Editor’s note: Well this is not a good sign – anyway study below but see MAUREEN FARRELL of WSJ for analysis.
U.S. IPO Market: Material Weakness Also Don’t Matter Much by Proskauer Rose
Vanguard’s move into PE may change the landscape forever
Welcome to this third edition of Proskauer’s IPO Study. In it, you’ll find our analysis of market practices and trends for U.S.-listed initial public offerings (IPOs). Our proprietary database and analyses now cover 309 IPOs that priced between 2013 and 2015.
The 2015 IPO Market
Entering 2015, we were cautiously optimistic about the U.S. IPO market. We saw 74 IPOs price in the first half of 2015 – a decrease from the same period in 2014, but similar in number to the start of 2013. Of these 74 IPOs, 54 priced in the second quarter of 2015. The second half of 2015 saw a fall-off in volume primarily due to market volatility, driven by interest rate speculation, geopolitical risks with Greece and China, significant distress on oil prices and the energy and power (E&P) sector, and poor performance by IPOs priced in the first half of 2015. As a result, only 51 IPOs priced in the second half of 2015 – the lowest deal count during any year’s second half since 2012.
The year’s $30.1 billion aggregate deal value (including over-allotment) was the lowest since 2009. For some private companies with high valuations, their public debut was actually a “down round.” The resurgence of foreign private issuer (FPI) IPOs that occurred in 2014 slowed in 2015, consisting of 13% of IPOs in our study compared to 16% in 2014. This FPI slowdown was driven by a decrease in Chinese IPOs in 2015, which accounted for 17% of FPI IPOs, compared to 26% in 2014. The resurgence of special purpose acquisition companies (SPACs) continued in 2015, with 20 SPACs pricing, compared to 12 in 2014 and 10 in 2013.
The 2016 IPO Market…So Far
The market slowdown has continued into Q1 2016, with no IPOs pricing in January and four pricing in February (as of February 26).
Companies considering an IPO in 2016 will have more flexibility as a result of the Fixing America’s Surface Transportation (FAST) Act, which was passed by Congress in December 2015. The FAST Act modified the Jumpstart Our Business Startups (JOBS) Act to require public filing of the IPO registration statement only 15 days before road show launch (down from 21 days) and allows issuers to omit audited financials for prior year(s) that would not be required in the prospectus at pricing. A few quarters of 2016 will need to elapse before we can meaningfully interpret how companies are approaching and implementing the FAST Act’s changes.
Here are some cross-sector IPO trends that we observed in 2015.
IPOs Were Distributed Consistently Across Industry
The distribution across sectors in 2015 was nearly identical to 2014, and remained broadly consistent with 2013 (excluding FPIs and master limited partnerships (MLPs)). The health care sector continued to represent the largest share of IPOs by deal count, at 39%, compared to 32% in 2013. 22% of IPOs in 2015 were in technology, media, & telecommunications (TMT), compared to 30% in 2013.
Fewer Mega IPOs
We covered several mega-sized IPOs in our study last year, including the colossal $21.8 billion IPO by Alibaba and 15 other $1 billion+ IPOs. In 2015, only two $1 billion+ IPOs priced, with the largest being First Data at $2.8 billion. Instead, 2015 saw the continued rise of IPOs raising proceeds in the range of $100–$250 million. This range covered 43% of IPOs in 2015, compared to 41% in 2014 and 31% in 2013.
IPOs Are Increasingly Unlikely to Be a Liquidity Event
2015 saw fewer IPOs with a secondary component – only 19% compared to 26% in 2014 and 28% in 2013. We saw a similar trend with management participation in the secondary – 36%, down from 40% in 2014 and 52% in 2013. Looking a little closer we see that sponsor–backed IPOs are not driving this trend – only about a third had a secondary in each of the last three years. It’s clear that non-sponsor deals have driven the drop – only 10% in 2015 had a secondary, compared to 21% in 2013.
In 2015 insiders were not selling as often, but we observed 41% of IPOs had insiders purchasing in the offering, up from 27% in 2014 and 21% in 2013. This three year increase suggests a heightened need for insiders to help support deals in a weaker market. The trend was especially pronounced in the health care sector, where 64% of IPOs had insiders purchasing. Overall, insiders purchased 21% of the total shares in those 2015 IPOs with insider purchasing activity.
Hot-button SEC Comment Areas Vary By Industry
Issuers in certain sectors were particularly susceptible to SEC scrutiny in specific hot-button areas. Cheap stock was a focus area for health care issuers (73%), likely driven by the fact that biotech and biopharm sciences companies are more likely to use equity as pre-IPO compensation. Likewise, TMT issuers were scrutinized with respect to revenue recognition (95%), likely as a result of unique contractual arrangements by companies in this sector, as well as market positioning claims (53%) that use non-financial metrics to estimate market size (e.g., website users, viewers, or devices used). Segment reporting comments were prevalent in the industrials (50%), financial services (43%) and TMT (42%) sectors.
Fewer SEC Comments; Longer Time-to-Pricing
The average number of first round SEC comments decreased 29% from 2013 to 2015, with 30 in 2015, 38 in 2014, and 42 in 2013. Issuers on both the “high” and “low” end of the comments spectrum saw this decrease. From 2013 to 2015, the low end went from 16 to 11, and the high end went from 89 to 78.
In 2015 the average time from first submission or filing to pricing increased to 149 days from 124 days in 2014 (a 20% increase). This may be due to more difficult market conditions.
Interestingly, the number of SEC comments and time-to-pricing varied by sector. Health care had the lowest average number of first round comments (24) and the fastest average time through the SEC (118 days), while financial services had the highest average number of comments (46) and days to pricing (194).
Sponsor-Backed IPOs Were Less Common and Had Different Characteristics
As a percentage of the overall IPO market, sponsor-backed IPOs decreased to 45%, down from 51% in 2014 and 57% in 2013. The consumer/retail sector had the highest percentage of sponsor-backed IPOs in our 2015 study (83%), followed by 70% in the industrials sector and 55% in the TMT sector. On average, sponsor-backed issuers:
- continue to be larger, with an average market cap at pricing of $1.5 billion, compared to $1.2 billion for non-sponsor-backed issuers;
- are more likely to be eligible to utilize the controlled company exemption and are less likely to have majority-independent boards at pricing;
- are more likely to include a secondary component in their IPOs; and
- are more likely to disclose non-GAAP financial measures.
Are Multiple Class Structures Going Mainstream?
There was once a time when it was rather challenging to launch an IPO with a multiple class structure, an arrangement that provides insiders and sponsors with special voting rights. Our analyses found that pre-IPO investors are increasingly seeking to maintain control of the companies they take public, and that this is not impacting pricing or aftermarket performance.
In 2015 the percentage of issuers with multiple classes of common stock increased to 24% from 15% in 2014. IPOs with multiple class structures priced in or above the range more often than IPOs with a single class of stock. We also saw every sector execute a deal with a multiple class structure, with greater concentrations in the TMT and financial services sectors.
More Common to Disclose Material Weaknesses in Internal Controls
There appears to be a trend toward more issuers disclosing a material weakness in internal controls. About one third of IPOs in 2014 and 2015 disclosed a material weakness compared to 17% in 2013. Apparently, the market is not too concerned – in 2015, 77% of issuers disclosing a material weakness in internal controls priced in or above the range, compared to 67% of all IPOs.
Nearly Universal Acceptance of JOBS Act Accommodations
Almost four years after its passage, accommodations under the JOBS Act appear to be firmly accepted in the market. Overall, 91% of the 2015 IPOs in our study were by emerging growth companies (EGCs), an 18% increase from 2013, and 100% of the 2015 IPOs in the health care, E&P and financial services sectors were by EGCs. Consistent with 2014, virtually all EGCs in our study opted to confidentially submit their registration statements. Furthermore, the number of EGCs that utilized the JOBS Act accommodation permitting two years of audited financials (rather than three) increased to 69% in 2015, up from 58% in 2014 and 39% in 2013. In addition, nearly half of EGCs in 2015 showed only two years of selected financial information.
Corporate Governance Structure Remains Mostly Steady
Board characteristics remained remarkably consistent over the past three years, with an average of 7.3 directors in 2015, compared with 7.6 and 7.8 in 2014 and 2013, respectively. In 2015, 68% of issuers in our study had a majority of independent directors, similar to the 69% in 2014 and 68% in 2013. The number of issuers providing for certain anti-takeover measures in their bylaws (such as a classified board structure and a restriction on stockholders’ ability to call a special meeting) also remained relatively unchanged. Our findings did indicate, however, a 12% increase in the percentage of issuers separating Chairman and CEO roles, from 2013 to 2015.
The 180-day lock-up market standard endured in 2015, but as in every year, there were a few IPOs with unique structures. One lock-up disclosure trend that is clear: issuers are more frequently disclosing that “substantially all” shares are locked up (50% of IPOs in our study disclosed this in 2015, compared to 36% in 2014), instead of quantifying the number of shares locked up. As is customary, issuers themselves are locked up for 180 days post-IPO, but carve-outs for issuing shares in connection with an acquisition, joint venture or other commercial arrangement (usually capped at between 5% and 10% of shares outstanding) are becoming increasingly prevalent: this type of carve-out was included in 84% of IPOs in our study in 2015, 72% in 2014, and 64% in 2013.
Fees and Expenses Remain Consistent
Average total IPO fees and expenses (excluding underwriting fees) remained consistent over the past three years, and so did the split between legal fees, accounting fees and printing costs. From 2013 to 2015, fees and expenses for non-EGCs continued to be meaningfully higher than those for EGCs, but were lower as percentage of deal value. Average total IPO fees and expenses for EGCs (excluding underwriting fees) over the last three years was $3.7 million, representing approximately 3.2% of gross proceeds of the base deal on average, as compared with average total non-EGC fees and expenses of $6.4 million, representing approximately 1.4% of gross proceeds of the base deal on average.
SPACs on the Rise
Special Purpose Acquisition Companies (SPACs) are making a comeback, with more SPAC IPOs in the market in 2015 than in any year since before the financial crisis of 2008. Although we do not include SPACs in our overall IPO study, we have included an appendix discussing the SPAC market and comparing key terms of the structure being used today, versus the structure that was predominant in the SPAC market in 2006 and 2007. Among the key differences in today’s market as compared to the old: mechanics make it more difficult for large shareholders to block the consummation of a business combination; sponsors now foot the cost of SPAC working capital (rather than take it out of IPO proceeds from public shareholders); and a greater percentage of underwriting fees are deferred until completion of the initial business combination.
We hope you enjoy the 2016 IPO Study and welcome your comments. Please feel free to contact any of our lawyers listed inside the front cover.
U.S. IPOs: Material Weakness Also Don’t Matter Much To Investors – Methodology
- Our proprietary database now includes 309 IPOs, which priced from 2013 to 2015.
- This study covers 90 IPOs that priced in 2015: 78 domestic issuers and 12 foreign private issuers (FPIs).
- The total population that met our criteria (described below) in 2015 was 125.
- Our three year analysis section covers 258 IPOs (excluding MLPs and FPIs): 74 in 2015, 86 in 2014 and 98 in 2013.
- The criteria for our study include:
- Listing on a U.S. exchange.
- Minimum initial base deal of $50 million in first public filing.
- Our study excludes: blank check companies (BCCs), special-purpose acquisition companies (SPACs), trusts, real estate investment trusts (REITs) and business development companies (BDCs).
- There is an appendix included for FPIs and SPACs in 2015.
Sources and Analysis
- Data compiled from publicly available: (i) registration statements on Form S-1 and Form F-1 and final prospectuses, (ii) SEC comment letters and (iii) as-filed underwriting agreements.
- Financial information is based on the issuer’s most recent audited fiscal year as disclosed in the final prospectus.
- Market, sector, financial sponsors and performance information is sourced from Dealogic.
- The term “average offer” means the average percentage change from the IPO price to the closing price on 1 day, 30 days, 90 days or 180 days (excludes deals priced after August 1, 2015) after the initial trade date and includes market data available as of January 31, 2016 (our cut-off date).
- References to shares locked up refer to shares owned prior to the IPO.
- Analysis of first round SEC comment letters and time to pricing excludes 4 prior public reporting issuers, 2 of which underwent a recent SEC review of Form S-4, and 1 issuer who had recently filed but withdrew a registration statement that had gone through SEC review (collectively referred to as “prior SEC-reviewed issuers”).
- Analysis of corporate governance items excludes MLPs and FPIs, given their different corporate governance structures and available exemptions under stock exchange rules.
- All data was compiled, reviewed and analyzed by Proskauer capital markets attorneys and corporate finance analysts.
- The number of IPOs per sector is proportional to the industry composition for all 132 IPOs in 2015 meeting our criteria.
- We analyzed the geographic distribution of IPOs by surveying the location of issuers’ headquarters.
- Our study included issuers with headquarters in 24 states and 9 foreign countries.
- In the U.S. market, California was home to the highest percentage of IPOs (24%), followed by New York (12%) and Massachusetts and Texas (9% each).
- California IPOs were dominated by health care and TMT issuers, together representing 14 of 18 (78%) of California IPOs.
- New York IPOs included multiple sectors, with the most in TMT.
- Health care IPOs represented 6 of the 7 (86%) Massachusetts IPOs.
- 5 of these 6 (83%) were biotech/biopharm.
Deal Execution, Over-Allotment Option and Exchange Listing
- Out of 90 IPOs, 17 (19%) priced in Q1, 34 (38%) in Q2, 25 (28%) in Q3 and 14 (15%) in Q4.
- The over-allotment option was partially or fully exercised in 71 of 90 (79%) IPOs in our study.
- More IPOs listed on NASDAQ than NYSE.
See full study below.