The Road To IPO: Legal And Regulatory Insights Into Going Public - Securities

June and Mid-Year 2013 IPO Market Review

July 3, 2013 3:43 PM

The IPO market in June continued to produce a flow of new offerings at a torrid pace compared to recent years. The month ended with 19 IPOs—more than six times the paltry total of three in June 2012, when the IPO market was taking an early summer hiatus—and the highest June figure since the 19 in June 2005. The last week of June alone produced 10 offerings—the largest weekly total since the 11 IPOs in the first week of November 2007.

Gross proceeds of $3.64 billion in June failed to match the prior month's total of $4.56 billion but still represented the highest June figure since the $6.22 billion in June 2007. June's gross proceeds were buoyed by Coty's $1.0 billion IPO and HD Supply's $957 million IPO.

In total, the 70 IPOs in the first half of 2013 were six IPOs (9%) above the 64 in the first half of 2012 but 26% below the 95 in the first half of 2007—the recent high point of the IPO market, when the year ended with 193 IPOs. Gross proceeds for the first half of 2013 were $16.86 billion.

Year-to-date, 74% of all IPOs have been by emerging growth companies under the JOBS Act.

The average 2013 IPO has enjoyed a 17% first-day gain from its offering price—just eclipsing the 16% average first-day gain for full-year 2012. So far in 2013, 15 companies—21% of the total—have produced a first-day gain of at least 30%. An equal percentage of the year's IPOs have been "broken" (IPOs whose stock closes below the offering price on their opening day), compared to 20% in all of 2012 but still the second lowest level since 2007.

At June month-end, 42% of the year's IPOs were trading 25% or more above their offering price, including 23% up more than 50% from their offering price.

Through the first six months of 2013, the median deal size of $98.7 million is 5% higher than the $94.3 million in 2012. The median deal size of VC-backed companies is $78.8 million—the lowest level since the $72.0 million in 2007—while median deal size for non-VC backed companies is $230.0 million—58% higher than the prior ten-year average of $146.0 million. The median deal size for emerging growth companies, at $78.4 million, is less than a fifth of the $436.3 million median deal size for other companies.

The median annual revenue of IPO companies has decreased 33% from $133.6 million in 2012 to $90.1 million in 2013 to date—the lowest level since the $74.5 million in 2007. Emerging growth companies had median annual revenue of $53.5 million compared to $2.54 billion for other companies.

The percentage of profitable companies going public declined from 55% in 2012 to 44% in 2013 to date—the lowest level since the 26% in both 1999 and 2000. Only 30% of this year's life sciences and technology related IPO companies were profitable.

June IPO activity consisted of offerings by the following companies listed in the order they came to market:

RCS Capital, which is engaged in wholesale broker-dealer, investment banking and capital markets business activities, priced a downsized IPO at the midpoint of the range, and ended its first day of trading down 3%.
LightInTheBox, a Chinese global online retail company, priced at the midpoint of the range and appreciated 22% in first-day trading.
Textura, which provides on-demand project management software for the commercial construction industry, priced a twice upsized IPO at the high end of the range and ended its first trading day 39% above its offering price.
Data traffic management software maker Gigamon priced at the middle of the range and enjoyed a first-day gain of 50%.
Coty, a global fragrance and cosmetics conglomerate—the largest US-listed IPO in history for a consumer-products company, according to Dealogic—priced in the middle of the range and declined 1% on its first day of trading.
bluebird bio, a clinical-stage biotechnology company developing gene therapies for severe genetic and orphan diseases, priced an IPO upsized by just under 20% above the range and ended its first day of trading up 58%—the best first-day gain for any biotech company IPO since mid-2000.
PTC Therapeutics, a biopharmaceutical company focused on the discovery and development of orally administered, proprietary small-molecule drugs that target post transcriptional control processes, priced an IPO upsized by 21% within the range and saw a first-day gain of 10%.
Truett-Hurst, a wine sales, marketing and production company, priced an IPO through W.R. Hambrecht's OpenIPO auction-based process, and ended its first day of trading down 5%.
In-flight wireless connectivity provider Gogo priced at the top end of the range and ended its first day of trading down 6%.
Esperion Therapeutics, a biopharmaceutical company focused on the treatment for elevated levels of low-density lipoprotein cholesterol, priced an upsized IPO at the middle of the range and saw a first-day gain of 4%.
Luxoft, a global provider of software development services and IT solutions, priced at the midpoint of the range and appreciated 20% in first day trading.
NanoString Technologies, which develops, manufactures and sells diagnostic systems for the analysis of genomic information, priced below the range and declined 19% on its first day of trading.
Aratana Therapeutics, a development-stage biopharmaceutical company focused on pet therapeutics, priced a twice upsized IPO in line with a downwardly revised price and ended its first day of trading up 38%.
Private equity–backed CDW, a Fortune 500 provider of integrated information technology solutions, priced a downsized IPO at the low end of a downwardly revised range and increased 8% on its first day of trading.
HD Supply Holdings, one of the largest industrial and construction supplies distributors in North America, priced at the low end of the reduced range and ended its first day of trading up 4%.
Silvercrest Asset Management, a wealth management firm, priced below the range and saw a first-day gain of 8%.
Tremor Video, a provider of technology-driven video advertising solutions, continued the string of companies pricing below their original range and ended its first day of trading down 15%.
Noodles, a fast-casual restaurant operator, priced above an upwardly revised range and enjoyed a first-day gain of 104%.
The Netherlands-based Prosensa Holding, a biotech company engaged in the discovery and development of RNA-modulating therapeutics for the treatment of genetic disorders, priced an IPO upsized by 20% at the high end of the range and ended its first day of trading 48% above its offering price.

May 2013 IPO Market Review

June 7, 2013 3:54 PM

The pace of the IPO market increased in May with 21 IPOs—well above the eight in May 2012, and the largest number for the month of May since the lofty 29 in May 2007. May's tally also represented the highest total for any month since the 24 IPOs in November 2007. For the first five months of 2013 there have now been 51 IPOs, down 16% from 61 IPOs for the comparable period in 2012.

Year to date there have been 16 life sciences IPOs, as the sector has accounted for 31% of the total number of US IPOs in the first five months of 2013.

Gross proceeds of $4.56 billion in May were the highest monthly figure since last May, when gross proceeds were buoyed by Facebook's $16 billion IPO. May's gross proceeds represented the seventh highest monthly total since the end of 2007.

The average 2013 IPO has produced a 16% first-day gain from its offering price—equal to the average gain for all IPOs in 2012—with nine companies seeing a first-day gain of at least 30%. Nine of this year's IPOs—18% of the total—have been "broken" (IPOs whose stock closes below the offering price on their opening day), compared to 20% in all of 2012 and representing the lowest level since the 17% in 2003.

The median deal size in the first five months of 2013 of $104.5 million has increased 11% from the $94.3 million median for all of 2012. The IPO market remains bifurcated, with the median deal size of VC-backed companies at $79.6 million year to date—the lowest figure since 2006—while median deal size for non-VC backed companies is $232.7 million—almost 60% higher than the prior ten-year average of $146.0 million.

The median annual revenue of IPO companies has decreased 37%, from $133.6 million in 2012 to $84.3 million in 2013 to date—the lowest level since the $74.5 million in 2007. The percentage of profitable companies going public has also declined, from 55% in 2012 to 47% in 2013—the lowest level since the 26% in both 1999 and 2000. Only a third of the life sciences and technology related IPO companies in 2013 have been profitable.

While the stock market has retreated slightly from recent records highs, more than 40% of the IPOs this year are trading at least 25% above their offering price at the end of May—and 24% are trading more than 50% above their offering price—suggesting that investor appetite for IPOs remains strong. The confidential filing provisions of the JOBS Act make it harder to predict upcoming deal flow, but the 19 IPOs in June 2005 and 26 IPOs in June 2004 may be realistic targets for June 2013 IPO activity.

May IPO activity consisted of offerings by the following companies listed in the order they came to market:

GW Pharmaceuticals, which develops and commercializes cannabinoid-based therapeutics, priced at a discount to its AIM listed shares in London on March 18, the day before the IPO announcement, and saw a first-day gain of just 2%.
ING U.S., the American unit of retirement, investment and insurance company ING, priced below the range, but was still the second largest IPO of the year. The company ended its first day of trading up 7%.
Insys Therapeutics, a commercial stage specialty pharmaceutical company with products to treat cancer pain and chemotherapy-induced nausea and vomiting, priced at the low end of an already decreased range but gained 19% in first-day trading.
Cyprus-based QIWI, which provides payment services across physical kiosks, online and mobile channels mainly in Russia, priced a slightly upsized IPO at the midpoint of the range and inched up 0.5% on its first trading day.
Cyan, which provides next generation packet-optical transport systems for software-defined networks, priced at the midpoint of the range and opened below its offering price before climbing back to end the first day of trading 1% above its offering price.
PennyMac Financial Services, which originates, acquires and services residential mortgage loans, priced at the midpoint of the range and saw a first-day gain of 6%.
Quintiles Transnational Holdings, the world's largest provider of biopharmaceutical development services and commercial outsourcing services, priced an IPO upsized by 20% at the high end of the range —resulting in the third largest IPO of 2013—and still managed a first-day gain of 5%.
Biopharmaceutical company Receptos, which is focused on discovering, developing and commercializing innovative therapeutics in immune disorders, priced an IPO upsized by almost 11% at the low end of the range and ended its first day of trading flat.
Ambit Biosciences, which is developing small molecule therapeutics for the treatment of acute myeloid leukemia, priced below the range but maintained the original target for gross proceeds. The company ended its first day of trading down 8%.
Tokyo based UBIC, a provider of Asian-language eDiscovery solutions and services, priced within the range and saw a first-day loss of 3%.
William Lyon Homes, the fourth IPO from homebuilders or building construction companies this year, priced above the range and ended its first day of trading up 2%.
Marketo, provider of a cloud-based marketing software platform, priced at the high end of the range and enjoyed a first-day gain of 78%, eclipsing the previous best first-day gain of 2013 by Xoom and the best first-day gain since Splunk's 109% "moonshot" in April 2012 (an IPO that doubles in price on its opening day).
Tableau Software, which provides interactive data visualization software, priced an upsized IPO above an upwardly revised range the same day as Marketo. Tableau ended its first day of trading up 64%—just the second time since 2000 (and the first time since December 2010) that two companies produced first-day gains of more than 50% on the same day.
Israeli firm Alcobra, a biopharmaceutical company developing a non-stimulant ADHD treatment, priced an upsized IPO below the range and declined 6% in first-day trading.
Portola Pharmaceuticals, which is focused on the development and commercialization of novel therapeutics in the areas of thrombosis and other hematologic disorders, priced an IPO upsized by 22% at the midpoint of the range and ended its first day of trading with a 4% gain.
ChannelAdvisor, a leading provider of software-as-a-service solutions to manage sales across multiple online channels, priced at the high end of the range and enjoyed a first-day gain of 32%.
Constellium, a private equity–backed manufacturer of semi-fabricated aluminum products, priced below the range and ended its first day of trading down 3%.
Global Brass and Copper Holdings, a value-added converter, fabricator and distributor of specialized brass and copper products, priced at the low end of a downwardly revised range and climbed 23% in first-day trading.
Private equity–backed exterior building products company Ply Gem Holdings, continuing the steady flow of IPOs by home and construction related companies, priced above the range and saw a 11% first-day gain.
Epizyme, a clinical stage biopharmaceutical company developing personalized therapeutics for patients with genetically defined cancers, priced an IPO upsized by 20% at the top end of the range and soared 53% in first-day trading—the best opening-day performance for a biotech company since Eyetech Pharmaceuticals in January 2004.
Kamada, which is focused on orphan drugs and plasma-derived protein therapeutics, was the second Israel-based biopharmaceutical of the month. The company priced below the range but ended its first day of trading up 9%.

IPO Companies Get Reprieve from Nasdaq Proposal Requiring Internal Audit Function

May 17, 2013 2:28 PM

In February 2013, Nasdaq proposed a new rule requiring—for the first time—all Nasdaq-listed companies to establish and maintain an internal audit function. Under the proposal, IPO companies listing on Nasdaq after June 30, 2013 would have been required to establish the internal audit function before listing, and existing Nasdaq-listed companies would have been required to establish this function no later than December 31, 2013. Read our earlier post on Nasdaq's proposal.

This week Nasdaq announced that it was withdrawing the proposal in order to "adequately consider" the "breadth and nature of the comments" on the proposal. Nasdaq's announcement indicated that it intends to revise the proposed rule, taking into account the comments, and then resubmit it for SEC approval. Read Nasdaq's statement here.

April 2013 IPO Market Review

May 6, 2013 11:25 AM

While the widely forecast increase in deal flow may still be gaining traction, April did produce a small uptick in activity with 10 IPOs and gross proceeds of $3.1 billion—one more than the nine IPOs in the prior month but three shy of the 13 IPOs in April 2012. This brings the total number of IPOs for the first four months of 2013 to 30—43% below the 53 IPOs for the comparable period in 2012.

April IPO activity consisted of the following offerings:

Private equity–backed Taylor Morrison Home was the third IPO of the year to benefit from expectations of a recovery in the US housing market fueled by improving economic conditions and low interest rates. The previous two—Boise Cascade (an Idaho-based manufacturer of home construction material) and TRI Pointe Homes—both enjoyed respectable first-day gains from their offering price and continued solid aftermarket performance. Taylor Morrison priced an IPO upsized by 20% at the high end of the range—resulting in the third largest IPO of 2013—and produced a first-day gain of 5% from its offering price.
Chimerix, a biopharmaceutical company developing oral antiviral therapeutics for use in stem cell transplants, priced an IPO (also upsized by 20%) the following day at the midpoint of the range and jumped 34% in first-day trading—the third best opening day of the year.
Omthera Pharmaceuticals, an emerging specialty pharmaceutical company focused on the development and commercialization of new therapies for abnormalities in blood lipids, priced the next day below the estimated range and fell 7% from its offering price on the first day. Omthera was the seventh life sciences IPO of the year—the sector accounts for 23% of the total number of US IPOs in the first four months of 2013.
Private equity–backed EVERTEC, a leading full-service transaction processor in Latin America and the Caribbean, priced an IPO upsized by 20% at the high end of the range and inched up 2% from its offering price on the first day of trading.
Rally Software, a provider of cloud-based solutions to manage Agile software development, priced a modestly upsized IPO above the range and saw a first-day gain of 27%.
Fairway Group Holdings, which operates 12 high-volume grocery stores in the Greater New York City metropolitan area, priced above the range and traded up 33% on the first day.
Intelsat, the world's largest satellite service provider, continued the steady flow of private-equity backed companies going public. The highly leveraged company priced a downsized IPO below the range and opened below its offering price before climbing back to end the first day of trading 7% above its offering price.
Taminco, the world's largest pure-play producer of alkylamines and alkylamine derivatives, priced below the range and ended its first day of trading 3% below its offering price.
Blackhawk Network Holdings, a Safeway spin-off that provides prepaid gift, telecom and debit card products for consumers and businesses, priced above the range and increased 13% in first-day trading.
SeaWorld Entertainment, a private equity–backed operator of 11 US theme parks including SeaWorld and Busch Gardens, upsized its IPO by 30% and priced at the high end of the range to produce the second largest IPO of the year. In another sign of reduced investor wariness of heavily indebted companies, SeaWorld spouted a 24% first day gain.

The average 2013 IPO to date has enjoyed a 17% first-day gain from its offering price. In comparison, the average IPO for all of 2012 saw a 16% first-day gain. Five 2013 IPOs—17% of the total—were "broken" (IPOs whose stock closes below the offering price on their opening day), compared to 20% of all IPOs in 2012.

Buoyed by a number of large private equity–backed IPOs, the median offering size in 2013 to date of $141.2 million is at an all-time high. With an increasingly bifurcated market, the median deal size of VC-backed company IPOs so far this year is $77.9 million—the lowest level since 2006—while the median deal size for non-VC backed company IPOs is $289.3 million—almost double the average in the prior ten years.

The median annual revenue of IPO companies increased 5% from $133.6 million in 2012 to $140.5 million in the first four months of 2013. Conversely, with the IPO market receptive to emerging companies, the percentage of profitable companies going public fell from 55% in 2012 to 43% in the first four months of 2013—the lowest level since the 26% in both 1999 and 2000.

While year-to-date US IPO activity in 2013 remains well short of the level for the comparable period in 2012, recent filing activity and strong aftermarket performance by many of the 2013 IPO class—43% were trading 20% or more above their offering price at the end of April—bode well for future deal flow.

How Quickly Does the SEC Staff Review a Form S-1? [Updated Data]

April 24, 2013 5:12 PM

The SEC's longstanding target is to provide initial comments on a Form S-1 within 30 days after filing. For its fiscal year ended September 30, 2012, the SEC reported that the staff provided initial comments on all Securities Act filings (covering both IPOs and non-IPOs) in an average of 24.9 calendar days—equal to the 2007-2011 average—but slightly longer than the average of 24.4 calendar days in the preceding fiscal year. The SEC does not separately report this statistic for IPOs, and individual response times for initial IPO comments can vary in relation to overall filing volumes. In a slow market, initial comments can arrive in as little as 20 calendar days; when deal volumes surge, the 30-day standard may be missed by up to a week, although usually not more. In 2012, the 30-day standard was missed by a single IPO, and by only two days.

Unlike its 30-day target for initial comments on a Form S-1, the SEC has not committed to any specific timing objective for the staff to review and comment on the company's responses. The time required for SEC review will depend on the volume and nature of the staff's comments and the company's changes to the Form S-1, the quality of the company's response, staff workloads, SEC filing volumes, and other factors.

Based on our review of the filings for all US IPOs completed between 2010 and 2012, set forth below is the elapsed time (in calendar days) between Form S-1 filings and SEC comment letters. The ranges represent the 25th and 75th percentiles. Data beyond the fourth Form S-1 amendment is not presented because external factors, such as market conditions, often begin to affect company response times as the anticipated date for the road show approaches. Overall, time periods lengthened modestly for 2012 IPOs, compared to the prior two years. (The data below covers both public filings and confidential submissions by emerging growth companies under the JOBS Act.)

Elapsed Time Between Form S-1 Filings and SEC Comment Letters

Description	Median (Calendar Days)	Range (Calendar Days)
Initial Form S-1 filing to first comment letter	27	27-28
First comment letter to first Form S-1 amendment	14	9-18.5
First Form S-1 amendment to second comment letter	15	13-18
Second comment letter to second Form S-1 amendment	10	6-16
Second Form S-1 amendment to third comment letter	12	8-16
Third comment letter to third Form S-1 amendment	7	4-18
Third Form S-1 amendment to fourth comment letter	9	5-14
Fourth comment letter to fourth Form S-1 amendment	6	3-13

SEC Gives Nod to Use of Social Media Under Regulation FD—If Done Correctly

April 3, 2013 5:00 PM

Regulation FD prohibits a public company from disclosing material nonpublic information to securities market professionals and securityholders unless the company simultaneously discloses the information publicly.

In a report issued April 2, the SEC confirmed something that its staff has been saying for years—public companies can use social media outlets such as Facebook and Twitter to disseminate information in a manner that satisfies Regulation FD, but only if that usage complies with the principles outlined by the SEC in its 2008 Guidance on the Use of Company Web Sites.

In its 2008 guidance, the SEC indicated that website posting may, in some circumstances, be adequate public disclosure under Regulation FD. The 2008 guidance, which yesterday's report confirms is equally applicable to social media communications, states that, when evaluating whether a communication is sufficient under Regulation FD, a company must consider whether:

the communication is made via a recognized channel of distribution;
the means of communication disseminates the information in a manner that makes it available to the securities marketplace in general; and
there has been a reasonable waiting period for investors and the market to react to the information.

The required analysis must be made on a case-by-case basis. As noted in the report: "The central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information." The report highlights some factors that may be especially relevant in the social media context, including providing appropriate notice to investors about:

the specific social media channels the company will use for the dissemination of information, so that investors are in a position to subscribe, join, register for or otherwise review those particular channels; and
the types of information that may be disclosed through these channels.

Companies should remain vigilant about dissemination of information through executives' personal social media accounts, as the report warns that: "[D]isclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method 'reasonably designed to provide broad, non-exclusionary distribution of the information to the public' within the meaning of Regulation FD. This is true even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information. Without adequate notice that such a site may be used for this purpose, investors would not have an opportunity to access this information or, in some cases, would not know of that opportunity, at the same time as other investors."

As indicated in the above quote, the report expressly rejected the idea that having a large number of followers, in and of itself, makes a forum FD-compliant. The report also makes clear the SEC's view that a private communication is problematic if any member of the audience is in one of the groups of people covered by Regulation FD, regardless of how many other people receive that communication.

The report was issued by the SEC in conclusion of its enforcement staff's investigation into whether Netflix's CEO had violated Regulation FD by posting an updated corporate metric (that Netflix's monthly online viewing had exceeded one billion hours for the first time) on his personal Facebook page, without simultaneously making any other disclosure of the metric. The report notes that neither Netflix nor its CEO had previously used the CEO's personal Facebook page to announce company metrics, and that Netflix had not previously informed investors that the CEO's personal page would be used to disclose information about Netflix. Instead, the report notes that Netflix had consistently directed the public to Netflix's corporate website, Facebook page, Twitter feed and blog for information about Netflix. Stating that it recognized that there has been market uncertainty about the application of Regulation FD to social media, the SEC determined not to initiate an enforcement action or allege wrongdoing by Netflix or its CEO.

While the significance of the report may fall short of some of the headlines about it, the report reflects the SEC's recognition of the increased use and importance of social media channels, as well as the SEC's willingness to allow companies to explore new ways to communicate with investors. As a practical matter, however, the report does not immediately change the disclosure landscape in a revolutionary way. At least for now, as was the case before the report, most public companies (especially newly public ones) will continue to be best served by disseminating material information through a Form 8-K or press release, in addition to website posting, social media and other means of dissemination. However, with appropriate groundwork by companies based on the principles outlined in the SEC's 2008 guidance, the report may in time live up to the excitement with which it has been greeted in many quarters.

March and Q1 2013 IPO Market Review

April 1, 2013 12:40 PM

The IPO market continued at a measured pace in March, producing nine IPOs. With a total of 20 IPOs in the first quarter of the year, US IPO activity in 2013 was at half the level of the comparable period in 2012, although gross proceeds were up slightly from the first quarter of 2012. The strong finish to the quarter, recent uptick in filings and low level of withdrawals in recent months, however, point to increased deal flow later this year absent a retrenchment in the capital markets.

The average Q1 2013 IPO enjoyed a 19% first-day gain from its offering price and tacked on a further 4% by quarter-end. The best performing IPO of the quarter was 3D printing company ExOne (up 86% from its offering price by quarter-end) followed by a trio of goods and services companies—Boise Cascade Company (up 62%), Norwegian Cruise Line Holdings (up 56%) and Bright Horizons Family Solutions (up 54%).

Technology-related companies (including life sciences companies) dominated the IPO market in Q1 2013, accounting for 65% of all offerings in the first quarter of 2013 compared to 58% for all of 2012. The median annual revenue of IPO companies dropped 53%, from $133.6 million in 2012 to $62.9 million in the first quarter of 2013, and the percentage of profitable companies going public fell from 55% to 40%—the lowest level for both statistics since 2000.

Thumbnail sketches of March's IPOs follow:

The month's activity got underway with the smallest IPO of the year to date ($21.0 million), by minority focused online networking and job posting company Professional Diversity Network. Despite pricing below the range, the company traded below its offering price on the first day.
Equities-focused investment management firm Artisan Partners priced above the range and followed that with the best first day performance from a US-based asset manager in at least 15 years. The company ended its opening day of trading 29% above its offering price.
Energy-technology company Silver Spring Networks—a provider of hardware, software and services for "smart grids"—upsized by almost a third and priced at the midpoint of the range. The stock traded up 29% on its opening day but shed most of that gain in the aftermarket by month-end.
Model N—a provider of revenue management software to the life science and technology sectors—priced above the range and was the third IPO in a row to end its first day of trading 29% above its offering price.
The month then saw IPOs by a pair of biopharmaceutical companies. Tetraphase Pharmaceuticals priced below the range but maintained the original target for gross proceeds. After pricing at the low end of the range, Enanta Pharmaceuticals increased 23% in first-day trading.
Cloud-based digital ad management firm Marin Software priced an upsized IPO above the range, generating gross proceeds 25% higher than originally planned, and still gained 16% in first-day trading.
March ended with a pair of PE-backed IPOs. West Corporation—a provider of communications solutions—came to market below the range and ended its first day of trading 6% below its offering price. Packaged and frozen foods company Pinnacle Foods fared better, pricing at the high end of the range and ending its first trading day 11% above its offering price.

Form 10 IPOs—An Alternative Path to the Public Market

March 25, 2013 9:49 AM

A new kind of IPO structure, called a "Form 10 IPO," can provide an alternative path to capital and public trading for smaller companies without significant revenue in high-risk industries, such as life sciences. Although not an IPO in the usual sense, a Form 10 IPO may be the most practical route to going public for some companies.

The traditional IPO route can be difficult. Given the length of time it takes to complete the overall IPO process, there is significant risk that market conditions will change between the time a company begins the process and the time it is ready to market the offering to investors. In addition, it can be challenging for companies with limited operating histories to gauge their valuations, even as late in the process as during the road show, causing some companies to price their IPOs well below the estimated range, or even to abandon the effort despite having already invested significant time and expense in the process.

In response to these factors, the Form 10 IPO has emerged as an alternative to a conventional IPO. Previously, various forms of reverse-merger transactions had been the primary means for life science companies to go public if they could not complete a traditional IPO. Following the adoption of tightened stock exchange listing standards for reverse-merger companies, the Form 10 IPO has become a more desirable alternative.

What is a Form 10 IPO?

In a Form 10 IPO, a private company sells securities in a private placement under Regulation D and, in connection with the private placement, agrees to file a Form 10 registration statement to become a reporting company under the Exchange Act and to file a Form S-1 registration statement registering for resale the shares sold in the private placement. Typically, a Form 10 IPO company will arrange to have its stock quoted on an over-the-counter market and later seek to have its shares listed on a national securities exchange once it satisfies the applicable listing standards.

Advantages and Disadvantages

The principal advantage of a Form 10 IPO is that it can provide a company with significant capital more quickly than a conventional IPO. The following aspects of the Form 10 IPO process contribute to its advantages:

the price at which the company raises capital is negotiated up front with the investors in the private placement;
the SEC review process does not occur until after the sale of the securities;
institutional investors that ordinarily invest only in public companies may be willing to invest in a Form 10 IPO private placement; and
much of the time, cost and expense associated with public company preparations can be deferred until after the company has received the capital.

While these advantages may be very meaningful for some companies, there are also several disadvantages to a Form 10 IPO, including:

it may be difficult for a smaller company to comply with its public reporting obligations under the Exchange Act, which become applicable as soon as the Form 10 becomes effective;
the company may encounter difficulty in satisfying the public float and round-lot stockholder requirements for stock exchange listing;
the elapsed time from the sale of the securities to trading on a stock exchange—the ultimate goal in a Form 10 IPO—may be no shorter than in a traditional IPO;
if the company's stock trades below $5.00 per share and is not listed on a national securities exchange, the company will be subject to the SEC's "penny stock" rules, which could make it more difficult for broker-dealers to execute trades in the stock;
the aggregate legal and accounting expenses incurred in connection with a Form 10 IPO will likely be as much, if not more, than those associated with a traditional IPO;
the placement agent's fees may be based on a higher percentage of the financing proceeds than the percentage underwriting discount in an IPO, and the company may also need to issue warrants to the placement agent as additional compensation;
research coverage may be more difficult, and perhaps impossible, to obtain;
major investment banks may be less likely to underwrite the company's follow-on offerings because they did not have the opportunity to become familiar with the company during a conventional IPO process;
the intangible benefits of enhanced prestige and credibility provided by conventional IPO will be delayed, or not present at all; and
because the JOBS Act does not permit Form 10 registration statements to be submitted for confidential SEC review, an emerging growth company's plans to pursue a Form 10 IPO will become public knowledge as soon as it files the Form 10.

Offering Process

The Form 10 IPO offering process has multiple steps:

Pre-Financing Preparation: The Form 10 IPO process typically begins with the company's engagement of an investment bank. Once the investment bank is selected and engaged, the company and the bank will determine the appropriate path and timeline for the company's process. The investment bank will also act as placement agent in connection with the initial private placement.
The Private Placement: The company and placement agent will work together to identify investors and negotiate the private placement, which is completed pursuant to the exemption from registration provided by Regulation D. The securities sold in the financing can consist of shares of preferred or common stock, and will be sold pursuant to a stock purchase agreement. In addition to normal private placement terms, the stock purchase agreement will include the company's commitment, following the financing, to file a Form 10 registration statement to become a reporting company and to arrange to have its shares traded on an over-the-counter market and/or listed on a stock exchange.
Public Company Preparation: The company will become subject to the Exchange Act reporting requirements on the day the Form 10 becomes effective. As a reporting company, the company will be required to file Form 8-Ks, 10-Ks and 10-Qs. In addition, insiders and 10% stockholders will be required to file Form 3s and 4s, and 5% stockholders will be required to file Schedule 13Ds or 13Gs. Therefore, the company should begin its public company preparations, which are similar to those of a private company pursuing a traditional IPO, at the time of the private placement.
Governance Preparation for Stock Exchange Listing: Since the eventual goal of the Form 10 IPO process is for the company's stock to be listed on a national securities exchange, the company must determine early in the process how it plans to satisfy the applicable listing standards. Particular consideration should be given to the non-affiliate float and round-lot stockholder requirements. In addition, because the phase-in rules applicable to companies listing on a stock exchange in connection with an IPO are not available to a company going public through the Form 10 IPO process, the company must be prepared to be fully compliant with the director independence and committee composition requirements at the time it seeks listing.
Form 10 Registration Statement: The Form 10 registration statement contains information similar to that required in a Form S-1 registration statement, with the exception of information specific to the securities offering. The SEC review process is also similar to the Form S-1 review process—the SEC will review and provide comments on the Form 10 registration statement and the company will respond to the SEC's comments through response letters and Form 10 amendments. However, unlike a Form S-1, the Form 10 will automatically become effective 60 days after filing, unless withdrawn by the company. In the event significant issues remain unresolved as the date of effectiveness approaches, the SEC may request that the company withdraw the registration statement prior to effectiveness, or the company may elect on its own to do so. If the company does withdraw the Form 10, whether at the request of the SEC or on its own, a new 60-day clock will begin when the Form 10 is refiled.
PIPE Financing: To comply with the securities exchange listing standards, which require that a company have a minimum number of round-lot stockholders and a minimum amount of non-affiliate public float, a Form 10 IPO company may determine to conduct a PIPE financing after the Form 10 becomes effective. A primary goal for the PIPE financing will be to increase the company's non-affiliate stockholder base.
Resale Form S-1: After the Form 10 has cleared SEC comments and gone effective, the company will draft and file with the SEC a resale Form S-1, registering for resale the shares sold in the private placement and the PIPE financing, if any. The purpose of the resale Form S-1 is to provide liquidity to the investors and to facilitate trading in the stock.
Over-the-Counter Trading: A Form 10 IPO company usually will be unable to satisfy the applicable standards for listing its stock on a securities exchange immediately following effectiveness of the Form 10. Instead, the company will likely arrange through a broker-dealer, usually the investment bank assisting the company with its Form 10 IPO, to have the company's stock quoted on an over-the-counter system. Over-the-counter trading provides liquidity for the company's investors as well as an opportunity for the company to increase its non-affiliate stockholder base and otherwise progress towards satisfying the stock exchange listing standards.
Stock Exchange Listing: Once the company satisfies the applicable listing standards, including the director independence and committee composition requirements for which there is no grace period in the context of a Form 10 IPO, the company may list its shares on a stock exchange.

Outlook

For companies that anticipate having a difficult time successfully marketing, pricing and completing a traditional IPO, a Form 10 IPO may be appealing. However, a Form 10 IPO is not feasible for all companies and, even for those companies that are in a position to take advantage of the benefits, there is the fundamental tradeoff of time to capital versus time to market, liquidity and access to additional capital.

To date, few companies have completed Form 10 IPOs, and the extent to which this market will broaden remains to be seen. Interest may grow as the process becomes better known among IPO candidates and potential Form 10 IPO investors. Moreover, the JOBS Act's mandate to eliminate the prohibition on general solicitation and general advertising in private placements conducted pursuant to Rule 506 under Regulation D, once implemented, may help companies identify investors for private placements and PIPE financings in conjunction with a Form 10 IPO. In any event, a Form 10 IPO should remain a possibility for some private companies that seek public investor capital but are looking to avoid the market fluctuation and pricing risks associated with raising money through a traditional IPO.

Nasdaq to Require IPO Companies to Have Internal Audit Function Beginning June 30, 2013

March 18, 2013 9:18 AM

The basic role of an internal auditor is to provide an objective evaluation of the company's internal controls, identify actual and potential problems, and recommend corrective action. The internal auditor may also monitor compliance with policies, procedures and regulations, assess the efficiency of business processes, and perform other audit functions. NYSE rules have long required IPO companies to have an internal audit function. Now Nasdaq is about to impose the same requirement.

Nasdaq has proposed a new rule requiring all Nasdaq-listed companies to "establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company's risk management processes and system of internal control." The function may be provided internally or outsourced to a third party service provider other than the company's independent auditor. The Nasdaq proposal closely mirrors the NYSE's existing requirement of an internal audit function, including requirements that the audit committee meet periodically with the internal auditor and that the audit committee discuss with the outside auditor the responsibilities, budget and staffing of the internal audit function.

If approved by the SEC, IPO companies listing on Nasdaq after June 30, 2013 will be required to establish the internal audit function before listing. Companies listed on Nasdaq before June 30, 2013 will be required to establish this function no later than December 31, 2013.

Read Nasdaq's proposal here.

February 2013 IPO Market Produces Mixed Results

March 1, 2013 1:58 PM

The February IPO market got off to a strong start with wood products manufacturer and building materials distributor Boise Cascade and 3D printing company ExOne both pricing above the range and immediately trading up. Riding investor confidence that the US housing market is recovering, Boise enjoyed a first-day gain of 25%. Fueled by continued excitement surrounding the 3D printing market, ExOne's stock popped 47% in opening-day trading.

Web-based provider of short-term medical insurance Health Insurance Innovations was, however, the first "broken" IPO of 2013. Its stock inched down 2% on its first day of trading after pricing at the low end of the range and dropped another 9% by the end of February.

Online and mobile money transfer company Xoom priced an upsized IPO above the range mid-month and ended its first day of trading up 59%—the top first-day performer of the year—before giving up almost half the gain by month-end.

Tepid aftermarket performance toward the end of February combined with the withdrawal and postponement of two biotech IPOs rubbed some of the sheen off of recent average IPO returns and left the calendar entirely empty at month-end.

With a total of eleven IPOs in the first two months of the year, US IPO activity in 2013 to date is at half the level for the comparable period in 2011 and 2012 but is higher than the deal flow during the IPO doldrums from 2008 to early 2010.

Are Regulatory Burdens Driving US Companies to Pursue Overseas IPOs?

February 20, 2013 8:33 AM

Following the enactment of the Sarbanes-Oxley Act in 2002, many observers predicted that regulatory burdens would drive US companies to go public outside of the United States. The evidence supports this phenomenon, although the absolute numbers are not large and the trend has recently reversed despite the imposition of additional requirements by the Dodd-Frank Act in 2010.

Offshore IPOs by US companies grew from barely 1% of all US company IPOs worldwide between 1996 and 2001 to nearly 9% of all US company IPOs worldwide between 2003 and 2010. Since then, however, this percentage has declined to 5% in 2011 and only 1% in 2012, despite the additional burdens imposed by Dodd-Frank. Looking ahead, offshore IPOs may become less attractive to emerging growth companies because of the availability of reduced disclosure requirements for IPOs in the United States as a result of the JOBS Act.

IPO Market Opens Strong in 2013

February 8, 2013 3:10 PM

The US IPO market produced seven IPOs in January 2013—the busiest start to the year since 2006. Buoyed by the $2.2 billion IPO of Pfizer's animal health unit Zoetis, gross proceeds in January were $3.3 billion—the highest January figure since 2000. The month included IPOs by well-established companies with proven revenue and profitability as well as a trio of biotech offerings.

The average first-day gain for January's IPOs was 18% compared to 16% for all IPOs in 2012. Norwegian Cruise Line, Bright Horizons and Zoetis enjoyed first-day gains of 30%, 29% and 19%, respectively—these gains were all the more striking because each offering was priced above the range. There were no "broken" IPOs (IPOs whose stock closes below the offering price on their opening day) in the month.

With offerings by KaloBios Pharmaceuticals, LipoScience and Stemline Therapeutics during the last week of January, the biotech IPO market began the year with a solid start. LipoScience and Stemline rose 16% and 18%, respectively, in first-day trading while KaloBios was flat. Each of these IPOs priced at the bottom of the range.

The remaining January IPO was by Starwood-backed homebuilder TRI Pointe Homes, which saw a 12% first-day gain after pricing above the range.

Are Directed Share Programs Still Friendly?

January 28, 2013 8:48 AM

In a directed share program—often called a "friends and family" program—the company requests the lead managing underwriters to reserve a portion of the offering for sale to persons designated by the company, such as employees, customers, vendors or other persons having a business relationship with the company. Directed share programs are intended to reward friends of the company by providing an opportunity to purchase shares at the IPO price in advance of anticipated price appreciation and to strengthen the company's important business relationships by encouraging investments in the company.

Directed share programs reached their zenith in the Internet-company mania of the late 1990s, when many IPO stocks shot up in price and IPO allocations for retail investors were particularly scarce. The popularity of directed share programs has since waned, due in part to the return of more moderate post-IPO price gains, and these programs have shrunk in size.

In their heyday, directed share programs were present in about two-thirds of all US IPOs and often represented 10% or more of the offering. In recent years, less than half of US IPOs have had directed share programs, with 5% of the offering size now the norm. Directed share programs can also produce unfriendly investment returns: in both 2008 and 2011, the average IPO declined in price by year-end, leaving participants with losses. In contrast, the average IPO of 2012 ended the year trading 22% above its offering price, leaving participants in many of last year's directed share programs with attractive investment returns.

Meredith Cross, Former Director of the SEC's Division of Corporation Finance, to Rejoin WilmerHale

January 16, 2013 2:00 PM

WilmerHale announced today that Meredith B. Cross, who served as Director of the SEC's Division of Corporation Finance from June 2009 through the end of 2012, will be rejoining the firm. During this time, Ms. Cross led the Division's efforts to implement both the Dodd-Frank Act and the JOBS Act. Under her leadership, the Division recommended close to 60 rulemaking releases to the Commission, including those relating to say-on-pay, conflict minerals, proxy access, compensation committees and compensation advisers, asset-backed securities, and the new regulatory regime for derivatives. Ms. Cross also guided the Division's pragmatic response to numerous issues relating to the IPO "on-ramp" provisions of the JOBS Act. From 1998 to 2009, Ms. Cross was a partner at WilmerHale, and served as co-chair of the firm's Corporate Practice. She previously served the Division in a variety of capacities between 1990 and 1998, including Attorney Fellow, Deputy Chief Counsel, Chief Counsel, Associate Director and Deputy Director.

Read the full announcement.

SEC Approves Stricter Independence Standards for Compensation Committee Members

January 14, 2013 6:15 PM

On January 11, 2013, the SEC approved Nasdaq and NYSE rule changes that implement the stricter independence standards for compensation committee members mandated by the Dodd-Frank Act. Read our earlier post on these proposals.

There are two key implementation dates for all listed companies to keep in mind:

July 1, 2013 – this is when the new requirements relating to the duties and authority of the compensation committee with respect to compensation advisors take effect
Earlier of (1) a company's first annual meeting after January 15, 2014 or (2) October 31, 2014 – this is when the enhanced independence requirements for compensation committee members take effect

IPO companies will need to comply with the new compensation committee independence rules,subject to the same phase-in period applicable to other committee independence requirements: at least one independent member upon listing, majority of members must be independent within 90 days, and all members must be independent within one year. As a result, board and committee preparations in connection with an IPO must now factor in these new compensation committee independence requirements.

2012 IPO Market Results

January 3, 2013 10:08 AM

The US IPO market produced 102 IPOs in 2012—a 5% increase from the 97 IPOs in 2011. Before drying up in mid-May, IPO activity was at the highest level for the comparable period since 2007. Although deal flow picked up in the fall, the fourth quarter tally in 2012 was the lowest since 2002.

Gross proceeds increased 22% from $28.7 billion in 2011 to $35.1 billion in 2012, primarily due to Facebook's $16 billion offering—the third largest IPO in US history. The two other billion dollar IPOs of 2012 came from Mexican financial services company Santander ($2.9 billion) and real estate services company Realogy ($1.08 billion).

Median IPO size declined 33% from $140.4 million in 2011 to $94.3 million in 2012, reflecting an increase in the number of VC-backed IPOs, which tend to be smaller. The number of IPOs in the United States by US issuers increased from 42 in 2011 to 51 in 2012. Median IPO size in 2012 was similar to the $97.9 million median in 2010, when there was a resurgence of VCbacked IPOs.

The average first-day gain for all IPOs in 2012 was 16% compared to 14% in 2011, and was the highest such figure since 2000. In 2012, 20% of all IPOs were "broken" (IPOs whose stock closes below the offering price on their opening day) compared to 26% in 2011. The percentage of broken IPOs in 2012 was the lowest since 2003, when the IPO market was open to only the most select companies.

There was only one "moonshot" (an IPO that doubles in price on its opening day) in 2012. Enterprise software company Splunk saw its stock price jump 109% in first-day trading.

Aftermarket performance rebounded in 2012, following a weaker showing in 2011. The average 2012 IPO gained 22% from its offering price by the end of the year, with 64% of the year's IPOs trading at or above their offering price at year-end. In contrast, the average 2011 IPO lost 13% from its offering price by the end of 2011, with only 39% of the year's IPOs trading at or above their offering price at year-end 2011. The average IPO gained 14% from first day close to year-end in 2012 compared to an 18% decline in 2011.

The percentage of profitable companies going public increased from 51% in 2011 to 55% in 2012—despite the increase, this was still the lowest percentage since 2001. The median annual revenue of IPO companies increased 35%, from $98.7 million in 2011 to $133.6 million in 2012. These results continue to reflect the traits of a bifurcated IPO market, with larger and more profitable companies on one end of the spectrum and smaller venture-backed and technology companies on the other.

SEC Approves Auditing Standard 16, including Application to Emerging Growth Companies

December 17, 2012 8:13 PM

On August 15, 2012, the PCAOB adopted Auditing Standard 16 (AS 16), which prescribes the required auditor communications in connection with the issuance of an audit report, and applied the new standard to emerging growth companies (EGCs). ( Read our earlier post on AS 16.) Today the SEC approved AS 16 as proposed, including its application to EGCs. AS 16 is the first PCAOB standard adopted since the enactment of the JOBS Act. In order to apply AS 16 to EGC audits, the SEC was required to find that doing so is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition and capital formation.

The SEC made these findings, as discussed here.

Betwixt and Between: Flash Financial Disclosures When a Road Show is Launched After Quarter-End

December 3, 2012 10:03 AM

When the road show begins after the completion of a fiscal quarter but prior to the availability of financial statements for that quarter, prospective investors are inevitably curious about the quarter's financial results. In this circumstance, a company might consider providing estimated financial results for the quarter—dubbed "flash results"—in the preliminary prospectus, depending on factors such as:

the length of time since the end of the quarter and the status of the company's normal quarter-end closing procedures;
the availability of reliable estimates of the quarter's financial results prior to completion of closing procedures;
the ability of the underwriters to conduct due diligence on the flash results;
the extent (if any) to which the company's auditor can provide comfort on the flash results;
the time required to resolve any staff comments on the related disclosures; and
whether flash results are considered important to the marketing of the offering.

If flash results are included in the preliminary prospectus, the SEC staff can be expected to focus on whether the presentation of the flash results is balanced and not misleading, which often results in the inclusion of both revenue and income metrics. The staff may also ask the company to explain the basis of the flash results, to justify the use of ranges, and to eliminate or revise excessive disclaimers.

The frequency with which flash results appear in prospectuses, although low overall, has increased substantially in recent years. Fewer than 4% of US IPOs in the period 2007 to 2009 included flash results. The prevalence of flash results increased to nearly 7% in 2010 and jumped to 19% in 2011. These increases probably reflect the perceived need, in a choppy market, to commence the road show as soon as conditions appear receptive, even if the timing falls between quarter-end and the availability of financial statements for that quarter.

NYSE Introduces Listing Application Fee

November 27, 2012 1:35 PM

For the first time, the NYSE is imposing a listing application fee, matching Nasdaq's current listing application fee. Beginning January 1, 2013, the NYSE will require companies to pay a $25,000 fee when applying to list an equity security, with limited exceptions. The fee is non-refundable but is credited against the initial listing fee if the company completes the listing process on the NYSE. With both exchanges now requiring an application fee, companies will have a financial disincentive to changing an initial listing decision after filing an application with one exchange.

What's in a Name? "Emerging Growth" Companies Need Not Be Either

November 14, 2012 6:36 PM

An emerging growth company (EGC) need not be "emerging" or "growing." The JOBS Act defines an EGC as any issuer that had total annual gross revenues of less than $1 billion (adjusted for inflation every five years) during its most recently completed fiscal year, other than an issuer that completed an IPO on or before December 8, 2011. Emerging growth companies can come from any industry and can be high-tech or low-tech; tiny or large; backed by venture capital, private equity, or angel investors; or based in the United States or offshore.

Among the EGCs to complete IPOs since enactment of the JOBS Act are a 134-year-old English professional football team (Manchester United); a producer of sand used in the fracking industry (Hi-Crush Partners); a home furnishings company with $958 million in annual revenue (Restoration Hardware); and a two-year-old biopharmaceutical company with no revenue (Tesaro).

In short, the vast majority of all IPO candidates are likely to qualify as emerging growth companies.

Which Items of JOBS Act Relief are EGCs Adopting?

October 23, 2012 12:50 PM

Under the JOBS Act, an emerging growth company (EGC) has up to the last day of the fiscal year following the fifth anniversary of its IPO to come into full compliance with various disclosure regulations and accounting and auditing standards that are otherwise applicable to all US public companies. An EGC may elect to forgo any of the exemptions available to it and instead comply with the requirements that apply to a company that is not an EGC (except that an EGC is not permitted to choose to comply with some but not all of the non-EGC accounting standards).

Although the overwhelming majority of all IPO candidates are likely to qualify as EGCs—approximately 90% of all IPO companies between 2007 and 2011 would have qualified—the extent to which EGC standards are being adopted varies widely. We reviewed the publicly available filings of all EGCs that made their initial submission or filing after enactment of JOBS Act, and found the following rates of adoption with respect to four key items of EGC relief:

omission of CD&A: ~90%
confidential submission of draft Form S-1: ~80%
two years of audited financial statements (instead of three years): ~33%
deferred application of new or revised accounting standards: ~20%

It's too soon to track the adoption rate for the exemption from SOX 404(b) audit reports because the requirement is not applicable until a newly public company's second Form 10-K, although it seems likely that this relief will be widely adopted. Also, the exemption from new PCAOB auditing standards cannot be assessed yet, as there are no new auditing standards to which the EGC exemption applies. Based on EGC behavior to date with respect to audited financial statements and new accounting standards, however, one can imagine that many EGCs will be inclined to adopt future auditing standards at the time they are applied to other public companies so that their financial statements will be more comparable to those of their peers.

EGC Confidential Submissions on EDGAR Become Mandatory

October 15, 2012 2:45 PM

Effective today, confidential submissions of draft registration statements by emerging growth companies are required to be made on EDGAR. Previously, confidential submissions were made on the SEC's secure email portal—a stop-gap mechanism while the SEC modified EDGAR to accept confidential submissions. A confidential submission made on the EDGAR system remains confidential until converted into a public filing, no later than 21 days before the road show commences.

Read the SEC's instructions for making confidential submissions on the EDGAR system.

Research Analyst Quiet Periods Eliminated in EGC IPOs

October 11, 2012 10:17 AM

The IPO quiet period is now a little less quiet—at least for emerging growth companies (EGCs).

Since 2003, FINRA rules have prohibited research coverage by analysts employed by a company's underwriters for prescribed periods of time following an IPO (40 days for analysts employed by the offering's managing underwriters and 25 days for analysts employed by other underwriters participating in the IPO) and within 15 days prior to or after the expiration, termination or waiver of the IPO lockup period. These restrictions apply to traditional research reports as well as analyst public appearances, such as at conferences, in which a recommendation or opinion regarding the company's common stock is offered.

The JOBS Act eliminated research quiet periods within any prescribed period of time following an IPO by an EGC or prior to the expiration date of the company's IPO lockup period. In subsequently interpreting and implementing this portion of the JOBS Act, the SEC and FINRA eliminated all research analyst quiet periods prior to or after the expiration, termination or waiver of lockup periods in connection with IPOs by EGCs. As a result, effective October 11, 2012, there are no research analyst quiet periods in connection with IPOs by EGCs. FINRA's research analyst quiet period rules remain applicable to IPOs by other companies.

The most important consequence of this change is that research analysts employed by the underwriters of IPOs by EGCs can now publish reports immediately after a company's initial earnings release even when the earnings release occurs within 25 days after the offering. Previously, if an earnings release fell in this time period, the underwriters could not provide immediate research coverage. In addition, "booster shot" provisions, which automatically extend the IPO lockup period in the event of an earnings release (or other materials news event) within 17 days prior to or after the expiration, termination or waiver of the lockup period, are no longer needed in EGC lockup agreements.

SEC Issues More FAQs on JOBS Act

September 28, 2012 9:35 PM

Today, the SEC staff issued more Frequently Asked Questions (FAQs) on Title I of the JOBS Act, addressing questions relating to, among other topics:

test-the-waters communications;
the availability of the confidential submission process for an exchange offer or merger that constitutes an IPO of common equity securities;
the required time periods for audited financial statements of companies acquired by EGCs;
the required time periods for audited financial statements in IPOs of debt securities by EGCs;
Form S-1 signature requirements; and
the availability of EGC status to former reporting companies that are not currently required to file Exchange Act reports.

Read the SEC's FAQs.

Nasdaq and NYSE Propose Stricter Independence Standards for Compensation Committee Members

September 26, 2012

Subject to phase-in rules and some exceptions, every IPO company needs a board of directors that satisfies SEC and stock exchange requirements for independence. Independence standards are going to become more stringent for compensation committee members, beginning with an IPO company's initial stock exchange listing.

The Dodd-Frank Act directs the SEC to require the stock exchanges to adopt listing standards enhancing the independence requirements for compensation committee members. In June 2012, the SEC adopted Rule 10C-1, requiring the stock exchanges to have in effect by June 27, 2013 listing standards that prohibit the initial or continued listing of a company unless each member of the compensation committee is an independent director. The definition of "independence" is left to each exchange to decide by rulemaking.

In late September, Nasdaq and the NYSE each issued proposed listing standards implementing Rule 10C-1:

Nasdaq proposed to require that compensation committee members may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company (other than board fees and fixed amounts under a retirement or deferred compensation plan relating to prior service). This is the same standard that applies to audit committee members.
The NYSE did not propose to adopt a total prohibition of this nature, or any bright-line rule. Instead, the NYSE proposed to require boards to consider the source of compensation of a director, including any consulting, advisory or other compensatory fee paid by the company, as part of the board's affirmative determination of the independence of members of the compensation committee.

Both Nasdaq and the NYSE proposed to require boards to consider the affiliate status of any director who serves on the compensation committee, while making it clear that they do not believe stock ownership itself automatically impairs independence. Both exchanges noted that significant stock holdings could serve to align a director's interests with those of other stockholders.

Controlled companies, smaller reporting companies, companies that are not listed on a stock exchange and foreign private issuers that are not required to have an independent compensation committee will not be subject to the new listing standards adopted by Nasdaq and the NYSE.

Read Nasdaq's proposal and read the NYSE's proposal.

Is the JOBS Act Increasing the Number of IPOs?

September 12, 2012 2:31 PM

Less than six months after enactment of the JOBS Act, it's way too soon to know. But educated guesses are possible.

Yesterday, we participated in a JOBS Act roundtable organized by the US Treasury Department to assess the act's impact to date. Roundtable participants included institutional investors, securities exchanges, academics, investment bankers and lawyers.

The sense of participants was that although the JOBS Act is being well received by private companies, there did not yet seem to be evidence that the act is prompting a significant increase in the number of companies pursuing IPOs. A variety of reasons were offered for this, including the modest nature of relief under the JOBS Act in relation to the remaining regulatory burden of being a public company, perceived structural deficiencies in IPO pricing and trading, and the ready availability of private funding as an alternative to an IPO.

SEC Increases Registration Fees for Fiscal Year 2013

August 31, 2012 7:38 PM

For the fifth time in the last six fiscal years, the SEC has increased the registration fee rate for IPOs and other securities offerings. The fiscal year 2013 rate of $136.40 per million dollars registered is four and a half times greater than the fiscal year 2007 rate of $30.70.

A registration fee must be paid upon the filing of any registration statement with the SEC (including a Form S-1 for an IPO) and upon the filing of any subsequent amendment registering additional securities. The fee is based on the estimated maximum dollar amount of the offering, including the shares subject to the over-allotment option. No registration fee is paid upon the submission by an emerging growth company of a draft Form S-1 for confidential SEC review; the fee is paid upon the first public filing of the Form S-1.

The fee is calculated by applying the SEC's registration fee rate—expressed as a fixed dollar amount per million dollars registered—to the estimated maximum dollar amount of the offering. The rate is set by the SEC each fiscal year in accordance with federal legislation and is based in part on the anticipated volume of securities registrations in the upcoming fiscal year. The SEC is required to determine and announce the rate each year by August 31, which then becomes effective on October 1. On August 31, 2012, the SEC announced that the rate will increase to $136.40 per million dollars registered for fiscal year 2013 (beginning October 1, 2012) from $114.60 per million dollars registered in fiscal year 2012. For a typical IPO raising $100 million, this will increase the SEC registration fee from $11,460 to $13,640.

SEC Proposes Rules for Elimination of General Solicitation Prohibition in Private Placements

August 30, 2012 8:16 PM

Companies sometimes need to raise private financing during the course of the IPO process. The JOBS Act makes this easier. As directed by the JOBS Act, yesterday the SEC proposed rule amendments to eliminate:

in private placements conducted pursuant to Rule 506 under Regulation D, the prohibition on general solicitation and general advertising, provided that all purchasers are "accredited investors" (as defined in Regulation D); and
in private placements conducted pursuant to Rule 144A, the prohibition on general solicitation, general advertising, and making offers to investors who are not "qualified institutional buyers" (as defined in Rule 144A), provided that securities are sold only to persons that the company (and any person acting on its behalf) reasonably believes are qualified institutional buyers.

The JOBS Act does not limit these changes to placements by emerging growth companies. The revised rules, once effective, will be available to all companies.

Read the SEC's proposal.

SEC Issues FAQs on Research Analysts and Underwriters Under JOBS Act

August 22, 2012 5:28 PM

Today, the SEC staff issued Frequently Asked Questions (FAQs) on provisions of the JOBS Act that affect research analysts and underwriters, addressing questions relating to, among other topics:

test-the-waters communications by underwriters on behalf of emerging growth companies;
the impact of the JOBS Act on the "global settlement" (the court-approved agreement in 2003 that required many major investment banking firms to separate their research and investment banking functions and severely limit the interactions between equity research analysts and investment bankers);
the interaction between the JOBS Act and certain FINRA and SEC rules relating to research analyst activities; and
the permissibility under the JOBS Act of certain specific activities by research analysts.

Click here to read the SEC's FAQs.

PCAOB Adopts Auditing Standard 16

August 15, 2012 6:43 PM

Audited financial statements included in the Form S-1 for an IPO must be audited in accordance with PCAOB standards and accompanied by an audit report. On August 15, 2012, the PCAOB adopted Auditing Standard 16 (AS 16), which prescribes the communications that an independent registered public accounting firm must make to the audit committee of its client prior to issuing an audit report. Subject to SEC approval, Auditing Standard 16 will be effective for audits for periods ending after December 15, 2012. Read PCAOB's release adopting the new standard.

The matters auditors must discuss with the audit committee fall into several general areas, including appointment and retention of the auditor; obtaining information and communicating the audit strategy; results of the audit; form and documentation of communications; and timing. While the communications may be written or oral, the auditor is required to maintain documentation sufficient to establish that the communications were made. All communications must be made prior to issuance of the audit report. In general, the new standard codifies communications practices already followed by many auditors and audit committees, and does not create new substantive audit procedures.

AS 16 is the first PCAOB standard adopted since the enactment of the JOBS Act. By its terms, the standard will apply to emerging growth companies, subject to separate SEC approval under the standards prescribed by the JOBS Act.

You can read more about AS 16 here.

Natural Grocers Becomes First EGC to Traverse the IPO On-Ramp to Closing

July 30, 2012 10:19 AM

Natural Grocers by Vitamin Cottage, a specialty retailer of natural and organic groceries and dietary supplements, today became the first emerging growth company (EGC) to complete an IPO after commencing its SEC review process with the confidential submission of a Form S-1, as permitted by the JOBS Act. Natural Grocers' IPO illustrates several key steps in the IPO process for an EGC that elects to confidentially submit a draft Form S-1:

Natural Grocers made its initial confidential submission on April 25, 2012.
The staff's initial comments arrived 27 days later (a normal timeframe for initial comments on a Form S-1, whether confidentially submitted or publicly filed).
Natural Grocers confidentially submitted a revised Form S-1 to respond to the staff's comments.
After receiving a second comment letter, Natural Grocers made its first public filing of the Form S-1 on June 18, 2012, or 36 days before effectiveness. This timing reflects the requirement to publicly file the Form S-1 at least 21 days before the road show commences, together with about two weeks to conduct the road show before pricing the offering.
Before completing the IPO, Natural Grocers amended its Form S-1 several more times.

LegalZoom, which in May unveiled the first confidential submission under the JOBS Act, has not yet completed its IPO as of this writing. Read our earlier post on LegalZoom.

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United States: The Road To IPO: Legal And Regulatory Insights Into Going Public