Niederauer discussed the decline in small company IPOs, as well as the IPO market generally, and the need for tick size changes.  Hambrecht reviewed with the Committee his views regarding the potential utility of the Section 3(b)(2) exemption (or Reg A+) for smaller companies, and how Reg A+ offerings might well serve to revive the IPO market for smaller companies that undertake a Reg A+ offering with a contemporaneous exchange listing.  Hambrecht urged the Committee to recommend that the Staff of the SEC move forward with rulemaking to implement the exemption and take into account in their rulemaking addressing the obstacles that render current Regulation A of limited use compared to Rule 506 under Regulation D.  Hambrecht also discussed his recommendations for additional reforms to the IPO process generally.  Bob Greifeld, CEO of NASDAQ, also supported changes to tick sizes, as well as the creation of a separate market for the securities of small companies.

At the end of Q1, there were 27 companies in the visible pipeline.  Since passage of the JOBS Act in April 2012, which permits confidential submissions until just before the IPO roadshow, it is hard to determine the total pipeline, but perhaps there is better likelihood that the companies in the visible pipeline might complete an IPO.  A little more than a third of the pipeline consists of healthcare-related companies with the next two largest sectors being technology and financial, at about 18.5% each.

The average IPO size continues to decline.  Since the beginning of 2011, there have been only 11 IPOs exceeding $1B in gross proceeds.  Excluding the Facebook IPO, the average size of a 2012 IPO was $198M, continuing the decline from over $542M in 2008.  Further, in 2012, nearly half of the IPOs resulted in gross proceeds between $50M and $250M.  The good news about this—at least for some—is that smaller investment banks, both established and relatively new, have more of a chance to lead manage the IPO.

Foreign-headquartered companies continue to disappear from the IPO market.  There were no foreign private issuer IPOs in Q1 although there were three in April.  And the Chinese have largely disappeared, probably because of continuing U.S. investor concerns about audit quality and ownership of assets.  However, 2012 did see a more diversified mix of foreign private issuer IPOs with 15 different countries being the headquarters for at least one foreign IPO.

Total dollar volume decreased by 50.7% for financial sponsor-related IPOs in 2012, as only five sponsor-backed offerings were larger than $500 million, compared to fourteen in 2011.  Sponsor-backed issuers accounted for about a third of the backlog at the end of Q1 2013.

While analysts have different views about the remainder of 2013, there is strong hope that if the economy continues to stabilize and there is more certainty about its path, IPO activity will continue to grow.

Sources:

William Blair & Company, Equity Capital Markets Review (January 2013) and Equity Capital Markets Update, 1Q13
IPO Vital Signs

In separate enforcement matters, FINRA has recently been entering into enforcement agreements in matters which relate to insufficient information communicated by broker-dealers in the course of private placements.  In a recent Letter of Acceptance, Waiver and Consent with MD Sass Securities, LLC (No. 2009018187701), FINRA settled alleged rule violations relating to the broker-dealer’s use of sales literature and institutional sales material to institutional customers, prospective customers and retail customers. The literature was distributed on behalf of hedge funds and private equity funds that the firm marketed. Among the allegations are that these private placement materials included misstatements regarding objectives, misleading, exaggerated, promissory or unwarranted claims, statements and presentations, and unwarranted performance projections.  Moreover, the marketing materials did not adequately disclose risks and failed to provide a sound basis for evaluating the information presented. In one case, contradictory information was provided.  In another recent Letter of Acceptance, Waiver and Consent with James S. Turo (No. 2010022672001), FINRA alleged that a company conducted live webinars for a private offering that did not limit access and thereby served as a general solicitation. In both of these FINRA settlements, we may be seeing that organization’s approach to a post-JOBS Act world, particularly when Title II gets implemented and the ability to more broadly solicit investors in private placements becomes a reality.