PwC recently released its 2017 Annual US Capital Markets Watch report.   The report notes a 77% increase from 2016 in the number of IPOs, with 181 IPOs completed in 2017, raising $44.2 billion in proceeds.  The average size of IPOs in 2017 was $244 million.

The pharmaceuticals and life sciences sector was the most active sector for IPOs in 2017 with 42 deals, raising $4.0 billion.  The special purpose acquisition company (SPAC) sector completed 33 IPOs, raising almost $9 billion.  While the technology, media and telecommunications (TMT) sector accounted for fewer IPOs than the previously mentioned sectors, the 33 IPOs raised $12.3 billion in 2017.

To read PwC’s full report, visit: https://goo.gl/RVKXfu

 

In June 2017, the SEC’s Division of Corporation Finance (“Corp Fin”) announced a new policy effective July 2017 that essentially extends the confidential submission process to all issuers while keeping the EGC process unchanged.  The new policy also permits an issuer to submit for confidential review a registration statement filed to register a class of securities under the Exchange Act, such as a registration statement on Form 10 for a U.S. issuer or a Form 20-F for an FPI. An issuer must publicly file an Exchange Act registration statement at least 15 days prior to seeking its effectiveness. For certain large, privately held companies that have undertaken various rounds of private financings and may not have an immediate need to raise additional capital, a “direct listing” may be an attractive alternative to a traditional IPO.

Historically, there have not been many issuers that have undertaken a “Form 10 IPO” or “backdoor IPO,” but market dynamics have changed. However, for a unicorn, which has been able to raise capital in the private markets at attractive valuations, a direct listing may be a good alternative. A listing on a national securities exchange will provide much-needed liquidity for employees, early investors, and even venture capital and private equity sponsors. A unicorn, advised by financial intermediaries acting as financial advisers (not underwriters), likely will be able to attract the attention of additional or new institutional investors that might purchase its securities in the secondary market. These same financial intermediaries, or others familiar with the company, might provide research coverage following the listing of its stock on a securities exchange.

To learn more about direct listings, listen to our ThinkingCapMarkets podcast.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

More Views on Dual Class Structures

Bernard S. Sharfman takes a contrarian view on non-voting and dual class share structures in his paper, “A Private Ordering Defense of a Company’s Right to Use Dual Class Share Structures in IPOs.”  Mr. Sharfman notes that private ordering results in investors that have considered the potential issues associated with limited voting rights but that conclude that there are wealth maximizing aspects associated with dual class share structures.

In “Nonvoting Shares and Efficient Corporate Governance,” author Dorothy Shapiro Lund presents an interesting theory that the use of nonvoting shares lowers the cost of capital for an issuer.  Lund notes that the shareholder base of U.S. public companies is principally institutional.  Institutional investors (other than passive funds) and founders are generally more motivated investors that value their votes.  Retail investors generally do not vote.  Nonvoting shares lessen agency costs by allocating voting rights to shareholders with the most incentive to maximize the company’s value.  For this and other reasons set out in the paper, the author argues that the backlash against nonvoting shares is misguided.

We recently updated our FAQs to reflect changes brought about by the SEC’s new policy extending the ability to submit IPO (and certain follow-on) registration statements beyond emerging growth companies. You may access our FAQs on IPOs and our FAQs on Foreign Private Issuers (which address a number of issues beyond IPOs, such as the definition of “foreign private issuer,” the SEC Staff guidance relating to certain prongs of the FPI definition, testing FPI status, and related matters), here:

Frequently Asked Questions about Initial Public Offerings

Frequently Asked Questions about Foreign Private Issuers

Morrison & Foerster’s Anna Pinedo discusses IPOs for U.S. and non-U.S. domiciled companies in this ThinkingCapMarkets podcast.

 

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

JOBS Act and Information Uncertainty

A recent paper titled “The JOBS Act and Information Uncertainty in IPO Firms,” published by Mary E. Barth, Wayne R. Landsman, and Daniel J. Taylor, has garnered quite a bit of attention.  The paper examines the extent to which omission of certain information by emerging growth companies (EGCs) can be tied to IPO underpricing.  According to the paper, EGCs that present compensation information for fewer than five top executives and present fewer than three years of audited financial statements are associated with higher levels of underpricing.  It is difficult to conclude whether there really is a correlation since, in our experience, many of the EGCs that choose to rely on the accommodations and omit this information are concentrated in particular sectors and those are usually associated with underpricing.  Similarly, in our experience, many companies in those sectors have concentrated ownership and existing investors participating in the IPOs.  The paper also concludes that EGCs have higher levels of institutional ownership than non-EGCs. This may not be all that surprising given trends in private capital raising over the last eight to ten years.  The authors suggest that this information should be considered in connection with additional regulatory reforms that might reduce disclosure burdens.  Without more detail comparing the sectors of the companies that are or are not EGCs, and of the EGCs that choose to omit disclosures, and the pricing issues specific to IPOs of companies in such sectors, as well as of companies by age or maturity, it would seem difficult to draw any conclusions.

For many years, most successful companies followed a relatively predictable capital-raising path. A lot has changed. The companies that tend to pursue IPOs in recent years are more mature, better capitalized, and often seek to pursue IPOs for different reasons than did their predecessors. In our updated Short Field Guide to IPOs, we detail the path to an IPO, discuss some of the important steps along the way and highlight some of the detours or forks in the road.

Download a copy of the guide.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

The Decline in IPOs and the Private Equity Market

In their piece, “The Evolution of the Private Equity Market and the Decline in IPOs,” Michael Ewens and Joan Farre-Mensa discuss the decline in the number of initial public offerings in the United States in recent years and how it has impacted the ability of startups to finance.  The authors focus on venture-backed startups.  Interestingly, the paper notes that the percentage of M&A exits has remained fairly constant since the early 1990s.  Many commentators in the popular press have suggested that the number of M&A exits had increased, therefore negatively affecting the number of U.S. IPOs.  Prior to 1997, approximately 87% of startups with over 200 employees went public and of those with over $40 million in sales 67% undertook IPOs.  Since 2000, the fractions have declined to 29% and 30% respectively.  Private capital has filled the breach and as a result the decline in the number of IPOs has not negatively affected the ability of companies to raise capital.  In part, the authors attribute the change to a reduction in the costs associated with remaining a private company.  The authors also discuss changes in the private markets.  For example, the paper shows that VCs have changed how they deploy their capital, with a greater percentage of their investments being devoted to late-stage investments (as opposed to earlier stage companies).  Non-VC investors have provided a very significant percentage of financing in late-stage rounds.  These investors include private equity funds, corporations making minority investments, mutual funds and hedge funds and investment banks.

Up-C IPOs

A blog reader recently shared with us a paper titled “Private Benefits in Public Offerings:  Tax Receivable Agreements in IPOs,” written by Gladriel Shobe.  The paper considers some of the criticisms of up-C IPOs as a result of the tax receivable agreements put in place in these transactions.  For background on up-C IPOs, see our Practice Pointers.  The paper notes that in recent years, 5% of IPOs included use of tax receivable agreements (“TRAs”).  The author identifies three “generations” of TRAs.  The first generation from the early to mid-1990s involved companies that were taking additional steps in connection with their IPOs to create additional tax assets, or new basis.  The second generation TRAs appeared in 2007 with a Duff & Phelps IPO.  The paper identifies a third generation TRA that came about in 2010.  Finally, the paper notes some recent up-C IPOs that have not used TRAs.  After analyzing the various types of TRAs and the rationales for their use, the paper considers whether in the case of TRAs in up-C IPOs pre-IPO owners receive benefits that may not be properly valued or understood by IPO participants.

Dual-Class Structures

In his paper, “Sunrise, Sunset:  An Empirical and Theoretical Assessment of Dual-Class Stock Structures,” author Andrew Winden presents an analysis of initial and sunset dual-stock provisions based on over 100 companies, including pre-2000 and post-2000 structures excluding up-C IPOs.  The paper notes that among the sample set there are many different sunset provisions and provides very useful analysis of these.  The types of sunset provisions include passage of a specified period of time, dilution of high vote shares or controller ownership of such shares down to a low percentage of the aggregate number of outstanding shares, a reduction in the number of high vote shares or the number of high vote shares held by the controller as a percentage of the controller’s original ownership, death or incapacity of certain control persons or the departure of the founder, or conversion upon transfers of the high vote shares to persons that are not permitted holders.  Of course, a significant percentage of companies with dual-class structures, approximately 39% of those that went public after 2000, did not have sunset provisions.  The paper then offers an assessment of the utility of each of the particular approaches to implementing a sunset provision.

 

Issuers often wonder whether confidential treatment can be sought and obtained with respect to commercially sensitive information that may be contained in their commercial agreements. In our recently updated Frequently Asked Questions about Confidential Treatment Requests, we review the process for submitting such a request, as well as reasonable expectations regarding the information that may receive the benefit of confidential treatment.

Morrison & Foerster’s Anna Pinedo discusses the basics of confidential treatment requests in this ThinkingCapMarkets podcast.

Thursday, November 16, 2017

Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Breakfast & Registration:
8:30 a.m. – 8:50 a.m.

Keynote, Pitch, Panel:
8:50 a.m. – 10:00 a.m.

Closing Words & Networking:
10:00 a.m. – 10:30 a.m.

OurCrowd and Morrison & Foerster Seminar

Join OurCrowd, Morrison & Foerster, and the startup community for a breakfast program discussing the U.S. IPO market, financing alternatives, and opportunities for Israeli startups.

Speakers:

  • Ben Colman
    CEO, Covertix
  • Michael Idelchik
    Vice President of Advanced Technology Programs, GE
  • Andy Kaye
    President, OurCrowd
  • Anna Pinedo
    Partner, Morrison & Foerster LLP
  • Coby Sella
    CEO, Unispectral
  • Tomer Tzach
    CEO, CropX

Moderator:

  • Stephen Lacey
    U.S. Editor, International Financing Review

This is an in-person only session.

For more information, or to register, please click here.