May 31, 2016

Survey: Venture-Backed IPO Practices

2015 proved to be a tough year for venture-backed IPOs with the total number of IPOs completed decreasing by 37% from 2014. The outlook for IPOs in 2016 is still uncertain following a dramatic decrease in IPO activity in the first quarter of 2016 compared to IPO activity in the comparable periods over the last five years. Despite the decrease in activity, there is still optimism by the pipeline of outstanding pre-IPO companies ready to access the public markets. Here’s a venture-backed IPO survey for 2015 from Gunderson Dettmer, focusing on key governance and disclosure items.

Among others, the findings of the 60 venture-backed companies include:

– All but two are incorporated in Delaware
– 35% listed on the Nasdaq Global Select Market, 35% on the Nasdaq Global Market, 23% on the New York Stock Exchange, and 7% on the Nasdaq Capital Market
– Average time from incorporation to IPO was nearly nine years
– Average time from initial registration statement submission to the SEC to pricing the IPO was nearly five months
– 62% relied on insiders buying in the IPO, up from 51% in 2013
– Only three of the companies completed follow-on offerings in 2015

Last week, Corp Fin published this “Small Entity Compliance Guide” about the changes to the Exchange Act Section 12(g) threshold. Also check out this blog by Nasdaq Private Market’s Annemarie Tierney about “What is the RAISE Act and How Useful will it be to Sellers of Private Company Shares?”…

Trend: Companies Staying Private Longer

Here’s news from this MoFo blog by Ze’-ev Eiger:

On May 17, 2016, Fortune Magazine published an article by Geoff Colvin, “Take This Market and Shove It,” examining the growing trend of companies staying private rather than opting for an IPO. The article notes that while the total number of U.S. companies continues to grow, the number that are traded on stock exchanges has plunged 45% since peaking 20 years ago, and that IPOs, once an indicator of U.S. business dynamism, dried up after the bust in 2000 and have never fully recovered, even though today’s economy is far larger. The article provides various explanations for why some public companies are returning to private ownership and many other companies are simply staying private, while public companies are increasingly becoming fewer and bigger. Although going or staying private allows companies to invest for the long-term and focus on their businesses rather than Wall Street expectations, the article notes that another important driving force has been the increasing fear of activist investors. Other significant factors noted by the article include the following:

– A decreasing reliance of companies on physical assets (e.g., factories and machinery), resulting in a decreasing reliance on IPOs for broad-based financing.

– All-time low interest rates, resulting from a savings glut and easy monetary policies across the globe, and the tax deductibility of interest payments.

– The high costs associated with going public. Underwriting and registration costs average 14% of the funds raised and offerings are usually underpriced by on average 15% in order to produce a first-day “pop.” Public companies also face additional rules, notably those imposed by the Sarbanes-­Oxley of 2012 and the Dodd-Frank Act.  In addition, public company disclosures are replete with information for competitors to study.

– The ability of PE firms to provide broad managerial advice to private companies. In addition, public companies suffer from the so-called agency problem (the misalignment of owners and managers), which does not arise in private companies because the majority owners are usually either the managers themselves or members of a powerful board of directors.

– Private ownership is also attractive to managers because executive compensation is not publicly reported.

The article also refers to an informal online survey indicating that 77% of CEOs think it would be easier to manage their company if they were private rather than public and that only 8% of CEOs thought that they did not have all of the cash they needed to fund investments.

SCOTUS: No Federal Jurisdiction Over State Law Claims That Don’t Raise ’34 Act Issues

Recently, as noted in these memos in our “Federal v. State Law” Practice Area, the US Supreme Court unanimously held – in Merrill Lynch, Pierce, Fenner & Smith v. Manning – that the ’34 Act’s exclusive federal jurisdiction provisions do not preclude a claimant from pursuing state law securities claims in state court…

Broc Romanek