What's Market: A Round-Up of IPOs in 2016
A review of trends in initial public offerings (IPOs) that emerged in 2016.
Following a lackluster year in 2015, initial public offering ( www.practicallaw.com/2-382-3541) (IPO) activity in the US continued to decline in 2016. There were 102 US IPOs in 2016 by US domestic and foreign private issuers ( www.practicallaw.com/1-382-3481) (FPIs), raising more than $16.6 billion. By comparison, 153 IPOs priced in 2015, raising more than $23.9 billion. This followed an exceptional year in 2014, in which 254 IPOs priced, raising more than $73.3 billion.
The slowdown was most pronounced in the first quarter, during which only eight IPOs went to market. According to Renaissance Capital, a manager of IPO-focused ETFs, the first quarter of 2016 was the least active first quarter by number of IPOs since the first quarter of 2009, and it raised the lowest amount of proceeds in any Q1 in at least 20 years. In 2016, the number of IPOs increased to 26 in the second quarter and 34 in each of the third and fourth quarters, but still fell far short of previous annual totals.
Average deal size throughout the year was up slightly from 2015. The average deal size in 2016 was $163.6 million, up from $156.6 million in 2015 but down from $288.7 million in 2014. In 2016, three IPOs raised over $1 billion (US Foods Holding Corp.'s $1.02 billion IPO, ZTO Express (Cayman) Inc.'s $1.4 billion IPO, and Athene Holding Ltd.'s $1.08 billion IPO), compared to just one IPO over $1 billion in 2015. However, according to Renaissance Capital, 2016 saw the lowest amount of new capital raised since 2003.
Factors influencing the drop in the number of IPOs included:
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) , as well as mutual funds, hedge funds, and sovereign wealth funds, at high valuations, allowing companies to delay going public.
Fewer large-scale IPOs of private equity portfolio companies.
An active M&A market, offering an attractive alternative exit path for financial sponsors.
Uncertainty regarding the US presidential election.
General volatility in the global markets, including following the Brexit vote in June.
2016 US IPO Developments
A review of the 2016 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.
Nearly half of FPIs exercised 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 61.8% of all IPOs paying an underwriting discount of 7%.
73 issuers (71.5%) chose to list their securities on NASDAQ.
IPOs by companies in the services and pharmaceutical/biotechnology industries accounted for 49% of all offerings.
95.1% of issuers had a lock-up period ( www.practicallaw.com/2-382-3598) of 180 days for the company and 93.1% 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.
86 issuers (84.3%) identified themselves as EGCs.
83 issuers (81.4%) confidentially submitted a draft registration statement to the SEC. On average, these issuers took 170 days from the first confidential filing to the first public filing of the draft registration statement.
Only five issuers (5.8%) that identified themselves as EGCs opted not to confidentially submit their draft registration statement to the SEC.
A review of the 2016 IPO filings shows that 18 issuers were FPIs. Of these 18 FPI issuers, just two (Grupo Supervielle S.A. and LINE Corporation) did not self-identify as an EGC. Each of the 18 FPIs chose to confidentially submit its 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.
66 EGCs (76.7%) included two years of audited financial statements.
19 EGCs (22.1%) chose not to take advantage of the accommodation and included three years of audited financial statements.
One EGC (1.2%) included less than one year of audited financial statements.
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 2016, more FPIs chose US GAAP over IFRS, with 10 FPIs (55.6%) opting to use US GAAP and seven FPIs (38.9%) choosing to use IFRS. Only one FPI (5.6%) used its own country's GAAP to prepare its financial statements.
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.
Underwriting fees varied greatly in 2016, ranging from 1.5% (for certain shares in PhaseRx, Inc.'s $18.5 million IPO) to 9% (in AzurRx BioPharma, Inc.'s $5.3 million IPO).
In 2016, 63 IPOs (61.8%) featured an underwriting discount of 7%. This was down from 70.6% of all IPOs in 2015. This benchmark discount was particularly pronounced for pharmaceutical/biotechnology IPOs, where 83.9% of IPOs had a 7% discount.
One IPO featured a bifurcated approach to underwriter compensation. In its $18.5 million IPO, PhaseRx, Inc. offered the underwriters a:
1.5% discount for sales to current stockholders and their affiliates.
3.4% discount for sales to all other investors.
Choice of Securities Exchange
Of the 102 US IPOs in 2016, far more issuers chose to list their securities on NASDAQ (71.5%) than on the NYSE (27.5%) or NYSE MKT (1%). More specifically:
27 issuers (26.5%) listed on the NASDAQ Global Select Market.
28 issuers (27.5%) listed on the NASDAQ Global Market.
18 issuers (17.6%) listed on the NASDAQ Capital Market.
28 issuers (27.5%) listed on the NYSE.
One issuer (1%) listed on the NYSE MKT.
Of the 31 pharmaceutical/biotechnology companies that went public in 2016, 28 (90.3%) listed their securities on one of the NASDAQ exchanges. Similarly, of the 19 services companies that went public in 2016, 15 (78.9%) listed on one of the NASDAQ exchanges.
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 2016, the services and pharmaceutical/biotechnology industries dominated the IPO markets in terms of the total number of IPOs (19 and 31, respectively). Offerings by these types of companies represented 49% of all IPOs and raised a total of over $5.5 billion (33.3% of the proceeds raised in all IPOs). The largest services company IPO was by LINE Corporation for the equivalent of $687.2 million (the IPO was in Japanese yen). The largest pharmaceutical/biotechnology company IPO was by Patheon N.V. for $625 million.
The banking/financial services industry achieved the highest average deal value in 2016, with average proceeds of more than $189.4 million per IPO. The pharmaceutical/biotechnology industry, by contrast, averaged just $82.4 million per IPO, while the services industry averaged $158.1 million per IPO. The average deal value for all industry sectors was $163.6 million.
High-profile IPOs in 2016 included:
US Foods Holding Corp. for $1.02 billion.
Valvoline Inc. for $660 million.
ZTO Express (Cayman) Inc. for $1.4 billion, the largest IPO of 2016.
trivago N.V. for $287.2 million.
Overall, there was a wide range of insurance, consumer, technology, healthcare, and banking IPOs in 2016.
Lock-up agreements in 2016 showed little variation among issuers and industry sectors. Nearly all IPOs (95.1%) had a lock-up period of 180 days for the company. Similarly, 93.1% of IPOs had a lock-up period of 180 days for the company's directors, officers, and shareholders.
Monster Digital, Inc. imposed a general lock-up period of 180 days for its directors, officers, and shareholders, but also imposed a lock-up period of one year for a single specified shareholder. In addition, both Atomera Incorporated and Polar Power, Inc. imposed a lock-up period of one year for their directors and officers, while imposing a lock-up period of 180 days for their shareholders.
Following a mediocre year for IPOs in 2015, the IPO market slowdown intensified in 2016. Although average deal size was up slightly from 2015, the number of IPOs declined by 33.3% compared to the prior year. However, despite the stagnation in the 2016 IPO market, there are reasons to be cautiously optimistic for 2017. US economic fundamentals remain strong, recent offerings have performed well, and the new administration has announced that it intends to roll back regulations. All of this bodes well for pre-IPO companies seeking to go public in 2017.
It is expected that several high-profile companies may come to market in 2017. These include Snap Inc., Dropbox, Inc., and Spotify Ltd.