evolving capital markets & crowdfunding symposium
TRANSCRIPT
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Evolving Capital Markets
Crowdfunding Symposium
New Legis lat ion , New Markets, New
Opportuni t ies
David Weild
212-542-9979
Atlanta
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David Weild
• Leader, Grant Thornton's Capital Markets group
• Chairman & CEO, Capital Markets Advisory Partners
• Chairman of the Small Business Crisis Task Force for the International Stock
Exchange Executives Emeriti (non-profit)• Former vice-chairman and executive vice-president of NASDAQ
• Numerous senior management roles at Prudential Securities, including:
– President of PrudentialFinancial.com
– Co-Head of strategy (banking, research, institutional sales and trading)
– Head of corporate finance
– Head of equity capital markets and equity syndicate globally
– Head of technology investment banking
– Commitment Committee member
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Equity capital marketsThought leadership citations and public policy activity
“ The problemsdocumented by [Weild & Kim's] studies led to the
JOBS Act (HR 3606)."
"Broken Markets "
Sal Arnuk and Joseph Saluzzipage 198FT Press
May 2012
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"The financial system has been wounded by a
flood of so-called innovations that merely
promote hyper-rapid trading…Individual
investors are being shortchanged."John C. Bogle, founder of VANGUARD
"A Mutual Fund Master, Too Worried to Rest"
By Jeff SommerThe New York Times
August 11, 2012
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"Markets are still adjusting to regulatory
changes like the Order Handling Rules and
Regulation ATS that were made over a
decade ago."Professor Robert Schwartz
Baruch College
Marvin M. Speiser Professor of Finance and University Distinguished Professor of Finance atthe Zicklin School of Business
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"The irony of all this is that the change in Order Handling Rules [in 1997]
that were instituted under my watch at the [SEC] has resulted in the
proliferation of markets, technologies and automation that brought about
the flash crash and yesterday's [Knight Securities] events. I think publicconfidence is severely shaken by things of this kind."
Arthur Levitt, former chairman of the SEC
Bloomberg Surveillance with Ken Pruitt and Tom Keen August 2, 2012
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"I think many of our problems with market liquidity in small- and mid-caps
can be traced right back to decimalization [tick sizes]," said Dennis Dick ,
prop trader at Br ig ht Trading in Detroit. "Where decimalization has
helped to reduce spreads in the large-cap space, it has actually harmedliquidity in the small- and mid-cap space."
For blocks, "it's nearly impossible to execute any sizable order without
significant price impact," Dick said.
"SEC to Examine Tick Size for Small Caps"By John D’Antona Jr.
Traders Magazine Online News April 17, 2012
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" Larry Tabb, chief execut ive of th e Tabb Grou p , said dime spreads
shouldn't be off the table and considered as well. This, he added, would
incentivize brokers to trade and provide research for smaller and new
companies.
" [Professo r James] Angel believes issuers, not the regulators, should
decide what the spread should be in stocks. But if a company trades better
with sub-penny pricing, 'then sub-penny should be permitted.'"
"Wider Spreads and Fees Could Help Restore Investor Confidence"By John D’Antona Jr.
Traders Magazine Online NewsJune 1, 2012
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Some past publicationsFoundational arguments behind The JOBS Act (but much left to be done!)
- Cited in Congress - Cited by the U.S. Treasury - Cited by the SEC
- Cited by the Senate - Cited by The President's Jobs Council
Subscribe to the Capital Markets Series at www.GrantThornton.com/subscribe
November 2008 November 2009 June 2010 October 2011
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The JOBS ActSeminal events • NYSE/NVCA Blue Ribbon Task Force2008
2009• Senator Kaufman speech on the floor of the U.S.Senate
• CFTC-SEC Joint Panel on Emerging RegulatoryIssues2010
2011Title IV - House subcommittee on capital markets(testimony 3/16)• President Obama cites IPO market problems
(9/8 speech)
• SEC Small Business Forum (testimony 11/17)
• Signing of The JOBS Act
• SEC Advisory Committee testimony(Decimalization)
• Congressional testimony (Decimalization)
2012
"How can we create a market structure that works for a $25
mil l ion IPO —both in the offer ing and the secondary
aftermarket. If we can answer that quest ion, th is country
wil l be back in business."
Title I - Met with to interest Kate Mitchell who laterChaired the IPO Task Force for the US Treasury
Why are IPOs in
the ICU? (11/2008)
Titl es II, V, VI - A wake up call for America(11/2009)
"We’re also planning to cu t away the red tape
that prevents too m any rapid ly growing
startup companies from rais ing capita l andgoing public ."
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(100)
(50)
0
50
100
150
200
250
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Indexed value of selected global exchange listings (1997 = 0)
Hong Kong
China
Australia
United States
Deutsche BörseTokyo
Toronto London
Sources: Capital Markets Advisory Partners LLC and World Federation of Exchanges
Based on the number of listed companies at year-end, excluding funds. Data as of Dec. 31, 2011.
U.S. has lost 43.5% of all listed companies since 1997.First published in A Wake-Up Call for America (November 2009)
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The U.S. IPO market collapsed
0
100
200
300
400
500
600
700
800
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
N u m b e r o f U . S .
I P O s
Price/share < $5.00 Deal size < $50 million Deal size ≥ $50 million
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of December 31, 2011, excluding funds, REITs, SPACs and LPs
*Christie, William G., and Schultz, Paul H., “Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?”Journal of Finance
, Vol. 49, No. 5, 1994.
520 averageIPOs/year pre-bubble
539 averageIPOs/year bubble
128 averageIPOs/year post-bubble
Pre-bubble Bubble Post-bubble A B C D E F G H I J
A Christie-Schultz study*B First online brokerageC New Order Handling RulesD Regulation ATSE Online brokerage surges
and stock bubble inflates;Gramm-Leach-Bliley Act
F Regulation FDG DecimalizationH Sarbanes-Oxley ActI Global Research Analyst
SettlementJ Regulation NMS
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Small IPO collapsed with SEC changes to theeconomic model that paid for small-cap support.Chapter 2 of the JOBS Act—Title 1, Section 106(b): Tick Sizes
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
P e r c e n t a g e o f t o t a l U . S .
I P O s
Tick size
12-1/2 to 25 cents
Order Handling Rules
1/100thof 1 cent
Regulation NMS
Regulation ATS
3-1/8 cents
Decimalization
1 cent
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic
Data includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.
Transactions raisingless than $50 million
Transactions raisingat least $50 million
Smaller tick sizes undermined U.S. small-company IPOs
Sarbanes-Oxley
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Why do we care about IPOs? A vibrant IPO marketimproves private investment activity and M&A values.
Large-cap public (symmetricalorder book)
Small-cap public (asymmetricalorder book)
IPO (“canary in the coal mine”)
Venture B, C, D round, etc.
Angel | venture A
Startup: Friends, family, angel
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The JOBS Act focused on limiting cost for issuersand improving communications with investors. It has
yet to address aftermarket support.
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The "one-two punch“[Order Handling Rules (1997) and Reg. ATS (1998)]
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
T i c k s i z e s
P e r c e n t a g e o f t o t a l U . S .
I P O s
Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.11992: $0.125 for NASDAQ stocks ≥ $10, AMEX stocks ≥ $5 (≥ $10 in 1995) and NYSE stocks > $1; 1997: $0.0625 for NASDAQ stocks ≥ $10, AMEX stocks ≥ $0.25 and NYSE stocks ≥ $0.50.21992: $0.03125 for NASDAQ stocks < $10, AMEX stocks < $0.25 and NYSE stocks < $0.50.
A Order Handling RulesB Regulation ATSC DecimalizationD Sarbanes-Oxley ActE Regulation NMS
A B C D E
Quote-driven market (pre-Reg. ATS)
Effective tick size > minimum tick size
Electronic order book market (post-Reg. ATS)
Effective tick size collapsed to minimum tick size
Transactions raisingless than $50 million
Transactions raisingat least $50 million
Tick size for higherpriced stocks1
"Bankable" spreador effective tick size
Tick size for lowerpriced stocks2
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JOBS ActSEC resources
SEC JOBS Act portal:
http://www.sec.gov/spotlight/jobs-act.shtml
FAQs:
Emerging Growth Companies (Title I)General Applicability of Title 1:http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm Confidential Submission Process for Emerging Growth Companies:http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm
Crowdfunding (Title III)
Crowdfunding Intermediaries:http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm Notice: Use of the Crowdfunding Exemption:http://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htm
Exchange Act Registration and Deregistration (Titles V –VI)Changes to Registration and Deregistration Requirements:http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm
http://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtml
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• Emerging Growth Companies (EGCs): ‒ Category defined ‒ IPO process reforms ‒ Reduced public company reporting
requirements ‒ Research restrictions loosened
• Shareholder registration threshold raised
for companies to 2000 • "Held of record" definition revised—no
deadline for SEC rulemaking• Shareholder registration threshold raised
for banks—SEC rule due April 5, 2013
The JOBS ActImplementation timeline
April 5, 2012 (signing)
• General solicitation and advertisingpermitted for accredited investorsand QIBs (Reg. D and Rule 144A)
• SEC study on decimalization'simpact on small companies due toCongress (public companies)
• GAO report on impact of Blue Skylaws on Reg. A offerings
October 2, 2012 (180 days)
• SEC authorized to increasetrading in EGC stocks from onepenny to nine cents
• Review of Reg. S-K to decreaseEGC registration and reportingburden
July 5, 2012 (90 days)
• SEC to issue rules exemptingcrowdfunding offerings of up to$1 million annually (aggregate)
• Crowdfunded shareholdersexcluded from shareholder count
December 31, 2012 (270 days)
No deadline
• New registration
exemption on offerings upto $50 million
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• Emerging Growth Companies (EGCs): ‒ Category defined
‒ IPO process reforms ‒ Reduced public company reportingrequirements
‒ Research restrictions loosened• Shareholder registration threshold raised
for companies to 2000• "Held of record" definition revised—no
deadline for SEC rulemaking• Shareholder registration threshold raised
for banks—SEC rule due April 5, 2013
The JOBS ActImplementation timeline
April 5, 2012 (signing)
"News You Can Use"Please consult your attorney.
• "Confidential filings" for IPOs becoming the
norm.
• "Testing the waters" to become the norm fortechnologically complex businesses.
• Likely more parallel pathing of privateplacements and IPOs. Check with attorneyson "integration."
• Companies able to stay private longer andmake more aggressive use of Rule 144A,Rule 506 of Reg. D and other privateplacement exemptions (shareholder capincreased from 500 to 2000).
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• General solicitation and advertisingpermitted for accredited investorsand QIBs (Reg. D and Rule 144A)
• SEC study on decimalization'simpact on small companies due toCongress (public companies)
• GAO report on impact of Blue Skylaws on Reg. A offerings
July 5, 2012 (90 days)
The JOBS ActImplementation timeline
"News You Can Use"Please consult your attorney.
• Deadlines missed. Reg. D expected shortly.
• Definition of accredited investor
• Rules governing advertising
• Debate over what restrictions may be placedon advertising content to accredited investorsand QIBs under Reg. D.
• Likely to see firms advertise (esp. funds) andsolicit via email.
• Point of control shifted from solicitation toverifying that the investor is duly qualified.
• Reg. A—Blue Sky may be an impediment.Lots of back channel discussion to ensue withstock exchanges and SEC (TBD).
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October 2, 2012 (180 days)
• SEC authorized to increase
trading in EGC stocks from onepenny to nine cents
• Review of Reg. S-K to decreaseEGC registration and reportingburden
The JOBS ActImplementation timeline
"News You Can Use"Please consult your attorney.
• Deadlines aggressive—likely to be missed by
SEC. Please monitor.• Increased “tick sizes” will increase support for
small cap public companies, but needs to beextended well beyond simply EGCs.
We recently spoke to the SEC Advisory
Committee on Small and Emerging Companies.They are taking this seriously.
SEC report to Congress on the impact of
Decimalization on capital formation concluded
that they needed to study the issue further.
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The JOBS ActImplementation timeline
• SEC to issue rules exemptingcrowdfunding offerings of up to $1million annually (aggregate)
• Crowdfunded shareholdersexcluded from shareholder count
December 31, 2012 (270 days)
"News You Can Use"Please consult your attorney.
• Deadlines aggressive—likely to be missed by
SEC. Please monitor.• Limited to $1 million.
• Regulation not yet settled—likely to go toFINRA.
• Broker/dealers and crowdfunding portalsprohibited from acting until SEC gives
approval.• Likely to be used to satisfy 400 shareholder
requirements on IPOs (TBD)!
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The JOBS ActImplementation timeline
No deadline
• New registrationexemption on offerings upto $50 million
"News You Can Use"Please consult your attorney.
• "Reg. A+"
• Needs to be fleshed out.• Currently in discussions with one stock
exchange and a known tech securities lawfirm on providing some advice to SEC.
• Hoping for a construct (no guarantees) that:
‒ Limits Blue Sky
‒ Provides streamlined disclosure
‒ Provides and exchange listing
• Advantage: investors receive tradablesecurities.
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Success rate of IPOs maintainingissue price one month after going public
Source: Capital Markets Advisory Partners LLC, All rights reservedIncludes only corporate issuers, excluding funds, MLPs, SPACs and REITs.Based on the average success rate of the last 30 filed deals, up to one month ago. A successful deal is defined as trading at or above issue price one month after pricing.
IPOs that are trading at or above issue price 30 daysafter pricing(Trailing 30 IPOs)
• FaceBook – Not an anomaly
– Unintentional
– Underlying causes
• Deteriorating coverage ofinvestors
• Unreliable feedback
• Poor placement
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Increased economic incentives (e.g., tick sizes) arethe third leg of the stool
Improve economic
incentives to support
especially small-cap
stocks
(increases in tick sizes)
Lowered cost
for issuers
Improved issuer
communication
with investors
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Collapse (Before and after structural changes)
Small-capitalization companies and capital formation
Before 1997 After 2001 % changeTick sizes $0.25 per share $0.01 per share -96%
Investment banks (acting as a bookrunner) 167 (1994) 39 (2006) -77%
Small company IPOs 2,990 (1991-1997) 233 (2001-2007) -92%
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A major contributor to employment
-
5
10
15
20
0
200
400
600
800
1,000
1,200
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
A d d i t i o n a l j o b
s
M i l l i o n s
D o m e s t i c c o m p a n i e s g o i n
g p u b l i c i n t h e U . S .
Minimumadditional jobs(direct plusprivate marketeffect)*
+3.1 million jobs (direct)
*Best estimate of the multiplier effect in the private market of more companies going public
Sources: Grant Thornton LLP, Dealogic and the U.S. Department of Commerce Bureau of Economic AnalysisDomestic corporate companies going public in the U.S. as of Dec. 31, 2011, excluding funds, REITs and other trusts, SPACs and LPs. Assumes an annual growth rate of 2.57% (U.S. real GDP growth, 1991-2011) and 822 jobs created on average post-IPO (see "Post-IPO
Employment and Revenue Growth for U.S. IPOs," Kauffman Foundation).
+6.2 million jobs (direct plus private market effect)
+9.4 million jobs (direct)+18.8 million jobs (direct plus private market effect)
Minimumadditional IPOs
Actual number ofdomestic IPOs
Maximumadditional IPOs
Minimumadditional jobs(direct)
Maximumadditional jobs(direct plusprivate marketeffect)*
Maximumadditional jobs(direct)
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© Grant Thornton LLP All rights reserved
U.S. member firm of Grant Thornton International Ltd
This presentation is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, and is in all respectssubject to negotiation, agreement and signing of specific contracts. The information contained within this document is intended only forthe entity or person to which it is addressed and contains confidential and/or proprietary material. Dissemination to third-parties,copying or use of this information is strictly prohibited without the prior written consent of Grant Thornton LLP.
David [email protected]@cmapartners.com212-542-9979
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While 81% of all public companies are sub-$2 billionin market value…
0%
20%
40%
60%
80%
100%
Nano-cap(sub $100 million)
Micro-cap($100 to $500 million)
Small-cap($500+ to $2 billion)
Mid-cap($2+ billion to $10 billion)
Large-cap($10+ billion)
52.0%
15.6%
12.5%6.4%
81.1% of listed companies
13.5%
Percentage of total number of listed companies
Sources: Grant Thornton LLP and Capital IQIncludes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.
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0%
20%
40%
60%
80%
100%
Nano-cap(sub $100 million)
Micro-cap($100 to $500 million)
Small-cap($500+ to $2 billion)
Mid-cap($2+ billion to $10 billion)
Large-cap($10+ billion)
0.3% 1.3%
19.1%
74.3%
6.6% of total market value
5.0%
Percentage of total public company market value
…sub-$2 billion companies represent less than 7% oftotal public company market value
Sources: Grant Thornton LLP and Capital IQIncludes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.