The following chart highlights the alternatives for EGCs and non-EGCs and now the three paths for FPIs pursuing IPOs.
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.
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.
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.
- Ben Colman
- Michael Idelchik
Vice President of Advanced Technology Programs, GE
- Andy Kaye
- Anna Pinedo
Partner, Morrison & Foerster LLP
- Coby Sella
- Tomer Tzach
- Stephen Lacey
U.S. Editor, International Financing Review
This is an in-person only session.
For more information, or to register, please click here.
HR 1585, sponsored by Rep. Schweikart, titled The Fair Investment Opportunities for Professional Experts Act, passed the House by a voice vote. This bill would amend the “accredited investor” definition to add persons, regardless of the net worth/net income test, holding certain financial services licenses as well as persons determined by the SEC to be financially sophisticated by virtue of education or job experience.
The House also passed the Meeks bill, HR 3903, Encouraging Public Offerings Act, about which we previously blogged, which would extend JOBS Act IPO-related accommodations, including the ability to test the waters, to all issuers. HR 3903 passed 419-0.
As previously reported, the U.S. markets have experienced a 35% year-over-year increase in volume, with 111 IPOs completed in the first nine months of 2017, raising $26.5 billion. A recent PwC report noted that the pharma and life sciences sectors accounted for 31% of the IPOs conducted in 2017’s third quarter with 11 IPOs raising $1.1 billion.
In Renaissance Capital’s Quarterly Report on the U.S. IPO Market, biotech IPOs are in the spotlight once again. Renaissance reported 10 biotech IPOs conducted this past quarter. This continues a substantial increase from the first quarter of 2017, which hit a four year-low with only three biotech IPOs completed.
Private equity-backed IPOs have fallen to their lowest volume since the first quarter of 2016. PE-backed IPOs accounted for seven IPOs, which raised $1.4 billion across a variety of sectors. Venture capital-backed IPOs remained steady with 13 IPOs raising $1.7 billion. Tech companies only accounted for two of the 13 VC-backed IPOs raising $330 million, a five quarter low.
Renaissance also reports that the third quarter of 2017 saw 49 new IPO filings, a 23% increase from 2017’s second quarter. There are now 77 companies in the IPO pipeline with 47 having filed in the past 90 days. We will continue to monitor the IPO market on this blog.
The U.S. Department of the Treasury issued its second report (of four reports), titled “A Financial System that Creates Economic Opportunities, Capital Markets.” The Report was issued in response to Presidential Order 137772 setting forth the Core Principles that should guide regulation of the U.S. financial system. The Report addresses various elements of the capital markets, from the equity and debt markets, to the U.S. Treasury securities market, and to derivatives and securitization. The recommendations relating to the U.S. IPO market and reducing the regulatory burdens for companies seeking to undertake an IPO as well as for smaller public companies may be very familiar to readers of this blog, since many of the measures are included in the Financial CHOICE Act or otherwise addressed in proposed legislation or in rule proposals from the SEC.
See our alert, which may be accessed here.
Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.
Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.
The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:
- conducting venture private placements;
- traditional and structured PIPE transactions;
- institutional (debt) private placements;
- Rule 144A offerings;
- Regulation S offerings;
- Regulation A offerings and crowdfunding;
- shelf takedowns;
- registered direct and ATM offerings;
- confidentially marketed public offerings; and
- continuous issuance programs, including MTN and CP programs.
This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.
For more information, please click here.
On October 2, 2017, Congressmen Ted Budd (R-NC) and Gregory Meeks (D-NY) introduced a bipartisan bill, H.R. 3903, in the U.S. House of Representatives. The bill proposes amendments to the Securities Act of 1933, as amended, to increase initial public offering (“IPO”) and follow-on activity. The proposed legislation extends three JOBS Act provisions currently available to emerging growth companies to all issuers: (1) submission of a draft registration statement for confidential nonpublic review by the SEC prior to the public filing of the IPO registration statement; (2) within the one-year period following an IPO, confidential submission of a draft registration statement for an offering; and (3) the ability to test-the-waters with institutional investors. The SEC’s Division of Corporation Finance’s policy changes earlier in the year already have addressed confidential submissions for IPOs as well as follow-on offerings undertaken within twelve months of an IPO; however, the bill would ostensibly extend the confidentiality provisions contained in Securities Act Section 6(e)(2) for these draft registration statements. Currently, those confidentiality provisions are available only for EGCs and confidential submissions made under the new SEC policy must be the subject of a Rule 83 confidential treatment request. Also, the bill would address the ability to test the waters, which was not addressed by the Division of Corporation Finance.
The text of the bill is available here.
EY’s recently published Global IPO trends: Q3 2017 reports that 2017 is on course for the busiest IPO year in 10 years–largely due to the level of activity outside the United States. According to the report, 1,156 IPOs have been completed globally, which have raised approximately $126.9 billion. 2017’s Q3 accounts for about 29% of the year’s global IPOs, with 330 deals raising $37.6 billion in proceeds. Globally, the industrials sector leads in number with 70 deals raising $4.9 billion, followed by tech IPOs with 52 deals raising $5.9 billion and consumer products with 39 IPOs raising $2.5 billion in the third quarter. The most popular exchanges were the Hong Kong Exchange (14 IPOs), the NASDAQ (13 IPOs), the London Stock Exchange (12 IPOs), the NYSE (11 IPOs), and the Australian Stock Exchange (also 11 IPOs).
The EY report notes that the U.S. markets have experienced a 35% year-over-year increase in volume, with 111 IPOs for the first nine months of 2017, raising $26.5 billion. 27 IPOs were completed in Q3 2017, raising $3.5 billion. 10 of these were in the healthcare sector, which was the most active sector in the third quarter, raising $0.9 billion. Year to date, the median IPO size is $116.7 million and the median post-IPO market cap is $490.5 million.