What's Market: A Round-Up of IPOs in 2015
A review of trends in initial public offerings (IPOs) that emerged in 2015.
Following an exceptional year in 2014, initial public offering ( www.practicallaw.com/2-382-3541) (IPO) activity in the US declined sharply in 2015. There were 153 US IPOs in 2015 by domestic and foreign private issuers ( www.practicallaw.com/1-382-3481) (FPIs), raising more than $23.9 billion (see Figure A). By comparison, 254 IPOs priced in 2014, raising more than $73.3 billion. 2014's largest IPO, by Alibaba Group Holding Limited, alone raised $21.8 billion, while the largest IPO of 2015, by First Data Corporation, raised just $2.6 billion.
The slowdown was most pronounced in the first quarter, during which only 27 IPOs went to market. The first quarter of 2015 was the least active quarter by number of IPOs since the first quarter of 2013, according to Renaissance Capital - manager of IPO-focused ETFs. In the second quarter of 2015, the number of IPOs rebounded to 53 before dropping off to 37 and 36 in the third and fourth quarters, respectively.
Average deal size throughout the year remained significantly lower than in recent years. The average deal size in 2015 was $156.6 million, down from $288.7 million in 2014 and $215.7 million in 2013. In 2015, only one IPO raised over $1 billion (First Data Corporation's $2.6 billion IPO), compared to eight and five IPOs over $1 billion in 2014 and 2013, respectively. According to Renaissance Capital, 2015 saw the lowest amount of new capital raised since 2009.
Factors influencing the drop in the number of IPOs and in average deal size in 2015 include:
The ready availability of private financing from venture capital ( www.practicallaw.com/8-382-3901) and private equity ( www.practicallaw.com/7-382-3708) sponsors ( www.practicallaw.com/3-382-3828) at high valuations, allowing companies to delay going public.
Fewer large-scale IPOs with private equity sponsors.
A very active M&A market, offering an attractive alternative exit path for financial sponsors.
Volatility in the global markets.
2015 US IPO Developments
A review of the 2015 IPO filings by all US domestic issuers (excluding real estate investment trusts ( www.practicallaw.com/5-501-5112) (REITs), special purpose acquisition companies (SPACs), and unit offerings) and FPIs that completed an IPO (or a first-time US issuance for an FPI on an F-series ( www.practicallaw.com/3-386-0825) registration statement ( www.practicallaw.com/4-382-3743) ) revealed the following trends:
The vast majority of issuers confidentially submitted their draft registration statement to the Securities and Exchange Commission ( www.practicallaw.com/9-382-3806) (SEC) before making any public filing.
FPIs continued to exercise the flexibility permitted by the SEC rules to use financial statements prepared under accounting principles other than US GAAP ( www.practicallaw.com/3-382-3512) .
Underwriting discounts did not vary greatly, with 70.6% of all IPOs paying an underwriting discount of 7%.
113 issuers (73.9%) chose to list their securities on NASDAQ.
IPOs by companies in the services and pharmaceutical/biotechnology industries accounted for 58.2% of all offerings.
92.2% of issuers had a lock-up period ( www.practicallaw.com/2-382-3598) of 180 days for the company and 90.8% had a lock-up period of 180 days for their directors, officers, and shareholders.
Confidential Submissions and Reduced Financial Disclosure
Since the passage of the Jumpstart Our Business Startups Act of 2012 ( www.practicallaw.com/2-518-7869) (JOBS Act), one of the principal advantages for an emerging growth company ( www.practicallaw.com/3-518-8137) (EGC) conducting an IPO is the ability to submit a draft registration statement and later amendments to the SEC for confidential nonpublic review prior to any public filing.
While an FPI can also qualify as an EGC, the SEC's Division of Corporation Finance has historically maintained a policy permitting certain FPIs to submit drafts of a first-time registration statement to the SEC for nonpublic review.
143 issuers (93.5%) identified themselves as EGCs, including all issuers in the first and third quarters.
130 issuers (85%) confidentially submitted a draft registration statement to the SEC. On average, these issuers took 108 days from the first confidential filing to the first public filing of the draft registration statement.
Only 13 issuers (9.1%) that identified themselves as EGCs opted not to confidentially submit their draft registration statement to the SEC.
A review of the 2015 IPO filings shows that 31 issuers were FPIs. Of these 31 FPI issuers, just one (Ferrari N.V.) did not self-identify as an EGC. Ferrari, Multi Packaging Solutions International Limited, and China Customer Relations Centers, Inc. were the only FPIs that chose not to confidentially submit their draft registration statement.
For more information on the process for confidentially submitting a draft registration statement (submission types “DRS” and “DRS/A”) via EDGAR, see Practice Note, Filing Documents with the SEC ( www.practicallaw.com/7-383-5122) .
Under the JOBS Act, EGCs are permitted to include in the IPO registration statement only two years of:
Audited financial statements (instead of the three years required for non-EGCs).
Selected financial data (instead of the five years required for non-EGCs).
The MD&A (Management's Discussion and Analysis of Financial Condition and Results of Operations) section in an EGC's IPO prospectus ( www.practicallaw.com/4-382-3719) need only include a discussion of two years of financial information (instead of the three years required for non-EGCs).
Despite these accommodations, an EGC may elect to include three full years of audited financial statements in its IPO registration statement. Among other reasons, an EGC may include three years to:
Show medium- to long-term trends in the issuer's results of operations.
Make it easier for investors to compare the issuer to its non-EGC peer companies.
Avoid potential claims that omitting the third year is a material omission under the anti-fraud provisions of the federal securities laws, especially where the results for the third, oldest fiscal year are less favorable than the two most recent years.
91 EGCs (63.6%) included two years of audited financial statements.
45 EGCs (31.5%) chose not to take advantage of the accommodation and included three years of audited financial statements.
Seven EGCs (4.9%) included just one year of audited financial statements.
(See Figure B.)
Presentation of Financial Statements by FPIs
SEC rules give FPIs more flexibility than US issuers when it comes to the accounting principles they can use to prepare the financial statements required in their SEC filings. While US domestic companies must use US GAAP, FPIs are permitted to use any of the following:
Another comprehensive set of accounting principles, for example, their own country's GAAP, accompanied by a reconciliation to US GAAP.
In 2015, more FPIs chose IFRS over US GAAP, with 18 FPIs (58.1%) opting to use IFRS and 13 FPIs (41.9%) choosing to use US GAAP. None of the FPIs prepared their financial statements under their home-country GAAP.
For more information on financial statement requirements for FPIs, see Practice Note, Annual Report on Form 20-F ( www.practicallaw.com/9-387-4914) .
In a typical IPO, at the time of pricing the underwriters commit to purchase the offered securities for resale to investors (firm commitment ( www.practicallaw.com/4-382-3470) basis). This is distinguished from conditional arrangements, such as best efforts (or agency) commitments. Historically, the underwriting discount for a firm commitment IPO typically ranges from 5% to 7% of the gross proceeds, although lower and higher discounts are not uncommon.
In 2015, IPO underwriting discounts did not vary as widely as in prior years. Discounts ranged from 3% (in Ferrari N.V.'s $893.1 million IPO) to 8% (in Unique Fabricating, Inc.'s $22.3 million IPO, China Customer Relations Centers, Inc.'s $9.6 million IPO, and Oasmia Pharmaceutical AB's $9.5 million IPO) (see Figure C). In contrast, the underwriting discounts in 2014 were spread across a wider range, from 0.75% to 8.42%.
In 2015, 108 IPOs (70.6%) featured an underwriting discount of 7%. This benchmark discount was particularly pronounced for pharmaceutical/biotechnology IPOs, where over 90% of IPOs had a 7% discount.
One IPO featured an innovative bifurcated approach to underwriter compensation. In its $40 million IPO, Wowo Limited, an FPI and EGC, offered the underwriters a:
3.5% discount for sales to investors introduced by the issuer.
6.5% discount for sales to investors introduced by the underwriters.
Choice of Securities Exchange
Of the 153 US IPOs in 2015, far more issuers chose to list their securities on NASDAQ (73.9%) than on the NYSE (24.2%) or NYSE MKT (2%). More specifically:
53 issuers (34.6%) listed on the NASDAQ Global Select Market.
43 issuers (28.1%) listed on the NASDAQ Global Market.
17 issuers (11.1%) listed on the NASDAQ Capital Market.
37 issuers (24.2%) listed on the NYSE.
Three issuers (2%) listed on the NYSE MKT.
Of the 61 pharmaceutical/biotechnology companies that went public in 2015, 59 (96.7%) listed their securities on one of the NASDAQ exchanges. Similarly, of the nine retailers that went public in 2015, seven (77.8%) listed on one of the NASDAQ exchanges. Services companies, on the other hand, were split evenly between the NYSE and NASDAQ at 14 companies each.
For a discussion of the quantitative and qualitative listing requirements for the NYSE and NASDAQ and descriptions of other US securities exchanges, see Practice Note, Selecting a US Securities Exchange ( www.practicallaw.com/3-381-1953) .
For a comparison of the corporate governance listing requirements of the NYSE and NASDAQ, see Comparative Corporate Governance Standards Chart: NYSE vs. NASDAQ ( www.practicallaw.com/9-503-6198) .
Active Industry Sectors
In 2015, the services and pharmaceutical/biotechnology industries dominated the IPO markets in terms of the total number of IPOs (28 and 61, respectively). Offerings by these types of companies represented 58.2% of all IPOs and raised a total of over $12.9 billion (53.9% of the proceeds raised in all IPOs). The largest services company IPO was by First Data Corporation for $2.6 billion, which was also the largest IPO of 2015. The largest pharmaceutical/biotechnology company IPO was by Axovant Sciences Ltd. for $315 million.
The services industry also achieved the highest average deal value in 2015, with average proceeds of more than $280.9 million per IPO. The pharmaceutical/biotechnology industry, by contrast, averaged just $82.8 million per IPO, while the retail industry averaged $139.1 million per IPO. The average deal value for all industry sectors was $156.6 million.
The retail industry represented 5.9% of all completed IPOs, raising a total of over $1.2 billion (5.2% of the proceeds raised in all IPOs). High-profile IPOs completed by retailers included offerings by:
Party City Holdco Inc. for $371.9 million.
Shake Shack Inc. for $105 million.
Other high-profile IPOs in 2015 included:
In the services industry:
First Data Corporation for $2.6 billion;
GoDaddy Inc. for $410 million;
Match Group for $400 million;
Etsy, Inc. for $266.7 million;
Planet Fitness, Inc. for $216 million; and
Box, Inc. for $175 million.
In the computer and electronics industry, Fitbit, Inc. for $731.5 million.
In the automobile industry, Ferrari N.V. for $893.1 million.
Overall, there was a wide range of construction, consumer, technology, healthcare, and banking IPOs in 2015. Figure D shows the number of completed IPOs broken down by the issuers' Standard Industrial Classification (SIC) codes, which are assigned to an issuer by the SEC based on the business activity that generates the most significant portion of its revenues.
Lock-up agreements in 2015 showed little variation among issuers and industry sectors. Nearly all IPOs (92.2%) had a lock-up period of 180 days for the company. Similarly, 90.8% of IPOs had a lock-up period of 180 days for the company’s directors, officers, and shareholders.
Etsy, Inc. imposed a general lock-up period of 180 days for its directors, officers, and shareholders, but also imposed lock-up periods of 270 days and 360 days for a portion of their shares. In addition, Viking Therapeutics, Inc. imposed a general lock-up period of 180 days for its directors, officers, and shareholders, but also imposed a lock-up period of nine months for a specified significant shareholder that is also a key business partner. With respect to the company, Eyegate Pharmaceuticals, Inc. imposed a lock-up period of 90 days for any shares of capital stock and 12 months for any "at-the-market" or continuous equity transaction of shares of capital stock.
Following a record year for IPOs in 2014, the IPO market slowed substantially in 2015, both in the number of IPOs and in average deal size. However, despite the turbulence in the 2015 IPO market, there are reasons to be cautiously optimistic for 2016. US economic fundamentals remain strong, the JOBS Act has brought needed improvements to the IPO process, and the IPO pipeline appears full. All of this is good news for pre-IPO companies seeking to go public in 2016.
Several high-profile companies are expected to come to market in 2016. These include Neiman Marcus Group, Albertsons, McGraw-Hill Education, and SoulCycle.
An Expert's View: IPO Activity
Joshua Ford Bonnie of Simpson Thacher & Bartlett LLP reviews 2015 trends in IPO activity:
How do the "JOBS Act 2.0" provisions of the recently enacted Fixing America's Surface Transportation Act (FAST Act) facilitate IPOs by EGCs?
Signed into law on December 4, 2015, the FAST Act builds on the JOBS Act to further enhance EGC access to the IPO market by:
Reducing the number of days before a roadshow that an EGC must publicly file its registration statement with the SEC from 21 days to 15 days.
Establishing a grace period for companies that lose their EGC status during the IPO process. If a company was an EGC at the time that its registration statement was first submitted to the SEC for review (whether through confidential submission or public filing), but later ceases to be an EGC, it will still be treated as an EGC for the purposes of the IPO process through the earlier of:
the date it consummates its IPO; or
one year after it has lost its EGC status.
While the FAST Act only expressly amends the statutory provision relating to confidential submission, we are optimistic that the SEC will permit companies that use the grace period to also continue to take advantage of the special disclosure rules for EGCs.
Permitting an EGC that submits a registration statement (whether through confidential submission or public filing) on Forms S-1 or F-1 to omit financial information for historical periods otherwise required under Regulation S-X if:
the omitted financial information relates to a historical period that the issuer reasonably believes will not be required to be included in its registration statement at the time of the contemplated offering; and
prior to the distribution of a preliminary prospectus to investors, the registration statement is amended to include all financial information required by Regulation S-X at the time of the amendment.
The SEC's Division of Corporation Finance has issued interpretive guidance clarifying that the FAST Act:
Permits the omission of financial information for historical periods of other entities (such as acquired businesses) if the EGC reasonably believes that such information will not be required to be presented at the time of the offering.
Does not permit the omission of financial statements for an interim period that will be included within required financial statements for a longer interim or annual period at the time of the offering.
EGCs are clearly taking advantage of the confidential submission process, with more than 90% of issuers that are EGCs filing confidentially in 2015. What trends have you seen regarding the use by EGCs of the other accommodations available to them under the JOBS Act?
In addition to taking advantage of the confidential submission process, we have also found that nearly every eligible issuer is taking advantage of the JOBS Act provisions that enable EGCs to present executive compensation disclosure for fewer executive officers (typically three instead of five) and to omit a Compensation Discussion and Analysis.
Use of other JOBS Act accommodations has proven more varied. For instance, we are seeing mixed practice regarding whether an EGC elects to present only two years of audited financial statements in its registration statement, rather than the three years required of non-EGCs. This decision seems largely driven by both the marketing preferences of the underwriters and the degree to which the information is available for a given issuer without significant incremental time and expense.
We are also seeing mixed practice regarding the use of the "testing the waters" provisions of the JOBS Act. Practice here continues to develop and evolve as market participants learn more about the utility of the testing the waters process for particular issuers and situations.
In the years since the enactment of the Sarbanes-Oxley Act of 2002 (SOX), the average size of IPO issuers in the US by revenue and earnings has generally been increasing. Do you expect the JOBS Act to change this trend?
The "IPO on ramp" provisions of the JOBS Act and the FAST Act have reduced, to a degree, the burden of the IPO process on companies. However, we do not expect this legislation to reverse the decline in the number of smaller companies going public.
Despite the recent changes to the IPO process for EGCs, the ongoing costs of being a public company in the US have risen over time, increasing the requisite scale a company must have to effectively bear these costs. Apart from the "one-time" costs associated with the IPO process itself, the incremental financial and other resources required to operate as a public company, including compliance with SOX, are significant.
Companies that choose to go public also become subject to public policy driven regulations with little connection to investor protection or efficient capital markets, such as recently adopted disclosure regimes pertaining to the use of conflict minerals, resource extraction, activities involving Iran, and CEO pay ratios. More prescriptive (and proscriptive) governance requirements, and increased levels of shareholder activism, may also diminish the appeal of life as a public company to certain private company owners and managers.
Conversely, the JOBS Act has made it more attractive for private companies to remain so by increasing the number of shareholders that a private company may have before it is required to register with the SEC and providing an exclusion from this cap for shareholders who received their securities under an employee compensation plan. We have also seen that, at least in certain sectors, private companies are able to fund themselves at attractive valuations without having to go public.
Mr. Bonnie would like to thank William R. Golden, an associate at Simpson Thacher & Bartlett LLP, for his assistance in preparing these responses.