2013 was the strongest year for venture-backed initial public offerings (IPOs) in almost a decade: 82 deals (the most since 2007) generated aggregate proceeds of over $11.2 billion, an average offering amount of $137.2 million. At least one venture-backed company went public each month in 2013, and the pace of IPOs has accelerated in the first three months of 2014.
Posts Tagged ‘IPOs’
The small company initial public offering (IPO) is dead. In 1997, there were 168 exchange-listed IPOs for companies with an initial market capitalization of less than $75 million. In 2012, there were seven such IPOs, the same number as in 2003.
While there is no doubt that the small company IPO has disappeared, the cause of this decline is uncertain and disputed.
A number of theories have been offered for this decline, but the most prominent theory attributes the decline to increased federal regulation and market structure changes also driven by federal regulation. The explanation for this decline is important, because it has driven passage of the JumpStart Our Business Start-ups Act (the JOBS Act) as well as recently introduced Congressional legislation to mandate decimalization for a five-year period for all companies with a market capitalization of $750 million or below.
Plaintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings—2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.
One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target as the subject of federal securities class actions.
How do shareholders motivate managers to pursue innovations that result in patents when substantial potential costs exist to managers who do so? This question has taken on special importance as promoting these kinds of innovations has become a critical element of not only the competition between companies, but also the competition between nations. In our paper, Motivating Innovation in Newly Public Firms, forthcoming in the Journal of Financial Economics, we address this question by providing empirical tests of predictions arising from recent theoretical studies of this issue.
Amid the recent uptick in U.S. IPO transactions to levels not seen since the heady days of 1999 and 2000, Davis Polk’s pipeline of deals remains robust, leading us to believe that strength in the U.S. IPO market will continue in the near future. With ongoing pressure on companies that are past the IPO stage to update or modify their corporate governance practices to align with the views of some shareholders and proxy advisory groups, we thought this would be a good time to review corporate governance practices of newly public companies to see if they have also shifted in recent years. Our survey is an update of our October 2011 survey and focuses on corporate governance at the time of the IPO for the 100 largest U.S. IPOs from September 2011 through October 2013. Results are presented separately for controlled companies and non-controlled companies in recognition of their different governance profiles.
We analyzed the terms of venture financings for 128 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2013.
Overview of Fenwick & West Results
Valuation results in 3Q13 showed a noticeable increase over 2Q13, including the greatest difference between up and down rounds in over six years. The software industry was especially strong, not only valuation-wise, but also in the number of deals.
Here are the more detailed results:
Section 5 of the Securities Act of 1933 is slowly dying. We have to be careful about making such a bold-sounding claim because Section 5 performs two distinct legal functions. First, it creates a presumption that offerings of securities using the facilities of interstate commerce have to be registered with the Securities and Exchange Commission. That is not the aspect of Section 5 that concerns us here, however. Our aim in our current research is entirely at the separate function that takes up most of Section 5’s statutory text: restraining the marketing of registered public offerings so that salesmanship does not run ahead of the mandatory disclosure that is supposed to inform investor decisions of whether to buy or not, often referred to as “gun-jumping.” This is a devolution we find interesting and insufficiently examined in legal scholarship. Our focus is entirely on the IPO, the paradigmatic form of issuer capital-raising, and not offerings by seasoned issuers.
We describe this as a slow death because it began almost as soon as the Act was passed. Section 5 started as a simple, rigid and coherent rule that limited sales efforts after the SEC had declared the registration statement “effective.” The industry found this impracticable and to some extent just ignored it, setting in motion two decades of negotiations as to a proper balance between the demand for pre-effective marketing and the concerns about gun-jumping. A legislative compromise, eventually reached in 1954, gave us the statutory language that is mostly still with us today.
PwC U.S. recently released two reports on corporate governance considerations relating to public offerings. The first, titled “Going Public? Five Governance Factors to Focus on,” outlines key governance considerations companies should address when pursuing a public offering. Its companion document, “Governance for Companies Going Public: What Works Best™,” guides directors and executives of companies planning an IPO through the many governance decisions necessary; offers insights from interviews with directors, executives, investors and board advisors; reports results of PwC’s proprietary research on pre-and post-IPO governance structures; and assists those involved understand the governance landscape.
The five key governance considerations detailed in the report titled “Going Public? Five Governance Factors to Focus on” include:
In our recently published book, JOBS Act Quick Start (published by the International Financial Law Review), we provide readers with a context for understanding the significance of the Jumpstart Our Business Startups (JOBS) Act as both a recognition of the changes in capital markets over the last decade and catalyst for a broader dialogue regarding financing alternatives.
Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.
Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.
But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.
In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.