximately $4 billion in aggregate proceeds). At this pace, the biotech IPO market is on track to set new records for the number of biotech IPOs completed in the U.S. and abroad. With 30 biotech companies currently in the SEC registration process, there is no reason to believe that the number of biotech IPOs will substantially decrease in the second half of 2014. Whether these biotech companies decide to launch their offerings though will depend in part on the post-market performances of those biotech companies that have already gone public in 2014. Currently, the average share price performance of the 61 biotech companies that have gone public in 2014 stands at -4.5%, with the gainers and decliners about evenly divided. (Source: BioWorld Insight, August 11, 2014)
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 email@example.com.
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: