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2015 IPO Report CORPORATE
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2015 IPO Report – Table of Contents 2
US Market Review and Outlook
6
Regional Market Review and Outlook
– California
– Mid-Atlantic
–
– Tri-State
New England
8
Some Facts About the IPO Market
9
JOBS Act Relief: An Update on EGC Elections
10
Keeping Your DSP Company-Friendly
11
The Pros and Cons of an ESPP
12
Selected WilmerHale Public Offerings
14
Law Firm Rankings
16
The Many Faces of Director Independence
18
SEC Review: What to Expect When You’re Expecting to Go Public
22
Key Regulatory Diligence in an IPO
24
Initial Public Offerings: A Practical Guide to Going Public
2 US Market Review and Outlook REVIEW Building on the momentum from 2013, and boosted by a strong performance from life sciences and venture capital– backed companies, the 2014 IPO market produced 244 IPOs. The year’s total was the highest annual figure since 2000 and almost one-third higher than the annual average of 186 IPOs recorded between 2004 and 2007—the last period of sustained offering activity. The number of IPOs has seen a steady annual increase in all but one of the past six years, and the last seven quarters have each produced 50 or more IPOs—a level of consistently high activity not seen since 2000. Gross proceeds for 2014 were $74.4 billion, an 80% increase over the $41.3 billion in gross proceeds in 2013 and more than double the $30.8 billion average annual figure over the twelve-year period from 2001 to 2012. The 2014 figure is the third-highest yearly figure ever, trailing only the gross proceeds of $94.8 billion in 1999 and $108.1 billion in 2000.
US IPOs by Year – 1996 to 2014 # of IPOs
Dollar volume (in $ billions)
845
108.1 94.8 603 74.4
527 445
59.0 47.1
322
41.0
39.8
198
25.2 88
1996
1997
1998
1999
2000
2001
43.3
37.8 176
29.8
36.3
34.7 193
176
23.1
19.2 136
15.0
71
70
2002
2003
2004
2005
2006
2007
2008
2009
Emerging growth companies (EGCs) continued to dominate the IPO market in 2014. EGCs accounted for 85% of the year’s IPOs, compared to 82% in 2013 and 76% in the portion of 2012 that followed enactment of the JOBS Act. The median IPO offering size declined 11%, from $107.4 million in 2013 to $96.0 million in 2014, representing the lowest yearly figure since the $89.3 million median offering size in 2004. Among EGCs, the median IPO offering size in 2014 was $86.7 million—less than one-fifth of the $446.7 million median offering size for all other IPO companies. The median offering size for life sciences IPOs declined from $68.6 million in 2013 to $59.0 million in 2014. While the median offering size for non–life sciences IPO companies also declined, from $187.0 million in 2013 to $126.2 million in 2014,
2011
2012
2013
2014
Source: SEC filings
US IPOs by Quarter – 2011 to 2014 # of IPOs
Dollar volume (in $ billions) 72
58
54
51
50 20.4
40
36.1
60
57
There were nine billion-dollar IPOs in 2014, more than double the average of four billion-dollar IPOs per year that prevailed for the preceding twelve years. The largest IPO of the year—also the largest in history—was Alibaba’s $21.77 billion offering. The next four largest offerings in 2014 came from financial institutions, led by Citizens Financial Group ($3.01 billion) and Synchrony Financial ($2.88 billion).
2010
244 178
102
97
54
27
41.3
35.1
28.7
18.7
35 15.4
28
24
21 11.2
10.0 13
5.2
20
18 5.4
11.3
20
10.1
9.5
9.0 5.6
4.8
4.5
Q3 2012
Q4 2012
2.3 Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Source: SEC filings
Median IPO Offering Size – 1996 to 2014 $ millions 140.4
135.5 120.9
120.0
125.0
118.9 104.6
108.2
111.4
107.4 97.9
89.3
84.0
96.0
94.3
61.6
30.0
32.0
1996
1997
40.0
1998
Source: SEC filings
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Market Review and Outlook 3 the 2014 figure was largely in line with the $124.3 million annual median deal size for non–life sciences IPO companies for the five-year period preceding 2013.
Distribution of IPO Offering Size – 2012 to 2014 % 2012
% 2013
% 2014
21.6
The average 2014 IPO gained 14% from its offering price on its first trading day—down from the 21% gain for all IPOs in 2013, but still the fourthhighest annual figure since 2000. There were seven “moonshots” (IPOs that double in price on their opening day) in 2014—up from six moonshots in 2013. Only one of the seven moonshots, however, appreciated further over the remainder of the year. Ultragenyx Pharmaceutical eked out a 3% gain, while the other six saw an average decline of 40% from first-day close through year-end. In 2014, 27% of all IPOs were “broken” (IPOs whose stock closes below the offering price on their first day), compared to 22% in 2013. The average 2014 IPO company ended the year 24% above its offering price, topping the annual gains in the major market indices but falling well short of the 47% figure for all IPOs in 2013. Aftermarket gains were more modest, with the average 2014 IPO gaining only 9% from its first-day closing price through year-end. As of December 31, onequarter of all 2014 IPOs were trading at least 50% above their offering price, while 38% were trading below their offering price, and 44% were trading below their first-day close.
21.6 18.0
18.9
17.6
16.4
16.7
14.6
15.2
16.0
14.7
15.7
15.2 12.3
11.2
9.8
below $50M
$50M to $74.99M
$75M to $99.99M
$150M to $249.99M
$100M to $149.99M
10.1 9.8
9.0
7.8
7.8
$250M to $499.99M
$500M and above
Source: SEC filings
Average IPO First-Day and Year-End Gain by Year – 2000 to 2014 % First-day gain
% Year-end gain
52.6 47.4
33.3 27.8 18.8 13.5 14.3
12.8
12.6
11.3
8.6
27.6
25.1
11.5
22.0 14.8 15.9
18.4 12.8 9.3
10.6
23.6
21.4
15.9
13.6
14.4
-1.3
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-13.4
The ten best-performing IPOs of 2014 came from six life sciences and four tech companies, all venture-backed. The year’s best performer was Radius Health, which was trading 386% above its offering price at year-end, followed by Auspex Pharmaceuticals (up 337%), Kite Pharma (up 239%) and TubeMogul (up 222%). With life sciences company IPOs accounting for an increasing share of the overall IPO market—14% in 2012, 28% in 2013 and 40% in 2014—median annual revenue and profitability measures for IPO companies have plunged. The median annual revenue for IPO companies fell by one-third between 2012 and 2013, from $133.6 million to $89.9 million, and plummeted a further 24%, to $68.2 million, in 2014—the lowest level since 2000. The percentage of profitable IPO companies declined from 55% in 2012 to 43% in 2013, and to 36% in 2014.
-19.4
-36.8
Median Annual Revenue of IPO Companies – 1998 to 2014 $ millions 267.5 229.0
161.0
144.5 105.9 85.7
35.0
1998
17.9
17.6
1999
2000
2001
Source: SEC filings and IPO Vital Signs
2002
2003
2004
133.6
126.0
111.1
97.6
98.7
89.9
74.5
2005
2006
2007
68.2
2008
2009
2010
2011
2012
2013
2014
4 US Market Review and Outlook Among all life sciences IPO companies in 2014, median revenue was just $1.2 million, and only 13% were profitable. Excluding life sciences companies, median annual revenue of EGC IPO companies declined by only 5% between 2012 and 2013, from $120.6 million to $114.5 million, and then fell a further 8%, to $105.4 million, in 2014. The percentage of profitable non– life sciences EGC IPO companies slipped from 49% in 2013 to 46% in 2014. The median annual revenue for non-EGC IPO companies declined by 9%, from $2.54 billion in 2013 to $2.32 billion in 2014. The percentage of profitable non-EGC IPO companies decreased from 75% in 2013 to 61% in 2014.
Percentage of Profitable IPO Companies – 1998 to 2014 % 81
65
61 56
62
59
67
64
59
58
52
55
51
43 36
1998
26
26
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: SEC filings and IPO Vital Signs
Individual components of the IPO market fared as follows in 2014: ■
■
■
VC-Backed IPOs: The number of IPOs by venture capital–backed US issuers increased 42%, from 72 in 2013 to 102 in 2014. VC-backed IPOs accounted for 56% of all US issuer IPOs in 2014. The median offering size for US venture-backed IPOs declined 3%, from $77.3 million in 2013 to $75.0 million in 2014—the lowest yearly figure since the $71.0 million median offering size in 2006. The median deal size for non–VC backed companies in 2014 was $150.0 million. The average 2014 US issuer VC-backed IPO gained 32% from its offering price through year-end. PE-Backed IPOs: Private equity–backed IPOs by US issuers declined 6%, from 48 in 2013 to 45 in 2014. PE-backed issuers accounted for one-quarter of all US-issuer IPOs in 2014, down from 34% in 2013. The median deal size for PE-backed IPOs in 2014 was $231.5 million—almost triple the $81.2 million deal size for all other IPOs. The average PE-backed IPO in 2014 gained 16% from its offering price through year-end. Life Sciences IPOs: Life sciences companies captured 40% of the US IPO market in 2014, with 98 IPOs—almost double the 50 IPOs from this sector in 2013, a figure itself 16% higher than the annual average of 43 life sciences IPOs that prevailed in the three-year period between 2010 and 2012. The average 2014 life sciences IPO company ended the year 35% above its offering price,
Median Time to IPO and Median Amount Raised Prior to IPO – 1996 to 2014 # of years
Median amount raised prior to IPO (in $ millions) 100.9 89.6
8.7 70.0 5.7
3.1 15.0
1996
2.8
22.4
2.8
5.7
49.0
46.9 4.5 47.8 3.5
60.2
6.8 6.2 5.6
82.8
8.1
7.9
71.1 64.5
78.4 7.4
6.4
6.8
6.9
2013
2014
57.3
51.0
48.6 42.5
3.6
31.3 3.1
13.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Dow Jones VentureSource and SEC filings
and 62% of the year’s crop were trading above their offering price at year-end. ■
■
Tech IPOs: Deal flow in the technology sector remained strong in 2014. Techrelated companies (excluding life sciences companies) produced 69 IPOs, the largest number since 2000. However, the tech sector’s share of the US IPO market fell to 28% in 2014, down from the average of 40% in the preceding five years, due to the large influx of life sciences company IPOs. Aftermarket performance of tech IPOs was about on par with the rest of the market in 2014, with an average gain through yearend of 24%, compared to the average gain of 23% for non-tech IPOs. Foreign Issuer IPOs: The number of US IPOs by foreign issuers climbed from 36
in 2013 (20% of the market) to 60 in 2014 (25% of the market)—eclipsing the 56 in 2007, which had represented the highwater mark for foreign issuer IPOs since 2000. The number of US IPOs by Chinese issuers increased by 75%, from eight in 2013 to 14 in 2014. Israeli companies were the next most prevalent among foreign issuers, with 12 IPOs in 2014, more than double the five Israeli issuer IPOs in 2013, followed by UK issuers with six IPOs in 2014 compared to three in 2013. Aftermarket performance for foreign issuer IPOs in 2014 was, however, essentially flat. The average foreign issuer IPO company produced a gain of only 1% from its offering price through year-end. In 2014, 94 companies based in the western United States (west of the Mississippi
US Market Review and Outlook 5 River) completed IPOs. Eastern US–based issuers accounted for 90 IPOs, and foreign issuers accounted for the remaining 60 IPOs. California led the state rankings with 54 IPOs, followed by Massachusetts (with 23 IPOs), Texas (with 20 IPOs) and New York (with 10 IPOs).
Venture Capital–Backed IPOs – 1996 to 2014 # of VC-backed IPOs 261
■
■
■
Economic Growth: While the US economy has seen improvements in a number of key metrics, including job creation and an increase in household purchasing power due to declining energy prices, wage growth remains modest and the workforce participation rate—the labor force as a percentage of the whole population—is at its lowest level since 1978. Moreover, after more than six years with interest rates at historic lows, recent Fed statements raise the specter of a hike in interest rates later this year. Sustained economic growth will be key if the IPO market is to maintain or increase the pace that prevailed in 2014. Capital Market Conditions: Stable and robust capital markets remain a precursor to IPO activity. The major US indices posted impressive annual gains once again in 2014, with the Dow Jones Industrial Average, Nasdaq Composite Index and S&P 500 increasing 7.5%, 13.4% and 11.4%, respectively. On the heels of very strong gains in each of the past three years, similar gains may not be realistic in 2015, but a reduction in the market volatility that has periodically stalled IPO deal flow in recent years would help the market. Venture Capital Pipeline: Venture capitalists depend on IPOs—along with company sales—to provide liquidity to their investors. There has been a resurgence in VC-backed IPOs over the last five years, including IPOs by a number of high-profile companies, and the pool of attractive VC-backed IPO candidates remains large. Although venture capital investors often prefer a sale over an IPO because a sale usually can be completed faster and with greater certainty than an IPO, the outsized valuations that can be achieved in the
20.3
211
21.0 201 19.3
120
OUTLOOK IPO market activity in the coming year will depend on a number of factors, including the following:
Dollar volume (in $ billions)
8.0
73 5.1
1996
1997
63 5.7 43
4.0
1998
1999
2000
25 2.0
20 1.6
23 1.6
2001
2002
2003
2004
8.6
72 7.2 48 2.7
2005
3.9
2006
2007
7 0.7
9 1.2
2008
2009
102 9.9
72
6.7 51
43 4.2
42
2010
2011
2012
2013
2014
Source: Dow Jones VentureSource and SEC filings Based on US IPOs by VC-backed US issuers.
Private Equity–Backed IPOs – 1996 to 2014 # of PE-backed IPOs
Dollar volume (in $ billions) 19.4
60
17.4 52 14.8
32 21 6.4
18 3.8 1.6
1997
4.7 1.8
1999
2000
16
14
11
2.7
1998
28 7.2
23 19
2001
17
5.8
5.2
3.9
2.7
2002
5
2003
2004
2005
2006
45
12.1 32 9.7
8.7
18
1996
48 13.2
41
2007
16
1.0
2008
2009
2010
2011
2012
2013
2014
Source: Thomson Reuters and SEC filings Based on US IPOs by PE-backed US issuers.
public market may be shifting the sale/ IPO pendulum back toward IPO exits for the most valuable VC-backed companies. ■
■
Private Equity Impact: Private equity investors seek to divest portfolio companies or achieve liquidity through IPOs. With private equity firms holding near-record levels of “dry powder” (unspent capital that investors have committed to provide), and general partners facing deadlines as the investment window starts to close on funds raised in 2007 and 2008, private equity sponsors can be expected to continue to pursue IPOs aggressively in 2015. Impact of JOBS Act: Enacted with great fanfare in April 2012, the JOBS Act is intended to improve access to the
public capital markets for EGCs. The vast majority of all IPO candidates can qualify as EGCs, but the extent to which the JOBS Act is responsible for the increase in the number of IPOs over the past two years is unclear. In any event, the confidential submission provisions of the act and the significant increase in the maximum number of stockholders that a private company may have without registering as a public company has given emerging companies more flexibility in timing their IPOs. The IPO market has entered 2015 at a measured pace, with only 19 IPOs in January and February, compared to 37 in the first two months of 2014. If favorable market and economic tailwinds continue to prevail, however, a stream of new offerings should follow throughout the year.
