jack be nimble, jack be quick: planning for financings in ...5 84 88 92 96 100 104 108 1/1/16 2/1/16...
TRANSCRIPT
Jack be Nimble, Jack be Quick:
Planning for Financings
in Volatile Markets
July 12, 2016
Presented by:
Geoffrey Goodman, Wells Fargo
Gregory Ogborn, Wells Fargo
Anna Pinedo, Morrison & Foerster
James Tanenbaum, Morrison & Foerster
2
Agenda • During today’s session, we will address:
• General market conditions and the current IPO market
• The late-stage private placement market
• Financings in close proximity to, or concurrent with, an IPO
• Other financing alternatives
• Financing alternatives for public companies
2
3
Market Overview
and
the U.S. IPO Market
3
4
2016 YTD Has Been A Tale of Two Markets Given Macro Headlines
Wide Variations in Market Sentiment Driven By Geopolitical and US Economic Focused Headlines
2016 YTD Equity Market Performance Overview
14.8x
15.3x
15.8x
16.3x
16.8x
17.3x
12/31/15 2/16/16 4/4/16 5/21/16 7/8/16
S&P 500 NTM P/E Multiple
16.9x
Long Term Historical Average (15.8x)
2016 YTD S&P 500 NTM P/E Multiple
Source: Bloomberg, Factset. Market data as of 7/8/16
Valuations Remain Above Long-Term Historical Average
4
Q1 2016
“Stocks Decline Amid Focus on Central Banks”
“U.S. Stocks Tumble, Cap Worst Five-Day Start to Year on Record”
“U.S. Stocks Extend Worst Start on Record”
“Nasdaq Composite Near Bear Market”
“Dollar Plunges Most in 7
Years”
“U.S. Stocks With Markets Around the World as Rout Deepens”
“Equities Suffer Worst Week Since 2011”
“Signs of Inflation Temper Optimism on Growth”
“Stocks Rally to January Levels Amid Oil Bounce”
“Stocks Fluctuate, Euro Rallies”
“China Stimulus Boosts Commodities”
“Whipsaw Quarter for U.S. Stocks
Ends” “Stocks Add to 8-Week Highs”
“Rally Sparked by Dovish
Message”
“Strongest Three-Day Rally Since August”
“Investors Embrace ECB Measures”
“Oil Stabilizes”
“Minutes Underline Fed Caution”
“Energy Shares Lead Rebound”
“Stocks Drop Most in 2 Weeks”
“S&P 500 at Four Month High ”
“Retailers Stifle U.S. Stocks in Week as Growth Worries
Mount”
“Concerns Higher
Rates
Will Weigh on
Growth”
“Growth Anxiety Returns”
“Optimistic Economy Can Handle Higher
Rates”
“Stocks Tumble With Bonds on Fed Rate Rhetoric”
“Stocks Slip to 3-Week Lows”
“Stocks Cap S&P 500 Strongest Week Since March”
“Oil Near 10-month
High”
“Weak Payroll Spur Growth
Concerns”
“Stocks Selloff as Potential
‘Brexit’ Drives Flight to Safety”
“Stocks Plunge
Most in 10-
Months after
U.K. Exit
Vote”
“Stocks Rebound, but Jitters Linger”
Q2 2016
5
84
88
92
96
100
104
108
1/1/16 2/1/16 3/4/16 4/4/16 5/6/16 6/6/16 7/8/16
DJIA S&P 500 NASDAQ Russell 2000
Source: FactSet, Dealogic, Bloomberg and Wells Fargo Economics Note: Market data as of 7/8/16
Key Equity Market Drivers and Themes
U.S. Economy / Fed Rate Policy Global Growth
What Is Driving the Equity Market?
Equity Market Environment
$0.149
$0.151
$0.153
$0.155
$0.157
$0.159
$0.161
$0.163
1,800
1,850
1,900
1,950
2,000
2,050
2,100
2,150
1/1/15 4/3/15 7/4/15 10/5/15 1/5/16 4/6/16 7/8/16
USD
/ C
NY
S&P
50
0
S&P 500 USD / CNY
Major Indices Performance
Chinese currency devaluation
As of 7/8 2016 YTD 2015
Dow Jones 18,146.7 4.1% (2.2%)
S&P 500 2,129.9 4.2% (0.7%)
Nasdaq 4,956.8 (1.0%) 5.7%
Russell 2000 1,177.4 3.7% (5.7%)
New Issue ”Go/No-Go” Checklist
Oil Prices
$25
$30
$35
$40
$45
$50
$55
$60
$65
1,800
1,850
1,900
1,950
2,000
2,050
2,100
2,150
1/1/15 4/3/15 7/4/15 10/5/15 1/5/16 4/6/16 7/8/16
Lig
ht
Cru
de O
il (
$/B
bl)
S&
P 5
00
S&P 500 Light Crude Oil ($/Bbl)
Volatility (VIX)
10
15
20
25
30
35
40
45
1/1/14 6/3/14 11/3/14 4/5/15 9/5/15 2/5/16 7/8/16
CBOE Market Volatility Index
Benchmark for High Volatility
What Investors
Want to See…2016 YT D Perform ance
Dow Jones: +4.1%
Positive Mom entum in S&P 500: +4.2%
Major Indices Nasdaq: (1.0%)
Russell 2000: +3.7 %
VIX T rading
Below 20
Positive Returns in
Recent Equity Deals
Strength in the
Broader U.S. Econom y
Stability in Oil Prices /
the Global Econom y
1Q 2016 GDP: +0.8%
Oil Prices: +22.6%
13.20
20 Most Recent IPOs
(Offer/Current): +21.7 %
20 Most Recent FOs
(Offer/Current): +22.8%
4.0%
9.8% 9.8%
20.6% 20.2%
24.9% 26.6%
Jul '16 Sep '16 Nov '16 Dec '16 Feb '17 Mar '17 May '17
Curr
ent
Pro
bability o
f Rate
Hik
e
FOMC Meeting Date
Brexit sent the VIX up by ~50%, its
largest single-day gain since August 24
Markets stabilizing post-”Brexit” impact After dropping 74% to 14.82 last week, the VIX drops
another 11% to 13.20 as markets level out post “Brexit”
6
4
2
3
5
6
3
2
1
0 0
1
0 0
1
0
2
3
5
1
4
8
11
10
5
4
7
13
15
9 9 9 9
5
12
1313
7
14
7
1616
9
14
3
0
2
15
10
4
17
19
16
10
4
11
7 7
19
7
5
12
8
12
13
25
17
21
15
21
27
23
11
18
20
28
22
16
27
30
8
15
24
23
13
12
9
8
14
16
32
14
9
6
15
9
1
0
3
2
6
10
5
00
10
20
30
40
50
60
70
80
90
0
5
10
15
20
25
30
35
Jan-0
8
Mar-0
8
May-0
8
Jul-0
8
Sep-0
8
Nov-0
8
Jan-0
9
Mar-0
9
May-0
9
Jul-0
9
Sep-0
9
Nov-0
9
Jan-1
0
Mar-1
0
May-1
0
Jul-1
0
Sep-1
0
Nov-1
0
Jan-1
1
Mar-1
1
May-1
1
Jul-1
1
Sep-1
1
Nov-1
1
Jan-1
2
Mar-1
2
May-1
2
Jul-1
2
Sep-1
2
Nov-1
2
Jan-1
3
Mar-1
3
May-1
3
Jul-1
3
Sep-1
3
Nov-1
3
Jan-1
4
Mar-1
4
May-1
4
Jul-1
4
Sep-1
4
Nov-1
4
Jan-1
5
Mar-1
5
May-1
5
Jul-1
5
Sep-1
5
Nov-1
5
Jan-1
6
Mar-1
6
May-1
6
Jul-1
6
Vola
tility In
dex
# o
f In
itia
l Public O
fferings
IPO Volume CBOE Market Volatility Index
Lower Volatility Provides Improved Environment for IPO Issuance
VIX vs. IPO Issuance
24 IPOs have priced in Q2, compared to just 8 in Q1
Despite the recent increase in volatility following the Brexit outcome, we would expect the market to recover and IPO issuance to resume in the near term
Sources: Bloomberg; Note: Market data as of 7/8/16
7
Summary Statistics
Source: Capital IQ, Company filings, FactSet, Dealogic and Renaissance Capital Note: Market data as of 7/8/16; ¹ Reflects S&P performance from middle of each month to current period
Recent IPOs Continue to Represent an Attractive Asset Class
($ Millions) 4/14/16 4/19/16 4/21/16 4/26/16 5/11/16 5/11/16 5/12/16 5/23/16 5/25/16 5/25/16 6/09/16 6/09/16 6/22/16
IndustryFinancial
Institutions
Real Estate /
GamingTechnology Gaming Consumer Industrials Technology
Financial
InstitutionsConsumer Industrials Industrials EdTech Software
Deal Size $290.6 $1,207.5 $112.0 $531.4 $54.0 $241.5 $119.0 $80.1 $1,175.6 $169.1 $192.0 $45.6 $172.5
Market
Cap. @ IPO$1,817.9 $4,527.0 $1,129.4 $2,259.2 $159.6 $830.4 $821.7 $326.7 $5,066.8 $859.8 $999.3 $373.6 $1,255.5
IPO Pricing
vs. RangeIn Range In Range Below In Range Below In Range In Range Below In Range In Range Below In Range Above
Offer to
Current %+36.2% +27.5% (1.0%) +14.2% +0.9% +75.0% +91.1% +0.4% +9.0% +11.4% 0.0% +3.5% +136.9%
2016 Non-Healthcare IPOs Have Performed Well to Date
Monthly IPO Volume IPOs in Recent Months Are Outperforming
Above,
8.3%
Low End -
Midpoint,
25.0%
Midpoint -
High End,
33.3%
Midpoint,
25.0%
Below, 16.7%
Average Offer/Current: +31.2%
S&P 500 YTD Performance: 4.2%
IPO Pricing vs. Range:
54
32 2
4 4
6
5
1
4
6
1
$4,844.6
$1,166.4
$531.3
$0.0
$264.1
$128.2
$2,386.1
$2,103.1
$418.9
0
2
4
6
8
10
12
Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Healthcare Non-Healthcare Total $ Volume ($MM)
(16.0%)
1.3%
28.5%
0.0%
121.9%
(6.1%)
6.0%
20.8%
32.1%
5.2% 5.3% 4.2%
13.3% 14.2%
5.7%
2.4% 4.1%
2.8%
Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Average Offer/Current S&P Performance / Current
11 Non-Healthcare IPOs Priced in Q2
vs. 0 in Q1
Zero IPOs in January
¹
8
18
4 43 3
10
$2
$1 $0
$2
$1$1
$0$0
$2
$4
$6
$8
$10
$12
0
2
4
6
8
10
12
14
16
18
20
Healthcare FinancialInst.
Tech.,Telecom, &
Svcs.
Consumer& Retail
Industrials Real Estate Energy &Power
Deal Count Proceeds
Biopharma Represents 42% of Priced 2016 IPOs
Source: Dealogic, FactSet, company filings; market data as of 7/8/16
(16%)
(5%)(9%)
1%
(9%)
8%
0%
14% 14%
8%
58%
29% 28%
0%
Healthcare Financial
Inst.
Consumer &
Retail
Tech. & Svcs. Industrials Real Estate Energy &
Power
File / Offer Offer / Current
2016 IPO Performance by Sector
2016 YTD IPO Activity by Sector
Biopharma Continues to Dominate the IPO Market
Key Healthcare IPO Market Themes
13% 11%
27%
39%44%
55%
7% 9%
20%
27%32%
42%
2011 2012 2013 2014 2015 2016
Healthcare IPOs as % of Total IPOs
Biopharma IPOs as % of Total IPOs
($ in Billions)
Deal Count: 65
Proceeds ($B): $7.5
2015 Healthcare IPOs
n=18
(Average statistics for 2016 YTD IPOs)
Cautious investor sentiment for small-cap / early stage stories
Many issuers are in the wings evaluating potential market windows to launch
Significant participation from existing investors in biotechnology offerings
Activity dominated by crossover investor-driven biopharma transactions
9
162
18 159 6
0
20
100% Primary 1 - 20%
Secondary
21 - 40%
Secondary
41 - 60%
Secondary
61 - 80%
Secondary
81 - 99%
Secondary
100%
Secondary
87
31
20
107
02
100% Primary 1 - 20%Secondary
21 - 40%Secondary
41 - 60%Secondary
61 - 80%Secondary
81 - 99%Secondary
100%Secondary
Primary/Secondary Selling Trends
All IPOs Since 2014 1 All Tech IPOs Since 2012
Source: Dealogic, FactSet. Market data as of 7/8/16 1 Excludes ADR issuances, BDCs, MLPs, REITs, deal sizes below $75MM and market caps below $250MM
11
41
61
50
33 34
< 10% 10 - 15% 15 - 20% 20 - 25% 25 - 30% >30%
Num
ber
of
IPO
s
100% Primary
56%
Mixed43%
100% Secondary
1%
12
4648
22
18
11
< 10% 10 - 15% 15 - 20% 20 - 25% 25 - 30% >30%
Num
ber
of
IPO
s
Base Deal Size as % of Post-Deal Market Cap
All IPOs Since 2014 1 All Tech IPOs Since 2012
100% Primary,
70%
Mixed, 21%
100%
Secondary, 9%
Mean 21.2%
Median 20.0%
Mean 19.2%
Median 17.2%
Precedent IPO Sizing/Structuring Analysis
10
Overview of IPO Critical Tasks and Timeline
Hire Advisors
Lead Bookrunner
Auditors
Company counsel
SEC Review 2,3
SEC reviews prospectus, including financial statements
Typically three to four rounds of comments for an IPO (eight to ten weeks)
Update financials
Add co-managers
File with $ price-range
Due Diligence
Business
Financial
Legal
Accounting
Research
Financial Projections
Develop detailed financial projections (five years)
Financial Statements
Three years audited financials 1
Five years selected financials 1
SOX and internal financial controls
Marketing & Pricing
Investor targeting
Management dry-run
Salesforce presentations and teach-ins
Roadshow (one-on-ones and group events)
Bookbuilding
Pricing and allocation
Closing
Corporate Structure & Reorganization
Suitability of current corporate organization vs. reorganization
Tax structuring and implications
Corporate Governance & Board
Composition of board of directors
Search for independent directors
Board committees (audit, nomination and compensation)
Compliance with SOX
Potential management changes/additions
Capital Structure
Use of proceeds
Optimize capital structure and financing needs
Dividend policy
Elimination of preferred equity and converts
IPO Prospectus
Key marketing document
Underwriters provide outline/investment highlights
Company counsel drafts prospectus
Roadshow Slides
Underwriters craft slides with company
Executive Compensation
Determine compensation packages for executive management and board (including stock/options)
Approximately 18 Weeks
1 Potential to use two years of audited financial statements under the JOBS Act 2 SEC Review can take significantly longer 3 SEC review may be confidential under the JOBS Act
Organizational Meeting
Pre-Organization Meeting Preparation Filing Preparation
(Four to Six Weeks) SEC Review (Eight
to Ten Weeks)
Marketing & Pricing
(Two Weeks)
11
Illustrative Key Terms of an Initial Public Offering
Item Sam ple Recom m endation Considerations
15 - 20% of market cap Deal size dependent on: 1) need for primary proceeds; 2) deal size relative to issuer size;
3) desire for liquidity from insiders / financial sponsors; 4) target metrics (i.e., leverage).
Company raises primary capital to fund new product development and other growth initiatives.
Secondary shares provide liquidity to selling shareholders.
15% standard Over-allotment option allows the bookrunning manager to stabilize the stock
in the aftermarket; often includes secondary shares.
180 day s (standard for IPOs) Lock-up period "locks-up" key insiders, company and management from selling stock immediately
post-offering; ability to "break" lock-up if stock performs post offering.
No more than 5% of shares
offered, if at allAllows "friends and family " of an IPO issuer to purchase a limited number of shares at the IPO price. Total DSP
program shares are ty pically 5% of the offering size.
NASDAQ / NY SE No impact on transaction execution. Considerations regarding listing include: listing requirements,
filing and ongoing fees, governance requirements, exchange listing of peers. Reserve sy mbol early .
7 - 8 day s Roadshow includes management meeting with investors through 1x1 meetings and group functions.
Can include international stops, depending on investor receptiv ity .
80% - 85% Institutional Favor quality holders who own relevant comparables and express intent to own for the long-term.
15% - 20% Retail Separate and distinct distribution channel. Lower turnover and less price sensitive investors.
7 .00% Represents fees issuer pay s to underwriters. Consists of management fee, underwriting fee and
selling concession .
2 - 3 Bookrunners Lead underwriters responsible for execution of the transaction. Number varies on offering size.
2 - 3 Co-Managers Incremental role in marketing the deal - primarily add value post-deal with relevant banking
coverage and aftermarket trading support.
TBD Dependent on company requirements and market conditions. Considerations include seasonality of
business, preparedness of company , availability of audited financials, and timing of capital needs.T im ing
Prim ary vs. Secondary
Over-allotm ent Option
Roadshow
Gross Spread
Underwriters
Deal Size
Lock-up Period
Exchange Listing
Distribution
Directed Share Program
("DSP")
Up to 100% primary shares, with
potential for secondary portion
4
12
Underwriters’ salesforce presentations
7-8 day roadshow
40 - 50 1x1 meetings
3 group lunches (NY, Boston, SF)
Conference calls to reach those investors who do not get physical meetings
Maximize demand by targeting key regions – New York, Boston, Mid-Atlantic, Midwest, West Coast
7:30am Prep w/ underwriters
8:00am 1x1 meeting
9:15am 1x1 meeting
10:30am 1x1 meeting
12:00pm Group lunch
1:45pm 1x1 meeting
3:00pm 1x1 meeting
4:15pm 1x1 meeting
6:00pm Private dinner
The Overall Marketing Plan Typical Day on the Road Roadshow Priorities
Daily Update: Markets, events, meetings
Travel packs: Investor bios, sector holdings, investment methodologies, track record
Transparent feedback: Investor comments on positioning, valuation and issues of concern
Open Book Policy: Update on institutional and retail demand, likelihood and timing of expected orders; price sensitivity
Manage Message: Carefully coordinate message to investors
Mid-Atlantic
Boston
San Francisco Chicago
Denver
Los Angeles
San Diego
New York
Minneapolis
1
2 3
4
5
5
6 7
8
Indicates day number of roadshow
Illustrative Roadshow Schedule
13
Late-Stage Private Placements
13
14
Rationale • There may be a variety of different motivations for a late stage or pre-
IPO private placement
• Company may want to defer IPO and need to raise additional capital prior to the
IPO
• Company may want to take out early friends and family and angel investors and
“clean up” balance sheet or provide partial liquidity for longstanding holders
• Company may want to bring in strategic investors
• Company may be advised that it should prepare itself for the IPO by gaining
support and validation from key sector investors that are opinion leaders
• Company and bankers may want to “de-risk” IPO by bringing in cross-over
investors that will also invest in the IPO
• Company may be advised that an up round will make higher IPO pricing easier for
IPO investors to accept
• May be quite sector dependent
This is MoFo. 15
Market trends U.S. LATE STAGE ACTIVITY BY QUARTER
This is MoFo. 16
Market trends (cont’d)
17
Late stage investment characteristics • Impact on structuring and negotiating
• These transactions typically are made into existing, relatively mature companies
• Late stage
• Proven product viability
• Exhibit signs of increasing adoption and revenue growth
• Focused on marketing and sales
• Very late stage
• Cash flow is dependable
• Past initial hyper-growth period and reasonable to expect sale or IPO
within 12 – 24 months
18
Late stage investment characteristics (cont’d)
• New investors face companies with larger and more diverse groups of existing
shareholders
• Founders, current/former management, employees, seed, family, high net-
worth, early stage institutional venture and professional angels
• Each group has different levels of involvement, varying rights and
protections tied to equity and divergent objectives for their investment
• Founders/management may be significantly diluted by investment — need to
create alternative incentives for them
• Start-up, seed investors may desire quicker exit at lower valuation
• As we will discuss, investors in late stage private placements include cross-over
funds (often accustomed to investing in IPOs), strategic investors knowledgeable
about specific sectors, and sovereign wealth funds
19
• Focus on document preparation and diligence
• Thorough preparation enables tight time frame once we go to market
• Timing: 3 – 4 weeks, faster if marketing documents are started
Preparation
• Goal is to narrow the field of potential partners to the most interested/competitive who will then be invited to fully diligence the company
• At the end of the marketing phase, a select group of prospective investors will be chosen to meet with management and complete full due diligence
• Timing: 2 – 3 weeks
Marketing
• Provide selected investors access to key management members and material documents/financials in online data room
• Culminates in final Term Sheet proposals
• Timing: 4 – 5 weeks
Diligence
• Selected investor is given some period of exclusivity to work with the company to complete documentation
• Term sheet provides framework for key terms, but some negotiations remain
• Timing: 2 – 3 weeks
Closing
Pre-IPO Process Overview
20
Late stage (or pre-IPO) private placements
• Terms for the late-stage round
• Liquidation preference: are investors asking for a liquidation preference over
common stock? over other classes of outstanding preferred stock?
• Anti-dilution protections: most include weighted average anti-dilution adjustments
(as opposed to full ratchets)
• Voting rights: class votes or “super voting” rights
• IPO protections
• Investors now commonly ask for and expect to receive IPO protection
• Blocking rights: IPO price must be as high as the last private round or at a
specified premium to the last private round price
• IPO ratchet: late stage investor receives additional shares (as in Square) if
the IPO price is less than the last private round (or other specified price)
• Valuation concerns
• Announced SEC enforcement area of interest
• Down-round considerations
21
Protective provisions — charter/contractual
• High valuations at later stage yield minority investments and therefore
protective provisions are usually stronger
• Negotiate to include strong affirmative covenants
• Financial and other information delivery rights
• Registration rights and rights in M&A
• Redemption rights
• Negotiate to include strong negative covenants
• Specify the actions that the company may or may not take without specific vote of
the class
• Usually include all of the “ordinary course” provisions from venture – related to
sales of company or assets, bankruptcy, expansion of option pool, IPO or sale
• Expanded to include financial covenants, additional of debt, acquisition strategy,
partnerships, management changes, etc.
• Contractual remedies for failure particularly with affirmative covenants – e.g.,
right to take over board if fail to redeem
22
Transfer and investment restrictions
• Investments with strategic partners raise additional concerns, such as
a need to consider standstill provisions, special transfer restrictions,
restrictions on investments in competitors
• Transfer to “competitors”
• More heavily negotiated definition of competitors to whom investor may not
transfer—current and future competitors
• Negotiated “update” rights to list of competitors
• Related – negotiation of the right for strategic investor to make investment in
competitors of company
• Particularly important to issuer if investment is coupled with strategic
partnership
• Key is definition of competitor – by type of product and/or by name – and
update rights over time
• Also negotiation regarding steps to be taken if investor buys into a competitor
either directly or indirectly
23
Stand-still provisions
• Investment by strategic investors
• Stand-still provisions more common in M&A transactions
• Sometimes asked of investors in late stage deals, particularly of
strategies
• Investor is obligated to refrain from actions that relate to acquisition
of control of the issuer including making proposals to acquire the
issuer, buying shares, or launching a proxy contest
• Exceptions
• Negotiated sale
• Agreed-to-limits
• Other investor action
24
Right of first look for M&A • Investment by strategic investors
• Right of first offer
• Notice period
• Negotiation period
• Other potential rights
• Right of first refusal
• Investor friendly
• Chilling effect on competitive M&A
• Terms of transaction
25
Board seat • Investment by strategic investors
• Private company issues
• Board seat or observation rights?
• May have confidentiality issues with board seat if equity investment
is combined with strategic partnership
• Need to carefully consider composition of board – particularly given
approval of M&A – and incentives of early investors, particularly in
event of liquidation event
• Often necessary to push for removal of certain board members so
early investors do not have too much control in M&A
26
Secondary purchases • Secondary purchases — often combine investment directly in issuer
with purchase in secondary directly from existing stockholders
• “Cross-purchase” structure
• Less cash from investment available for company
• Typically purchase of common stock from management and employees to provide
liquidity
• Can also purchase preferred from previous investors particularly those that need
exit given LP demands
• Note issues particularly with liquidation preferences and other terms not
desirable to late stage investor
• Can’t change charter rights of class but can change contractual rights
• In contract rights, particularly important to ensure that you can bundle
secondary shares with primary securities for co-sale, tag and registration
rights
27
Tender offers • Disclosure and process issues under the tender offer
• Use of third party platform (e.g., Nasdaq Private Market) but administrative hassle
• Not subject to tender offer rules but important that it be “fair” particularly if insiders
are selling
• Information prepared by the issuer and included in OTP but investor effecting the
purchase and taking
• Note issues with options (net exercise feature)
• Issues with international stockholders/employees — tender offer rules in different
countries
• Mitigate risk through indemnification
• Also need true-up in company issued securities recommended as opposed to
allowing a “double dip” by participants
• Risks mitigated further by purchasing directly from issuer and requiring
issuer to effect tender
28
Leading Private Equity Capital Capabilities
Wells Fargo has significant expertise raising private capital for both pre and post-IPO issuers, driven in large part by the quality of our dialogue with leading crossover institutional accounts
Additional WFS Pre-IPO Marketing Events
Provides capital for growth initiatives
including strategic acquisitions and
international expansion
$300 Million Strategic Investment from
Sole Placement Agent
Provides capital for growth initiatives including strategic
acquisitions and international
expansion
Pending
Project Lotus
$35 Million Private Placement
Sole Placement Agent
Lead generation technology
platform
Provides capital for growth initiatives
including strategic acquisitions and
international expansion
Provides capital for growth initiatives
including strategic acquisitions and
international expansion
$27 Million Private Placement
Placement Agent
$300 Million Strategic Investment from
Financial Advisor to Lumos Sole Placement Agent
Accelerated the ongoing
transformation into a pure-play fiber bandwidth infrastructure
provider
Diversified shareholder base
before IPO
$120 Million PIPE
Sole Placement Agent
Supports future growth and
general partnership
purposes
$32 Million Registered Direct
Sole Underwriter
New capital provides support to
continued development and expansion with a planned ramp-up
in production
$125 Million Strategic Investment from
Exclusive Financial Advisor To American Express
Created a strategic partnership that
would help American Express gain access to the digital payment
market
Provides capital for growth initiatives
including strategic acquisitions and
international expansion
$240 Million Private Placement
Lead Placement Agent
Raised capital to support growth
during a opportunistic
economic climate for reinsurance-based companies
Selected Investors Accessed During Marketing
Cr
os
so
ve
r
Ins
titu
tio
ns
O
the
r L
ate
Sta
ge
In
ve
sto
rs
U
ltr
a H
igh
N
et
Wo
rth
29
WFS Acts as Sole Placement Agent for Gett on $300 Million Strategic Equity Investment by VW
Transaction Overview
On May 24, 2016, Gett, Inc. (“Gett” or the “Company”) and
Volkswagen Group (“Volkswagen” or “VW”) announced
the establishment of a strategic partnership together with
an investment of $300 million1
Gett will use the proceeds to further accelerate growth,
including expanding its on-demand mobility services in
Europe
Gett has a strong track record of both organic and
inorganic growth, including its acquisition of Radio Taxis
in March 2016
Gett is an on-demand mobility company that enables consumers to instantly book
on-demand transportation, delivery and logistics
A leading provider in the European ride hailing market, Gett is available in more
than 60 cities worldwide, including London, Moscow, Tel Aviv and NYC
Gett’s convenient and highly efficient mobility solution is equally successful with
consumers and businesses. It is trusted by more than 4,000 leading corporations
worldwide
The business model is based exclusively on licensed drivers who have a permit to
carry passengers and are committed to providing safe, reliable mobility
The Company has development facilities based in Israel
Gett has raised over $520 million in funding since inception and was selected by
Forbes as one of the “top 15 explosively growing companies”
Volkswagen is a leading automobile manufacturer and the largest carmaker in Europe
Delivered 9.9 million vehicles to customers in 2015
12.3% of the world passenger cars and 24.4% of the Western Europe new cars are
made by VW
Company Overviews
Transformative strategic investment that supports Gett’s continued expansion in
current and new markets
Furthers VW strategy to generate a substantial share of its future revenue from new
business models focused on mobility services
Partnership provides opportunities for VW to provide services to Gett’s large and
growing driver base
Opportunity to grow demand for Gett’s offering within the corporate segment by
leveraging VW’s corporate client base
Transaction Rationale
Strategic Equity Investment from
Sole Placement Agent
$300 Million
Note: 1 Closing of the transaction is subject to satisfactory completion of closing conditions, including regulatory approvals
30
Well-Coordinated Process to Find the Right Partner for Gett
Roadmap to Successful Execution
Init
ial
Ou
tre
ac
h
~90 Crossover
Institutions
~50 Late Stage VC / Private Equity
Investors
~20 Strategic Investors
Volkswagen Moves into Exclusive Phase 2 Diligence
~160 Total Investors Approached
~20+
Investors Indicated Interest and Moved into Phase 1 Diligence
Signed Term Sheet and Exclusivity Request Is Received from Volkswagen
~50
1x1 Investor Meetings During Company Marketing
Purchase Agreement Signed and Transaction Announced
Core Gett Deal Team
Senior Management
Jon Weiss Brian Maier
Andy Sanford
Gerry Walters Dan Nash
Felix Burmeister
Beau Bohm Greg Ogborn
Adam Stoeckel
Tech Investment Banking
Equity Capital Markets
Corporate Access
GICG
Equity Sales
Equity Syndicate
Enterprise Travel & Mobility
Legal
Tech M&A
Financial Sponsors
Auto Coverage
International
Tulip Capital
San Francisco
Charlotte
New York London
Hong Kong
Atlanta
Frankfurt
Toronto
Tel Aviv
~70+ dedicated professionals across 9 cities worldwide
Jerry Serowik Marc Ogborn
Steve Moss Branden Avishar
Equity Syndicate Auto Coverage
Dan Bricken Calvin Tarlton
International
31
Wells Fargo Maintains an Active Dialogue with the World’s Largest Non-Bank Investors
Canada Pension Plan Investment Board (CPPIB) operates at an arm’s length from federal and provincial governments to invest the funds of the Canada Pension Plan
CAD $269 Billion
Investor AUM Description
Canada
Caisse de Depot (CDP) managers portfolios for pension funds and institutions in Quebec and invests in global stocks across all market caps.
CAD $265 Billion
Ontario Teachers’ Pension Plan (OTPP) is Canada's largest single-profession pension
CAD $155 Billion
Ontario Municipal Employees Retirement System (OMERS) is one of Canada’s leading pension funds and serves 450,000 local members
CAD $72 Billion
British Columbia Investment Management Corporation (BCIMC) manages pension and retirement funds for public sector clients.
CAD $114 Billion
PSP Investments managers the pension plans for the federal public service, Canadian armed forces, and the Royal Canadian Mounted Police employees
CAD $112 Billion
United States
Berkshire Hathaway is an Omaha, Nebraska conglomerate holding company. The Corporate Development team of Berkshire Hathaway seeks to stay competitive and continually evolve into new markets and trends by acquisitions
$132 Billion
Investor AUM Description
Middle East
APAC
Abu Dhabi Investment Authority was founded in 1976 to invest on behalf of the Government of the Emirate of Abu Dhabi and manage its excess oil reserves
$773 Billion
Qatar Investment Authority is the sovereign wealth fund of the State of Qatar, and Qatar Holding (QH) is the strategic and direct investment arm of QIA
$256 Billion
KIA manages Kuwait’s foreign investments portfolios and is responsible for Kuwait’s General Reserve Fund and the Future Generations Fund
$256 Billion
The Singaporean government established the Government of Singapore Investment Corp. (GIC) sovereign wealth fund in 1981
$320 Billion
$177 Billion
Temasek Holdings (Pte), Ltd. is an investment company based in Singapore and was founded in 1974
The South Korean government established the Korea Investment Corp. (KIC) in 2005. KIC manages funds assigned to it from the Ministry of Finance’s Foreign Exchange Stabilization Fund, Bank of Korea (Korea’s central bank) and other public funds
$72 Billion
32
Valuation • How are the shares of privately held companies valued and who is
responsible for valuations?
• The IPO prices for many companies that have gone public have been lower than
the prices at which these companies had last raised capital privately and lower
than the prices at which secondary private transactions were completed
• Private companies also have been able to raise money at higher premiums than
their direct competitors who are public
• What does this suggest, if anything?
• Are investors no longer applying a “liquidity discount”?
• Is the premium associated with the liquidation preference that typically
accompanies preferred stock rounds only?
• In IPOs, investment banks in pricing the IPOs and IPO investors demand an
“IPO discount” (“IPO underpricing”)
• When VCs or “cross over investors” participate in successive private
financing rounds, often they can negotiate for themselves downside
protection, including protection should the company go public at a lower
valuation—but what about participants in secondary private markets?
33
Valuation (cont’d)
34
Valuation (cont’d)
• Can the late stage investor/fund face any liability in connection with
valuation issues?
• Is the investor buying newly issued shares or shares from an existing holder?
• Is the existing holder selling to the late stage investor sophisticated? Can s/he
evaluate the company and its value as well as the late stage investor?
• What information is available to the existing holder? Does the late stage investor
have more information? Better information?
• Will the late stage investor be shaping the IPO? Influencing the IPO price?
35
Investors are Highly Sensitive to Crossover Round Valuations
Step-up Analysis for Healthcare IPOs
Summary Average Performance 2015 – 2016 YTD
Source: FactSet and Dealogic. Data as of 7/8/16
Number of IPOs with Crossover:
2016 biopharma IPO activity has been driven by crossover investor desire for liquidity
Investors are currently less willing to pay a premium to crossover round valuations in the absence of meaningful milestone achievements between crossover round and IPO
Median:
Average Step-up
2015-2016 YTD:
Gene Editing/Therapy: 1.7x
Non-Gene Editing/Therapy: 1.5x
% of HC IPOs with
Crossovers50.0% 40.0% 100.0% 42.9% 57.1% 33.3% 66.7% 100.0% 50.0% 100.0% 50.0% NA NA 100.0% 100.0% 50.0% 50.0% 75.0%
1.9x
1.3x
1.0x
2.6x
1.5x1.4x
1.9x
2.9x
1.8x
1.1x1.2x
1.1x1.0x
1.0x
1.2x
1.0x
4 2 1 3 4 4 4 3 3 6 2 0 0 4 2 1 3 3
January '15 February'15
March '15 April '15 May '15 June '15 July '15 August '15 September'15
October '15 November'15
December'15
January '16 February'16
March '16 April '16 May '16 June '16
1.3x
File / Offer
IPO with Crossover (8.8%)
IPO without Crossover (8.6%)
Offer / Current
IPO with Crossover (14.3%)
IPO without Crossover (17.8%)
36
Blurred Lines between Financings
36
37
Financings in close proximity • We will discuss a few common scenarios
• Issuer engaged in discussions with investment banks about a potential IPO.
Investment banks recommended that the issuer commence working on the
potential IPO while also pursuing an institutional private placement. In the course
of the issuer’s discussions, the issuer has received interest from potential strategic
investors.
• Issues to consider in advising the issuer and its financial
intermediaries:
• Valuation of institutional private placement: will institutional investors seek to
invest at a lower valuation? if so, what adjustments are triggered in prior rounds?
how will a down-round be explained in the context of an anticipated IPO? will there
be a milestone or valuation-creation event between completion of the institutional
private placement and the IPO?
• What forecasts or projections have been shared with the institutional investors?
are these the same as those shared with research analysts? have research
analysts had an opportunity to conduct their own diligence?
38
Financings in close proximity (cont’d)
• What will be the financial statement impact of the financing?
• Are the institutional investors negotiating rights for themselves that will affect the
IPO? an acquisition?
• What other information has been shared with the institutional investors
• Securities law issues: are all of the investors “institutional accredited investors” or
“QIBs” so that if conversations were received as testing-the-waters discussions
there would not be a Section 5 issue?
• What kind of contractual commitment (if any) can be obtained from institutional
investors regarding their participation in the IPO?
• Indication of interest: is this something that can be disclosed in the IPO
prospectus?
• Contractual commitment to participate in another private placement
contemporaneous with the IPO
• Rules for “anchor” or “cornerstone” investors in the United States differ from
those in Europe and Asia
• No “confirmed” order in the U.S. without the pricing terms – cannot begin an
offering as a private placement and continue it as a public offering
39
Financings in close proximity (cont’d)
• Issuer has submitted its IPO registration statement to the SEC; issuer
was already in discussions about a late-stage private placement but
the placement had not come to fruition at the time the IPO
registration statement was submitted; IPO process has been
elongated as a result of market volatility. Issuer needs additional
funds. IPO underwriters also want to test the waters.
• Do you need to focus on integration of the various potential offerings? or in
potential gun-jumping issues?
• Does analysis change if the IPO is on file?
40
Financings in close proximity - integration
• Prevents circumvention of registration requirements by separating
single non-exempt offering into several exempt offerings
• Six-month safe harbor ─ Rule 502(a)
• SEC’s integration doctrine may apply to an offering that otherwise
qualifies for an exemption under Regulation D
41 This is MoFo. |41
Financings in close proximity –
integration – five-factor test
Under SEC’s integration doctrine, the following factors (“five
factors”) are considered in determining whether one sale of
securities by an issuer will be integrated with (i.e., treated as part of
the same offering as) a prior or subsequent offer or sale of
securities by the issuer:
Part of a single financing plan;
Issuances of the same class of securities;
Sales occur at or about the same time;
Same type of consideration is received; and
Proceeds will be used for same general purpose.
42 This is MoFo. |42
Financings in close proximity –
integration ─ SEC interpretive guidance
C&DI 139.25, which addresses a side-by-side private offering (under
Section 4(a)(2) or Rule 506) with a registered public offering without
having to limit the private offering to QIBs and a small number of
large institutional accredited investors
The focus is on how the investors in the private offering are solicited
Investors were not identified or contacted in connection with the public offering
Investors did not contact the issuer as a result of the general solicitation by
means of the registration statement
43 This is MoFo. |43
Financings in close proximity
Keeping track of the various offering processes
Which categories of potential investors will be contacted? by whom? to participate
in which offering?
What materials are used for each potential financing?
Who has received what information from the company and from the placement
agent?
Will all of the information that has been shared with potential investors be included
in the IPO prospectus?
Who has received material non-public information? SEC has made clear that it is
focused on “MNPI” or informational asymmetries
If an investor participated in an institutional private placement and received
information that will not be in the IPO prospectus, is there a basis on which it
can participate in the IPO?
44 This is MoFo. |44
Venture and mezzanine debt
Most pre-IPO companies traditionally have focused on equity
offerings; however, business development companies (BDCs),
venture debt lenders and other sources of capital also should be
considered
Structure of venture and BDC debt investments
Principal negotiating issues
45
Other Financing Approaches
45
46
Merging with and into an already public
company
• Using the life sciences sector as an example, there are a number of
public companies that were successful in raising capital to fund their
clinical development, but which have failed trials.
• Instead of liquidating and distributing their capital to stockholders,
these companies may be interested in considering merger
opportunities
• An issuer that has already commenced its IPO preparations but has
found that its IPO has been delayed may consider a reverse merger
into the already public company
• Unlike the “reverse mergers” into shell companies, which raise a
number of concerns, a reverse merger into an operating company
can be a worthwhile alternative
46
47
Regulation A+ Tier 2 offering, with a
listing
• An issuer that already commenced its IPO preparations and has found that
its IPO may be delayed may consider a Tier 2 Regulation A offering with a
contemporaneous stock exchange listing
• The disclosures prepared for a Form S-1 can easily be repurposed and used
to prepare a Form 1-A for a Regulation A offering
• Bankers may not have identified investor interest in an amount sufficient
(from the bankers’ perspective) for a traditional IPO; however, an issuer can
only raise up to $50 million in a Tier 2 Regulation A offering. The
expectations are that a Tier 2 Regulation A offering will not be as big as a
traditional IPO, so this offering format may provide a lower threshold for the
offering size
• By listing concurrently with the completion of the Regulation A offering, the
issuer will have a class of stock that it can use for stock-based compensation
awards, partnering transactions, or other purposes
• Furthermore, securities sold in a Tier 2 Regulation A offering are not
considered “restricted securities,” so funds that have limits on the
47
48
Regulation A+ Tier 2 offering, with a
listing (cont’d)
• Percentage of their portfolio that they can invest in private placements will be
able to invest in the offering
• Moreover, by establishing a public market for its securities, the issuer will
have many more options going forward, whether to provide liquidity for
existing VC and PE sponsors or to raise additional capital for its own
corporate purposes
• Following completion of the Tier 2 offering with listing, the issuer will be
considered an “EGC”
• It may be the case that investment banks that are disinclined to undertake
what they consider to be small IPOs may be more receptive to assisting with
what might be viewed as a large Regulation A Tier 2 offering
48
49
Exchange Act listing, without a capital
raise
• An issuer that already has undertaken the work required in
connection with an IPO may find it worthwhile to repurpose its Form
S-1 into a Registration Statement on Form 10, which is an Exchange
Act registration statement, and list its securities on an exchange
• The Form 10 enables an issuer to enter the SEC reporting regime
• After a Form 10 is cleared through the SEC, the issuer will be a
reporting company, responsible for periodic SEC filings, as well as
subject to Sarbanes-Oxley requirements
• A Form 10 registration statement cannot be used to raise capital
• If the issuer wants to raise capital, it would have to conduct an
exempt offering prior to, or alongside, the Form 10 registration
process
• The issuer might consider a Reg D/Rule 506 offering to accredited
investors, or a Rule 144A offering to QIBs, or a combination of these
49
50
Exchange Act listing, without a capital
raise (cont’d)
• Assuming that the issuer had its Form 10 declared effective, and also
listed its securities on an exchange, it may subsequently raise capital
through exempt offerings (a private placement, a PIPE transaction, a
144A offering) or through a registered follow-on offering
• For a registered follow on offering, the issuer will still need to use a
Form S-1 to register the offered securities
• If the issuer did not list its securities on an exchange (just on OTC
BB), and the issuer wants to do a follow-on offering, it should
consider trying to move up to Nasdaq or NYSE MKT in conjunction
with the follow-on in order to address blue sky concerns
50
51
The RE-IPOSM
51
This is MoFo. 52
Foreign exchanges • Foreign securities exchanges, such as the AIM, the TASE, the
Frankfurt exchange, and various of the Nordic exchanges, have been
successful in attracting strong, technology-based companies across a
range of sectors
• Founders, sponsors, or others may have advocated to have these
companies list their securities on these exchanges in order to create
a liquidity opportunity, as well as to provide a “currency” for potential
acquisitions or stock-based awards
• However, many of these exchanges have failed to develop any real
liquidity for their listed companies and the stocks have languished as
a result of market structure issues (i.e., “small currencies,” lack of
market makers, exchange rules), rather than as a result of company-
specific concerns
This is MoFo. 53
Recapitalization The company could then be recapitalized as follows:
• An institutional private placement in the United States completed “at market” by
reference to the home country securities exchange (which, by definition, will be
lower than the valuation that would be ascribed for a similarly situated company
listed on a U.S. securities exchange)
• In its home country, the company will undertake to register the resale of the
securities purchased in the private placement
• The institutional private placement is followed by a rights offering in the company’s
home country to existing stockholders, allowing existing stockholders to participate
at the same price as the new institutional holders
• Contemporaneously with the institutional private placement and the rights offering,
the company will proceed to undertake an IPO in the United States as an EGC
relying on the confidential submission process; the IPO could include a resale
component, or subsequent to the IPO, the company could file a resale for the
institutional investors
54
Financing Alternatives
for
Public Companies
54
This is MoFo. 55
Market trends • Privates have become more “public”
• In an effort to improve access to capital and minimize liquidity discounts, hybrid
financing techniques have become more important
• SEC’s Office of Risk Fin published a study in 2015 (“Capital Raising in the U.S.:
An Analysis of the Market for Unregistered Securities Offerings, 2009 - 2014”)
which showed that from 2009 to 2014 there was a shift from public to private or
hybrid offerings
• The shortened Rule 144 holding period, and the popularity of PIPE transactions,
and other hybrids contributed to the rise of private or targeted offering techniques
• The new Section 4(a)(7) resale exemption likely also will contribute to reducing the
liquidity discount associated with “restricted securities”
• JOBS Act changes to general solicitation rules will make privates even less private
• Perhaps more importantly, public offerings are becoming less “public”
• Due to market developments, such as heightened volatility and concerns about
investor front-running, fewer public offerings involve traditional marketing
• Most public offerings begin as confidentially marketed public offerings
This is MoFo. 56
Market trends (cont’d)
• Overall, companies rely on unannounced deals (PIPEs, registered
directs, CMPOs, and bought deals)
• Reliance on unannounced deals is unlikely to abate
• As among deal formats, reliance on PIPE transactions has declined.
More companies are eligible to use a Form S-3 for takedowns
(completed as registered directs or as underwritten confidentially
marketed public offerings). However, as has been the case since
PIPE transactions were created, PIPE transactions become
increasingly important in volatile markets.
57
Life Sciences Financing Spectrum for Structured Finance
Debt Structure
Traditional Lenders
Equity
Venture Lenders/BDCs
Royalty Funds Structured
Debt/Equity Private Placements
Convertible 144A Hedge Funds Mutual Funds
Venture Capital
Cost of Capital Most Expensive Least Expensive
Market Size ($) Market Size ($)
58
• High levels of global volatility has limited the accessibility of the equity follow-on market
• Companies are actively considering alternative financing vehicles to meet their capital needs at a lower cost of capital than may be achievable in the traditional markets
• Transaction structures completed this year include:
• 144A Convertible Debt
• Privately placed convertible debt
• PIPE – unregistered common stock targeted to private equity buyers
• Common stock with warrant coverage
• Royalty agreements
Recent Structured Debt / PIPE Transactions
¹Conversion premium at the closing market price on 1/25/16 is equal to 22.5% Source: Private Placement Tracker, FactSet Market data as of 7/8/16
Select Recent Healthcare PIPE/Structured Finance Transactions
Structured Finance Market
Announcement
Date Company Name Ticker Security Sold
Gross
Proceeds
Market
Cap
Proceeds
% of
Mkt. Cap.
Pricing Prem.
/
Discount at
Anc.
Conversion
Prem. /
Discount
at Anc. Term Coupon
Warrant
Coverage
Warrant
Prem.
at Anc.
Offer /
1-Day
Offer /
7-Day
Offer /
Current Top Investor
6/3/2016 Pieris Pharmaceuticals, Inc. PIRSConvertible Preferred Stock /
Units (Common Stock + Warrants)$16.5 $70.1 23.5% - 3.3% - - 59.1% 28.2% (4.1%) (15.9%) (15.4%) BVF, Inc.
6/3/2016 Lion Biotechnologies Inc. LBIO Convertible Preferred Stock / Common Stock 100.0 292.8 34.2% (21.2%) - - - - - 36.7% 26.2% 43.3% Unnamed Investors
5/27/2016 Aclaris Therapeutics, Inc. ACRS Common Stock 20.0 400.2 5.0% (6.1%) - - - 19.6% - 8.1% 9.2% 8.8% Aisling Capital
5/16/2016 Neo Therapeutics, Inc. NEOS Term Loan 60.0 124.7 48.1% - - 72 13.0% - - (3.6%) (2.8%) 20.6% Deerfield Management
5/4/2016 Relypsa, Inc. RLYP Senior Secured Term Loans 150.0 750.1 20.0% - - 30 11.5% - - (19.6%) (20.3%) 16.5% Athyrium Capital Mgmt
4/4/2016 Sorrento Therapeutics, Inc. SRNE Common Stock 150.0 241.7 62.1% (11.9%) - - - 19.6% 34.9% 11.9% 20.0% 20.9% Ally Bridge Group
3/28/2016 Veracyte, Inc. VCYT Term loan + $5MM Equity Offering Participation Rights 40.0 136.5 29.3% - - 72 12.0% - - 10.2% 6.7% 1.8% Visium Healthcare Partners
3/15/2016 Orexigen Therapeutics Inc. OREX Convertible Senior Secured Notes 165.0 101.9 161.9% - 7.1% - - 10.0% 114.3% (24.3%) (17.8%) (36.4%) Baupost Group, LLC
3/14/2016 Connecture, Inc. CNXR Convertible Preferred Stock 52.0 67.1 77.5% - 47.1% - 8.0% - - (12.1%) (3.3%) (16.3%) Francisco Partners, L.P.
3/7/2016 Argos Therapeutics, Inc. ARGS Common Stock + Warrants 49.7 114.7 43.3% (1.6%) - - - 75.0% (3.3%) (8.9%) (0.8%) 14.6% Pharmstandard International S.A.
2/29/2016 Coherus Biosciences Inc. CHRS Convertible Senior Secured Notes 100.0 561.2 17.8% - 54.9% 73 8.2% - - 4.1% 38.1% 19.3% HealthCare Royalty Partners
2/25/2016 TESARO, Inc. TSRO Common Stock 154.8 1,471.3 10.5% (4.1%) - - - - - 18.8% 24.3% 152.1% New Enterprise Associates
2/16/2016 Invacare Corporation IVC Convertible Senior Unsecured Notes 130.0 529.9 24.5% - (1.1%) 60 5.0% - - (23.9%) (29.0%) (23.7%) Unnamed Investors
2/4/2016 KemPharm Inc. KMPH Convertible Senior Unsecured Notes 86.3 214.1 40.3% - 15.5% 60 5.5% - - (3.2%) (14.8%) (71.1%) Deerfield Management
1/25/2016 Novavax, Inc. NVAX Convertible Senior Unsecured Notes 325.0 1,786.5 18.2% - 2.9%¹ 84 3.8% - - (14.7%) (23.9%) 15.1% Unnamed Investors
1/19/2016 Acorda Therapeutics Inc. ACOR Common Stock 75.0 1,721.9 4.4% (16.5%) - - - - - 14.0% 16.9% (21.3%) Unnamed Investors
1/6/2016 Essa Pharma, Inc. EPIX Units (Common Stock + Warrants) 15.0 105.2 14.3% (29.0%) - - - 150.0% (29.0%) 2.2% (4.5%) (40.9%) Clarus Ventures
1/4/2016 Halozyme Pharmaceuticals HALO Royalty-Backed Debt Financing 150.0 2,220.9 6.8% - - Dependent
on Royalty
8.75% +
3-Month
LIBOR
- - (5.4%) (28.6%) (47.4%) Pharmakon Advisors
59
Select Investors and Structured Finance Transactions
Investor Select Transactions
AMAG Pharma - (August, 2015) $500MM in 7.875% senior notes due in
2023
Cipher Pharma - (April, 2015) $100MM 10.25% senior secured notes
due in 2020. Issued with warrants for 600,000 common shares
Avinger (October, 2015) - $55MM term loan - Initial amount $30MM with
four years of interest payments, additional $20MM in two contingent
$10MM tranches
ViewRay (June, 2015) - Initial access to $30MM in debt financing with
interest over three years. Option to draw a further $20MM upon achieving
certain milestones
Navidea (May, 2015) - $50MM loan with 14% annual interest rate and
term of six years. Additional $10MM funding available through December
2016
Ceterix Orthopedics (May, 2015) - $35MM term loan agreement
TearLab Corporation (March, 2015) - $15MM term loan with 13%
annual interest, $20MM additional funding available through September
2016 at its option. 6-year maturity
AAC Holdings (October, 2015) - $25MM in subordinated convertible
debt, $25MM subordinated debt. Additional $50MM subordinated debt
facility subject to certain conditions
Depomed (March, 2015) - $375MM debt financing. Right to prepay the
tranches
Shine Medical Technologies (October, 2014) - $125MM term sheet,
milestone-driven debt financing
OMNIlife science, Inc. (April, 2014) - $27.5MM debt financing
Coherus Biosciences (February, 2016) - $100MM senior convertible
notes with 8.2% annual interest due in 2022. Conversion price at a 60%
premium to the average stock price over the prior 15 trading days
Raptor Pharmaceutical (July, 2015) - $60MM in 8% notes convertible at
$17.50 per share and $10MM additional funding pursuant to a revised
synthetic royalty loan agreement
Invuity, Inc. (March, 2014) - $15MM debt financing, concurrent with
$21MM equity deal (Series E)
Agile Therapeutics (February, 2015) - $25MM term loan. Hercules also
was granted a warrant to purchase 180,274 shares of common stock
Investor Select Transactions
Quotient Biodiagnostics (November 2015) - $50MM senior credit facility
Counsyl (August, 2015) - $40MM senior credit facility
Flexion Therapeutics (August, 2015) - $30MM senior credit facility
Sarepta Therapeutics (June, 2015) - $40MM senior credit facility
Agenus Inc (September, 2015) - $115MM royalty deal (Oberland receives
rights to 100% sales of GSX's shingles and malaria prophylactic vaccine
products until the loan is repaid)
BioMedica (May, 2015) - $50MM loan facility, $25MM drawn immediately
and the remainder taken at $5MM tranches
Unilife Corp. (March, 2014) - $40MM, 10.25% per annum, 6-year
maturity. Two additional $10MM tranches
Aerocrine (April, 2013) - $35MM term loan, administrator and funded
$25MM with 7-year maturity
Careview Communications (June, 2015) - $40MM debt financing, two
tranches each having a 5-year maturity
Paradigm Spine (February, 2014) - $75MM senior secured financing, 5-
year maturity
Tengion Inc (July, 2015) - Participant in $18.5MM senior convertible
notes
Outset Medical (June, 2015) - Participant in $40MM debt financing
Novocure (January, 2015) - $100MM term loan, $25MM at closing and
$75MM available through 6/30/16. 5-year agreement from initial funding
VIVUS (March, 2013) - $50MM drawn and $60MM additional at VIVUS
discretion. No payments in first year, 5-year maturity
SynCardia (December, 2013) - $10MM structured debt and synthetic
royalty financing
InSite Vision (April, 2013) - Sale of Besivance royalty for $15MM and
$1MM milestone
Note: Transaction detail disclosed in public press releases
60
PIPE market trends
Number of Deals Dollars Raised
2015 981 $57 billion
2014 1,333 $34.6 billion
2013 1,275 $23.8 billion
2012 1,253 $36.1 billion
2011 1,246 $29 billion
2010 1,529 $39 billion
2009 1,272 $42 billion
*Data: Total Placements/Total Dollars 2009 –2015
PrivateRaise.com
60
This is MoFo. 61
Strategic uses of PIPE transactions • PIPE transactions remain an important alternative in a number of
instances, including:
• As a means of structuring a venture capital or private equity-type investment
(which may take place in a distressed context)
• In circumstances where the issuer is seeking to finance an acquisition
• For a smaller issuer, when the smaller issuer has already tapped out its shelf
registration statement or needs to preserve its shelf capacity
• For selling stockholders (to place selling securityholder stock in an orderly way)
This is MoFo. 62
VC/Private equity PIPE • Venture capital or private equity funds will often invest in public
companies – either to increase their position or as a new investment if valuations make it attractive.
• Often a VC or a PE fund will invest in a public company as part of a recapitalization transaction.
• Why should these be structured as PIPE transactions?
• Highly customized security;
• Usually the investor will want to do its own diligence and is likely to acquire
material and non-public information that will not be capable of being disclosed by
the issuer after the transaction is completed (so the VC/PE firm will continue to be
restricted);
• The investors will likely want other contractual protections (affirmative/negative
covenants, information rights);
• The investors may want board representation;
• The investors will not be as focused on their resale opportunities or if they are
insiders/control persons will face other limitations
This is MoFo. 63
VC/Private equity PIPE (cont’d)
• These deals raise a host of issues that usually do not arise in other
PIPE transactions:
• Change of control issues:
• Company’s agreements
• Poison pill/rights plan
• NASDAQ or other change of control provisions
• Dilution for other shareholders and litigation risk
• Change of control premium issues
• Fiduciary duty and other governance issues
• Fairness opinions
This is MoFo. 64
PIPE to finance an acquisition • Why a PIPE?
• Marketing reasons:
• It may be important to share with potential purchasers a fair bit of information
about the acquisition (all material non-public information) and restrict their
ability to trade for an extended period of time
• Important to assess when this information will be shared broadly and/or when
the information will become stale
• Lack of “current information:”
• Is the acquisition material?
• Is pro forma information required to be filed?
• Pro forma information may not be available
• A comfort letter may not be available that could cover the financial information
• These considerations may make it impossible to undertake a registered
offering
This is MoFo. 65
PIPE for smaller issuers • Smaller issuers are subject to the 1/3 cap for primaries.
• Unfortunately, the cap may not provide sufficient flexibility for the issuer to raise much needed capital.
• An alternative for the issuer is to structure a PIPE or a 144A or other exempt offering alongside a take down off of a shelf (subject to the 1/3 cap):
• Things to consider:
• General solicitation issues: an issuer contemplating a PIPE or other exempt
offering in close proximity to a public offering should consider whether the public
offering may have been a “general solicitation” that renders the offering exemption
unavailable for the PIPE.
This is MoFo. 66
PIPE for selling securityholders • A significant securityholder or group of securityholders may wish to
dispose of their securities.
• These securities may be restricted securities because:
• They were acquired in an exempt offering, or
• The securityholders are affiliates of the issuer (“control stock”)
• Why should these be structured as PIPE transactions?
• Permits the securityholders to dispose of their securities in an organized manner
without disrupting the market for the issuer’s securities.
• Helps to avoid the downward pressure on the issuer’s stock price as a result of
alternative means of disposing of the securities, such as:
• Dribbling out securities over a period of weeks
• Dumping the issuer’s stock in a block trade
• The transaction is not announced until definitive purchase agreements are signed
(the issuer’s stock will not suffer the downward pressure associated with an
overhang).
This is MoFo. 67
PIPE for selling securityholders (cont’d)
• How is this accomplished?
• By utilizing the Section 4(a)(1½) exemption:
• Can be used by institutional investors to resell restricted securities purchased in a
private placement.
• Can also be used by affiliates for the sale of control securities when Rule 144 is
unavailable.
• In a Section 4(a)(1½) transaction: • The seller must sell in a “private” offering to an investor that satisfies the
qualifications (for example, sophistication, access to information, etc.) of an investor in a Section 4(a)(2) private offering, and
• The investor must agree to be subject to the same restrictions imposed on the seller in relation to the securities (for example, securities with a restricted legend).
• Other considerations: • Requires the issuer’s cooperation to effect the PIPE transaction.
• Purchase agreement contains both issuer and selling securityholder reps & warranties.
This is MoFo. 68
Weighing the Alternatives
This is MoFo. 69
Why choose a registered direct? • Over a PIPE transaction?
• Same efficient marketing: If an issuer has an effective shelf registration
statement, a registered direct offering can be marketed as a PIPE transaction —
on a “stealth” basis.
• Often a preliminary prospectus is filed, making the offering known to the
public. However, the issuer and placement agent may agree not to file a
preliminary prospectus supplement until late in the process.
• Often better pricing: Investors receive registered, freely transferable securities,
thus, no ‘liquidity’ discount.
• Prompt Pricing and Closing: If the issuer has an effective shelf registration
statement (or is a WKSI that can file an automatically effective shelf) the offering
can be priced and closed promptly. In some cases, pricing can occur overnight or
in a few days.
• Not limited to accredited investors: Because these transactions are registered,
offerings can be made to any potential investor, subject to suitability requirements.
This is MoFo. 70
Why choose a registered direct? (cont’d)
• Over a traditional underwritten follow-on offering?
• Short selling: In a fully marketed underwritten offering, the market has advance
notice of the potential offering, and market participants may begin shorting the
issuer’s common stock in anticipation of the offering.
• Potentially better pricing: Depending on the length of the marketing period and
general market conditions, shorting activity in the issuer ’s securities may cause
the market price of the issuer ’s stock to decline (sometimes significantly) by the
pricing date. As a result, the pricing in a marketed follow-on generally may be
lower than the price in a registered direct offering.
• Speed and Costs: Registered directs are typically faster (and cheaper) than firm
commitment deals.
• No capital commitment: From the placement agent’s perspective, a registered
direct offering does not require any capital.
This is MoFo. 71
Registered directs • A registered direct is most efficient when the issuer already has an effective
primary shelf registration statement.
• A selling stockholder also may use a registered direct offering to sell its
shares—either alone or with primary (issuer) shares.
• A registered direct offering is a “distribution” for Regulation M purposes.
• Assess the applicable Regulation M restricted period; file Regulation M notice.
• There is no overallotment option in a registered direct offering.
• An over-allotment option relates principally to stabilizing in connection with a firm
commitment offering and is not applicable to a best efforts agency deal like a
registered direct offering, where a specified number of shares are sold to the
investors directly.
• A placement agent cannot engage in market stabilizing transactions in a best efforts
agency transaction, only in passive market making activities.
• NASDAQ and other 20% rule limitations are being applied to registered directs
unless agents can demonstrate a broad distribution that includes retail investor
participation.
• The 1/3 cap on primaries apply for smaller public companies.
This is MoFo. 72
Why a confidentially marketed public offering
(CMPO)?
• Assumes that the issuer already has an effective shelf registration
statement. Things to consider:
• Will the eventual offering be a public or a private offering?
• Is the issuer’s disclosure grid current? Is it necessary to file updated risk factors?
Is it necessary to provide guidance on the current quarter? on write-downs? on
anticipated ratings actions?
• What is the best approach for updating the issuer’s disclosures (if needed)?
• Plan ahead all of the required (or desired) filings (e.g., these may include: 8-K,
preliminary prospectus supplement or FWP, term sheet, press release, final
prospectus supplement).
This is MoFo. 73
Why a confidentially marketed public offering
(CMPO)? (cont’d)
• Over a registered direct offering? In general, many of the advantages of a
registered direct offering also apply in the context of a pre-marketed public
offering.
• Wider distribution: An advantage of a registered direct offering is that it is marketed
in a targeted manner. However, that often means that the offering is not as widely
distributed as other public offerings, in which case a pre-marketed public offering
may be attractive (it can be opened up to retail investors).
• 20% rule: If an issuer anticipates offering and selling a number of shares that
exceeds 20% of the total shares outstanding prior to the offering, and those shares
will be sold at a discount, a registered direct offering may not be considered a “public
offering” under the rules of the applicable exchange; thus presenting shareholder
vote issues under the 20% rule. A pre-marketed public offering may be an attractive
alternative because it is underwritten (important for NASDAQ) and in the second
(public) stage can be opened up to a broader universe of offerees.
• Perceived better pricing: Many issuers still view an underwritten offering to be the
most desirable financing alternative.
• Underwriter can stabilize or over-allot (if it chooses to do so): Depending on
market conditions, this may be important.
This is MoFo. 74
Bought Deals
This is MoFo. 75
Bought deals • Firm commitment transaction (sometimes referred to as an
“overnighter”) wherein the underwriter purchases the securities from
the issuer without pre-marketing
• An issuer or a selling securityholder may need certainty of execution, and, as a
result, may prefer a bought deal to a CMPO
• Generally, a bought deal will only be feasible for a WKSI
• Usually, it is easier to execute a bought deal following the filing of a 10-Q or 10-K
when the issuer’s disclosures are current
• The underwriter must use its best efforts to re-sell the securities
(once purchased)
• Bought deal volumes have increased as issuers selling new shares
and PE/VC sponsors reselling their shares have sought greater
certainty on deal execution and pricing
75
This is MoFo. 76
Bought deals (cont’d)
This is MoFo. 77
Process • An underwritten public offering (unlike a block trade, which may be agented, and
may involve restricted securities). The issuer and the underwriter enter into an
underwriting agreement containing all of the “standard” provisions
• The underwriters undertake customary diligence for a shelf takedown. The
process is abbreviated, and, as a result of the compressed time period, caution
should be exercised.
• The issuer may “bid” out the deal
• Usually, in the context of a deal that is being bid out, the issuer will have designated
underwriters’ counsel. In advance of notifying potential bidding banks, the issuer and
its counsel will have worked with designated underwriters’ counsel to obtain a draft
comfort letter, negotiate an underwriting agreement, and confirm that other deliverables
will be available at closing
• There is no pre-announcement. The deal is announced once the underwriting
agreement is executed. Investors would not be able to front-run the transaction.
• Sometimes, the issuer may announce the deal after market close and keep it open until
before market open the following day.
77
This is MoFo. 78
Communications • Typically, the transaction will be announced promptly after market close through the
issuance of a launch press release that will comply with Rule 134
• After the launch, it remains critical to maintain the confidentiality of the price that the
underwriters have agreed to pay the issuer (or the selling security holder) for the
securities.
• After the overnight marketing, underwriters may express confidence that they have
allocated the entire block of securities to accounts. However, the pricing
announcement should be deferred until all investor orders have been confirmed
• A gross proceeds number may be calculated and disclosed but this would not inform
the market of the price paid by the underwriters
• The underwriting discount and the fixed price are not in and of themselves material
78
This is MoFo. 79
Trading • After completion of a bought deal (completion in this context means the sale
by the issuer to the underwriter), the underwriter will re-sell the securities
• The underwriter may re-sell all of the securities at a fixed price (that price may
vary)
• The underwriter may re-sell the securities at varying prices
• The underwriter may hold shares in a proprietary account
• The underwriter may allocate to asset management accounts (subject to
compliance with applicable policies)
• Communications and trade reporting may vary depending on the
underwriter’s execution
• The issuer will disclose that the underwriter may vary the price at which the
securities are offered to the public and sell the securities from time to time in
various types of transactions. There is no announcement at pricing of a
single price paid to the issuer because the underwriters may still be long the
securities.
79