Government-Business Forum on Small Business Capital Formation

Transcription

1 Gvernment-Business Frum n Small Business Capital Frmatin Washingtn, D.C. Nvember 15,2012 Small business capital frmatin issues nt addressed by the JOBS Act

2 Alternative Paths t the Public Markets Jhn J. Brer III Senir Managing Directr Head f Investment Banking The Benchmark Cmpany, LLC New Yrk Small business capital frmatin issues nt addressed by the JOBS Act 2

3 Backgrund The market fr traditinal IPOs is brken and cntinues t deliver largely disappinting results and mixed after-market perfrmance The market fr IPOs is characterized by the fllwing dynamics: Fewer spnsring firms: due t cnslidatin and shrinkage in the brkerage industry, there are far fewer firms willing t/capable f effecting IPO transactins Executin risk: given that the preparatin phase f an IPO can take 4 t 6 mnths, there is significant risk that market cnditins will have changed by the time a cmpany is ready t market its IPO stry t investrs Csts precede capital: a cmpany shuld anticipate spending ver $2 millin in legal, accunting and ther fees t prepare fr an IPO all befre marketing the stry and raising any IPO prceeds Marketing dynamics: traditinal IPOs are sld in a cndensed tw-week radshw cnsisting f a series f ne-n-ne meetings - this is clearly a sub-ptimal frmat fr cnveying the merits and risks f many businesses Pricing dynamics: few cmpanies have been able t price within their riginal filing range and ften price at a discunt t the target price Mixed after-market perfrmance: n average, traditinal IPOs are trading flat, but there is a wide variatin frm the mean and after-market supprt is ften sptty Small business capital frmatin issues nt addressed by the JOBS Act 3

4 Alternatives t a Traditinal IPO In respnse t the challenging and unpredictable IPO envirnment, there are alternative paths fr cmpanies t cnsider - Until recently, mst f these alternatives were fcused n varius frms f reverse mergers The reverse merger, in varius frms, has been the primary alternative t an IPO While reverse merger structures have histrically been widely used as a way fr a cmpany t becme public, there have als been structural and ther cncerns assciated with them that have discuraged their use: Lack f market liquidity pst merger Lack f brad institutinal investr spnsrship Lack f the transparency prvided, and due diligence perfrmed by, accuntants, attrneys and underwriters in an IPO Stigma ften experienced by reverse merger cmpanies by nt ding an IPO-especially since the cntrversies assciated with many Chinese reverse merger transactins erupted Recent rule making cvering exchange listing which makes it mre difficult t attain exchange listing and assciated benefits The new rules which tughen the listing standards fr reverse merger cmpanies have lead sme cmpanies seeking t becme public t seek alternatives Small business capital frmatin issues nt addressed by the JOBS Act 4

5 Change in Market Structure The Market Has Mved t Cnfidentially Marketed Offerings The cnfidential frmat fr marketing equity capital markets transactin has emerged as the preferred mechanism fr marketing a fllw-n financing - Sme market participants believe that the IPO market will fllw a similar path and that the cnfidentially marketed IPO ( CM-IPO ) will becme a mre frequently used alternative fr cmpanies seeking t becme public Publicly annunced, fully-marketed underwritten fllw-n s are predminant; Unregistered private placements (PIPEs) are uncmmn and viewed less favrably PIPEs emerge as a cmmn and mre accepted financing vehicle Shelf registratin filings becme mre cmmn and accepted Registered private fferings (RDs) and cnfidentially marketed public fferings (CMPOs) emerge as a preferred financing alternatives vs. PIPEs Reverse mergers int cash and trading shells emerge as viable alternative Frm 10 reverse mergers gain recgnitin with the Cugar Bitechnlgy and Puma Bitechnlgy transactins Frm 10 self-registratin Future: Cnfidentially marketed IPO Self Registratin Resale S-1 Small business capital frmatin issues nt addressed by the JOBS Act 5

6 Histrical Cntext Frm 10 Reverse Mergers The Frm 10 path t the public markets gained significant attentin with the success f Cugar Bitechnlgy Strng institutinal investr spnsrship Sale t Jhnsn & Jhnsn fr ~$1 billin (May 2009) Mst f the initial Frm 10 transactins were executed as reverse mergers int Frm 10 shells (e.g., Cugar, Radius, Puma) The new rules which tughen listing standards fr reverse merger cmpanies have made the Frm 10 reverse merger pathway significantly less attractive due t the time required t up-list In respnse, the fcus has turned t the Frm 10 self-registratin apprach Small business capital frmatin issues nt addressed by the JOBS Act 6

7 Direct Registratin Alternative Crnad Bisciences entered the public markets via the self-registratin pathway in a fast and efficient manner: Frm 10 review perid: 67 days Frm S-1 review perid: 48 days Ttal prcess private financing t public trading: 139 days Days trading n OTCBB befre up-listing t NASDAQ: 21 trading days- Exchange seasning rules d nt apply because the transactin is nt a reverse merger The CM-IPO is a mdest revisin t the Frm 10 self-registratin path that saves significant time and meaningful expense Fllws same prcess as the Frm 10 self-registratin path but remves the Frm 10 registratin step After clsing a private placement, a cmpany can prceed directly t filing a Frm S-1 Resale Registratin Statement with the SEC Filing a Frm 8-A cncurrent with the effectiveness f the Frm S-1 achieves the same result as the Frm 10 filing (i.e., registers the cmpany under the 34 Act) Small business capital frmatin issues nt addressed by the JOBS Act 7

8 Direct Registratin Alternative #2 OvaScience Inc. entered the public markets via the self-registratin pathway in a fast and efficient manner: Frm 10 filed April 11, 2012 after an institutinal private placement. Frm S-1 filed August 29, 2012 after retail private placement; review perid: 15 days frm filing t effectiveness n September 13, 2012 Ttal prcess last private financing t public trading: 91 days-otcbb trading as f Nvember 12, Opening price $7.50/ share vs. private placement price f $5.50/ share (a step-up f 36%) Days trading n OTCBB befre up-listing t NASDAQ: Nt yet up-listed-exchange seasning rules shuld nt apply because the transactin is nt a reverse merger This just anther, mre recent, example which shws less uncertainty and with a timeline cmparable-and maybe- substantially shrter than that fr an IPO fr the same cmpany Small business capital frmatin issues nt addressed by the JOBS Act 8

9 CM-IPO Overview The CM-IPO essentially turns the traditinal IPO prcess upside-dwn Unlike a traditinal IPO, where the registratin prcess with the SEC precedes the funding event, the CM-IPO is a prcess whereby a cmpany cmpletes a private placement that is fllwed by the ging-public prcess The CM-IPO prcess allws a cmpany t take an alternative path t the public markets while aviding the nerus restrictins impsed by the SEC, the stck exchanges and FINRA that are assciated with reverse mergers Prcess and Timeline Step 1 (T = 0): Execute private placement Step 2 (T + 15): Frm S-1 filed with the SEC Step 3 (T + 50): Investment bank t file Frm 211 with FINRA t apply fr trading n OTCBB Step 4 (T + 90): Frm S-1 reviewed and declared effective by the SEC (~75 day prcess) Step 5 (T + 95): Frm 211 cleared fr trading Step 6 (T + 96): Begin trading Small business capital frmatin issues nt addressed by the JOBS Act 9

10 Traditinal IPO Challenges/ CM-IPO Slutins Executin Risk / Csts: the typical IPO prcess takes apprximately 5-6 mnths. There is a significant risk that market cnditins will change by the time a cmpany is ready t g t market. Furthermre, the csts apprximate $1 MM befre any capital is raised, vs. Upfrnt Funding / Back-end Csts: the prcess t g public begins with a financing. Only upn successful cmpletin f the private placement will a cmpany invest the time and expense f ging public. Cmpressed Marketing Time-line: an IPO is typically marketed ver 8-12 business days that are filled with a cndensed rster f ne-hur meetings. Given the cmplexities f a typical emerging r grwth stry, this is a sub-ptimal frmat t market a transactin, vs. Privately Marketed, Extended Diligence: the CM-IPO allws fr mre a mre deliberate marketing prcess that can be cnducted under cnfidentiality, vs. Pricing Dynamics: n average, IPOs are pricing belw the mid-pint f the initial filed price range and may trade dwn in the aftermarket, vs. Pre-established Pricing / Trading: pricing is established upfrnt. Investrs will be aligned in seeing initial public trading at prices equal t r better than the deal price. Small business capital frmatin issues nt addressed by the JOBS Act 10

11 Challenges The Challenges f the CM-IPO Executin f the upfrnt private placement may be difficult withut a brad-based public marketing effrt Aftermarket trading may be thin if the private placement was sld t a narrw grup f investrs Lack f an underwritten ffering with a syndicate f banks may pse a challenge fr reaching brad-based Wall Street spnsrship There can be uncertainty ver meeting the timing and requirements fr the transitin frm OTCBB t a securities exchange A Traditinal IPO May be Preferable fr the Fllwing Cmpanies: Cmpanies with predictable revenues and earnings Cmpanies fr which the stry is intuitive and has brad appeal t generalist and grwth investrs wh can easily grasp the investment thesis in a traditinal IPO marketing structure Situatins where retail investrs are the target audience Small business capital frmatin issues nt addressed by the JOBS Act 11

12 Exchange Seasning Rules On Nvember 9, 2011, the Securities and Exchange Cmmissin apprved new rules f the New Yrk Stck Exchange, the NYSE MKT and NASDAQ that tughen the standards that cmpanies which have gne public thrugh a reverse merger must meet t becme listed n thse exchanges The main listing requirement changes cnsist f: The cmpany has cmpleted a ne-year seasning perid by trading in the U.S. ver-the-cunter market r n anther regulated U.S. r freign exchange fllwing the reverse merger The cmpany has timely filed all required reprts with the SEC, including at least ne annual reprt cntaining audited financial statements fr a full fiscal year cmmencing n a date that is after the date f filing all infrmatin required t be filed abut the reverse merger The cmpany has maintained the requisite minimum share price (i.e., $4 fr NYSE and NASDAQ, and either $2 r $3 fr Amex, depending n the applicable standard under which listing is sught) fr a sustained perid, but in n event less than 30 f the last 60 trading days, immediately prir t its listing applicatin and the exchange s decisin t list the cmpany s shares Small business capital frmatin issues nt addressed by the JOBS Act 12

13 Exchange Seasning Rules (cntinued) In additin, the NYSE and Amex rules give thse exchanges the discretin t impse mre stringent listing requirements in the case f a particular cmpany if there is an: Inactive trading market in the cmpany s securities, there is a lw number f publicly held shares that are nt subject t transfer restrictins The cmpany has nt had a Securities Act registratin statement subject t a cmprehensive SEC review, r the cmpany has disclsed that it has material weakness in its internal cntrls that have been identified by management The cmpany has disclsed that it has material weakness in its internal cntrls that have been identified by management and/r the cmpany s independent auditrs but the cmpany has nt yet implemented an apprpriate crrective actin plan A reverse merger cmpany generally wuld be exempt frm these special requirements if it is listing in cnnectin with a substantial firm cmmitment underwritten public ffering with prceeds t the cmpany f at least $40 millin, r if it has filed with the SEC at least fur annual reprts with audited financial infrmatin as f the applicatin fr listing Small business capital frmatin issues nt addressed by the JOBS Act 13

14 Gvernment-Business Frum n Small Business Capital Frmatin Washingtn, D.C. Nvember 15,2012 Small business capital frmatin issues nt addressed by the JOBS Act