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.

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.

 

 

 

 

 

 

 

 

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.

Wednesday, October 18, 2017

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

Lunch and Registration:
12:00 p.m. – 12:30 p.m.

Keynote and Pitch:
12:30 p.m. – 1:30 p.m.

Closing Words and Dessert:
1:30 p.m. – 2:00 p.m.

OurCrowd and Morrison & Foerster Seminar

It’s no secret that Israel has been leading the world of innovation. VCs and financial backers from every industry flock to Israel, the Startup Nation, which has the highest number of startups per capita in the world, and ranks fourth in NASDAQ listings, just behind the U.S., China, and Canada.

Join OurCrowd, Morrison & Foerster, and the startup community for a lunch program discussing financing alternatives and opportunities for Israeli startups.

Speakers:

  • Jon Medved
    Founder & CEO, OurCrowd
  • Omer Keilaf
    CEO & Co-Founder, Innoviz
  • James Tanenbaum
    Partner, Morrison & Foerster LLP

This is an in-person only session.

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

Since 2004, the number of companies valued at over $1 billion, known as unicorns, has grown exponentially.  Pitchbook’s recently published Unicorn Report notes that unicorns currently make up one-fifth of 2017’s total deal value. There are currently 176 U.S.-based companies that are classified as unicorns.  While the number of unicorns has increased, the number of financings and average deal size has declined.  In 2017, to date, there have been 43 financings for U.S.-based unicorns, raising $10 billion.  Last year, unicorns raised $18.2 billion in 68 deals and 2015 saw 118 deals raising $20.4 billion.

There are 17 companies that achieved unicorn status in the U.S. during 2017, to date.  On average, it took 6.7 years for these companies to reach unicorn status since their founding.  Looking at all U.S. unicorns, the companies have an average age of 8.8 years.

As more companies are electing to remain private for a number of reasons, including the costs associated with going public and remaining a public company, unicorn exits are scarce.  In 2017, to date, there have been eight exits by unicorns valued at $8.7 billion.  In 2016, there were 10 exits valued at $15.6 billion.  This year, two unicorns were acquired and five went public.

Access Pitchbook’s Unicorn Report here: https://pitchbook.com/news/reports/2017-unicorn-report.

Global fintech venture capital-backed financings are on course to hit record highs, according to a recent research briefing by CB Insights. For the first half of 2017, there have been 496 VC-backed financings that raised over $8.0 billion for fintech companies around the world. U.S. fintech issuers represented almost 40% of the total number of fintech financings in the first half of the year with 198 deals raising $3.1 billion.

Financings for blockchain and bitcoin companies globally in the first half of 2017 raised $343 million over 36 deals. Wealth tech company financings, which include robo-advisors and mobile investing platforms, raised $661 million across 33 financings. Financings for insurance tech companies accounted for over 15% of financings by number of deals, raising $826 million over 76 deals.

There are now 26 fintech unicorns, companies with a valuation of over $1 billion, which include 15 U.S.-based fintech companies. This follows an ongoing trend of privately held companies choosing to remain private longer. Late-stage investments have been ever more present with companies going through multiple rounds of financings due to increased access to capital. Both global and U.S. late-stage investments in fintech companies hit five-quarter highs, with a median deal size of $34 million and $38.5 million, respectively.

To see CB Insight’s full report, click here.

Wednesday, April 26, 2017
11:00 a.m. – 12:30 p.m. EDT

After the 2016 decline in the number of U.S. initial public offerings (IPOs), commentators questioned whether the trend toward companies deferring initial public offerings and remaining private longer would be a new norm.  Already this year’s IPO market appears to be rebounding.  During the session, the presenters will discuss:

  • Whether cross-over (or late stage) private rounds still remain an important milestone on the road to the IPO;
  • U.S. IPO activity (sectors, VC- and PE-backed companies, foreign private issuer activity, syndicate structures);
  • Disclosure and governance trends among IPO issuers;
  • Dual track processes and the legal and business considerations;
  • Multiple share classes; and
  • Other developments.

Speakers:

CLE credit is pending for California and New York.

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

During 2016, there were relatively few companies that completed initial public offerings (“IPOs”). Some commentators attribute the dearth of IPOs in 2016 to volatility arising from, among other things, Brexit and the U.S. Presidential election. Others point to the continuing trend of successful companies remaining private longer and continuing to benefit from attractive valuations in private financing rounds without facing the burdens associated with becoming Securities and Exchange Commission (“SEC”)-reporting companies.

In this year’s survey, we consider the characteristics of the emerging growth companies (“EGCs”) that completed IPOs and the corporate governance, compensation and other practices adopted by them. Specifically, we examined the filings of (i) the approximately 680 EGCs (on an aggregated basis) that completed their IPOs in the period from January 1, 2013, through December 31, 2016, and (ii) the 100 EGCs (on a standalone basis) that completed their IPOs during the year ended December 31, 2016. The survey focuses on EGCs that have availed themselves of the provisions of Title I of the Jumpstart Our Business Startups Act (“JOBS Act”). This year is anticipated to be a more active year for IPOs. Our objective is to provide data that will be useful to you in assessing whether your company’s current or proposed corporate governance practices are consistent with EGC market practice.

Read the 2017 review.

In a recent paper, authors Sergey Chernenko, Josh Lerner, and Yao Zeng consider investments by mutual funds (“cross over funds”) in 99 unicorn companies. Given the rise in recent years of investments by cross over funds in private companies, the authors compare the investments made by these funds compared to those made by venture capital funds. There have been numerous studies examining the role of venture capital funds in governance of private companies and the contribution of venture funds to promoting certain governance practices and information reporting. Not surprisingly, the authors find that more often than not cross over funds structure their investments as straight convertible preferred stock, rather than participating preferred stock. Cross over funds are more focused on cash flow rights, require stronger redemption rights, and generally are not interested in board representation or other roles in the companies. As a result, mutual funds tend not to monitor the governance of the unicorns in which they invest and function more as passive investors, without providing the type of oversight considered characteristic for venture investors. Although late-stage private placement activity declined in 2016, the trend toward companies remaining private longer remains important. As a result, understanding the roles of late-stage investors in unicorns can provide important insights. See the full paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2897254

Renaissance Capital reported several record lows in their 2016 Annual Review of the U.S. IPO Market.  A total of 105 IPOs were completed in 2016, raising $18.8 billion in proceeds—the lowest activity level since 2009 and the lowest proceeds level since 2003, respectively.  The median deal size for 2016 IPOs was $95 million, which is attributed to the number of smaller biotech offerings in 2016.  Only four IPOs raised more than $1 billion this year.  Additionally, 2016 had the lowest number of IPO filings since 2009 with just 120 companies filing for an IPO, an almost 50% decrease from 2015.

Sector updates.  The tech sector accounted for 20% of all U.S. IPOs in 2016, with only 21 offerings, raising $3 billion in proceeds.  The lack of tech sector participation in the IPO market is attributed to the public-private disconnect on valuation.  Renaissance reports that venture capital-backed tech companies chose to avoid public-market valuations and decided to remain private.  Mergers and acquisitions provided quick exits for tech companies that had filed for IPOs.  The healthcare sector remained dominant, accounting for 40% of all U.S. IPOs.  Another year of elevated biotech activity contributed significantly to this year’s 42 healthcare IPOs, which raised $3.4 billion in proceeds.  The financial services sector raised the most proceeds in 2016.  The 15 financial services IPOs raised $4.3 billion in proceeds.

Private equity-backed IPOs.  The number of, and the proceeds raised in, private equity-backed IPOs in 2016 are the lowest since 2009.  However, PE-backed IPOs continue to perform better than the overall IPO market.  The 30 PE-backed IPOs raised $8.8 billion in proceeds, with only five of the 30 finishing the year below the IPO issuance price.

Venture capital-backed IPOs.  Venture capital-backed IPOs in 2016 also represent the lowest level of activity and proceeds since 2009.  42 VC-backed IPOs raised $3.5 billion in proceeds. 50% of these deals were biotech and only 10 deals raised over $100 million.  The tech sector (historically comprised of VC-backed companies) contributed to the 56% decrease in VC-backed IPOs.  As discussed above, the notable public-private valuation disconnect contributed to the lower IPO numbers.

As 2016 comes to a close, we will continue to monitor the U.S. IPO market and provide updates on this blog.