OneMedForum SF 2O12 - The New Markets Movement

The Need For New Stock Markets:
The Loss of the Revenue Model Needed to Support Stocks
is Destroying Capital Formation
The New Markets Movement
OneMedForum SF 2012
San Francisco, CA
January 9-12, 2012

David Weild
212.542.9979
david.weild@us.gt.com
david.weild@cmapartners.com

© Grant Thornton and Capital Markets Advisory Partners

A catastrophic fall in the number of listed
companies (43%)
As seen in the study "A wake up call for America"*
200
China
Indexed value of selected global exchange listings

150

Hong Kong

100

Australia
(1997 = 0)

50
Germany

Tokyo
0
London Toronto

(50)
United States

(100)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Grant Thornton LLP, Capital Markets Advisory Partners, World Federation of Exchanges and individual stock exchanges YTD

*March 16, 2011; House Financial Services Committee ―Hearing on Legislative Proposals to Promote Job Growth, Capital Formation and Market Certainty‖ statement by David Weild

© Grant Thornton and Capital Markets Advisory Partners. May be used in whole or in part, with attribution.
2

Current bills before Congress primarily
address cost to issuers and the private market
Disclosure
Standards
• H.R. 1070 (Reg. A)
• H.R. 2930 (crowdfunding)

• H.R. 1070 (Reg. A)
• H.R. 1965 (banks; 500-2,000 shareholders)
• H.R. 2940 (general solicitation, Reg. D)
• H.R. 2930 (crowdfunding)
• H.R. 2167 (500-1,000 shareholders)

There are numerous bills attacking costs to
issuers, but the lack of an aftermarket support
model (incentives to dealers) is the key
problem that must be addressed!
• H.R. 1070—Passed House: 421-1
– Enhanced Reg. A bill takes cap from $5 million to $50 million
– Raises threshold for banks from 500 to 2,000 shareholders before
registration is triggered
– Repeal of the prohibition against general solicitation in Reg. D offerings
– Crowdfunding exemption for up to $1 million without an audit and $2
million with an audit
• H.R. 2167—Sent to House by HFSC
– Raises threshold from 500 to 1,000 shareholders before registration is
triggered
4

IPO success rates have been in sustained
decline for nearly two decades, despite deals
that are increasing in average size and maturity

Success rate of trailing 30 IPO filings

Source: Capital Markets Advisory Partners, LLC, All rights reserved
Includes only corporate issuers. Excludes funds, MLPs, SPACs and REITs.

5

Unprecedented volatility (S&P 500)
Standard & Poor's 500 index moves of 4% or higher

Intraday price volatility Closing price volatility
4% 4%

3% 3%

2% 2%

Excluding 2008
and 2009
1% 1%

0% 0%
1960s 1970s 1980s 1990s 2000s 2010s* 1960s 1970s 1980s 1990s 2000s 2010s*

*Analysis through 9/30/11
Source: Grant Thornton LLP, Capital Markets Advisory Partners and Capital IQ
Original analysis from "Market Swings are Becoming New Standard," New York Times, September 11, 2011

6

IPOs take > 3 times as long to get through the
SEC than they did 20 years ago

Number of days in registration
(Trailing 30-deal average)

7

The small IPO market collapsed with the
OHRs and Reg. ATS (loss of B/D incentives)
As seen in the study "Market structure is causing the IPO crisis—and more"

Percent of total U.S. IPOs
100%
Allegations of Spread Fixing (1994)
90% Manning Rule (1996) Transactions raising at least $50 million
80% OHRs (1997)
Regulation ATS (1998)
70%

60% Decimalization (2001)
50%
Sarbanes-Oxley (2002)
40% Reg. NMS (2005)

30%

20%

10% Transactions raising less than $50 million

0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Grant Thornton LLP, Capital Markets Advisory Partners and Dealogic YTD
Data includes corporate IPOs as of 6/30/11, excluding funds, REITs, SPACs and LPs
8

We should have enjoyed a venture-backed post
1990s 'IPO Echo Boom,' but the OHRs and
Reg. ATS short-circuited it
$120
U.S. Venture Capital Raised (In Billions)

Source: National Venture Capital Association
Data as of 6/30/11
$100

$80

$60

$40

$20

$0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
"Penny Stocks" Deal Size < $50 Milllion Deal Size ≥ $50 Million U.S. Unemployment Rate
12% 900
Sources: Grant Thornton LLP, Capital Markets Advisory Partners, Dealogic and U.S. Department of Labor
Data includes corporate IPOs as of 6/30/11, excluding funds, REITs, SPACs and LPs 800
10%
U.S. Unemployment Rate

700

Number of U.S. IPOs
8% 600
500
6%
400
4% 300
200
2%
100
0% 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
9

We believe the loss of small IPOs is a major
contributor to job loss in the United States
As seen in the study "Market structure is causing the IPO crisis—and more"

"Penny Stocks" Deal Size < $50 Milllion Deal Size ≥ $50 Million U.S. Unemployment Rate
12% 900

800
10%
700

8% 600

Number of U.S. IPOs
500
6%
400

4% 300

200
2%
100

0% 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Grant Thornton LLP, Capital Markets Advisory Partners, Dealogic and U.S. Department of Labor YTD
10

We should be approaching 1,000 IPOs/year
and < 5% unemployment
U.S. IPOs (Actual) U.S. IPOs (Projected)
U.S. Unemployment Rate (Actual) U.S. Unemployment Rate (Projected)
12% 1,000

900

10%
800

700
8%

Number of U.S. IPOs
600

6% 500

400

4%
300

200
2%

100

0% -
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Est. Est. Est.
The 'U.S. IPOs (Projected)' estimate assumes 520 IPOs per year starting in 1991 with a 3% compound annual growth rate equivalent to
the U.S. GDP growth rate. A simple linear regression model was created using historical data to predict the 'U.S. Unemployment Rate
(Projected)' based on this number of projected IPOs.
Sources: Grant Thornton LLP, Capital Markets Advisory Partners, Dealogic and U.S. Department of Labor
11

IPOs > $500 million have demonstrated the
steepest decline of all

with proceeds of at least $500 million


12

By 2010 – Small cap shifting out of Top 100
Distribution of fundamentally oriented U.S. institutions in 2010
Each tier = 100* institutions ranked by equity assets (e.g., 1st tier = top 100 institutions)
Market Value ≤ $2 billion Market Value > $2 billion
$8,000,000,000,000

$7,000,000,000,000

2010
$6,000,000,000,000

$5,000,000,000,000
Equity Assets

$4,000,000,000,000

$3,000,000,000,000

$2,000,000,000,000

$1,000,000,000,000

$0
Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

*36th tier = 43 institutions
13

Smaller accounts have larger interest in small cap
Distribution of fundamentally oriented U.S. institutions in 2010:
Equity assets less than $1 billion
Each tier = 100* institutions ranked by equity assets (e.g., 1st tier = top 100 institutions)
Market Value ≤ $2 billion Market Value > $2 billion
$1,000,000,000

2010
$800,000,000

$600,000,000
Equity Assets

$400,000,000

$200,000,000

$0
Tier 32 Tier 33 Tier 34 Tier 35 Tier 36
*36th tier = 43 institutions
14

.Loss of the Ecosystem: Underwriting Groups
Microsoft’s IPO (1986) vs. LinkedIn’s IPO (2011)

15

Microsoft IPO: $58,695,000 March 13, 1986
Underwriter Table from Final Prospectus 116 Underwriters (p. 1 of 3)

Source: Microsoft IPO Final Prospectus
16

Underwriter Table from Final Prospectus 116 underwriters (p. 2 of 3)

17

Underwriter Table from Final Prospectus 116 underwriters (p. 3 of 3)

18

LinkedIn IPO: $352,800,000 May 18, 2011
Underwriter Table from Final Prospectus 5 underwriters

Source: LinkedIn IPO Final Prospectus
19

An Issuer Bill of Rights
• Issuers deserve transparency in the trading of their shares
– Provide issuers with the names of all investors that have transacted, long and short,
in their stock, within 7 days of trading.
– All funds down to $10 million in size should report holdings (long and short) at least
quarterly. This would ease investor targeting for small cap issuers.
• Issuers deserve choice in how the market in their shares is made and
supported
– Issuer Boards of Directors should be allowed to determine ‗tick size‘ which would cost
little to implement and provide an important tool to impact support (research, sales
and capital) and modulate speculative trading and volatility.
• Issuers should have increased representation within the Division of Trading &
Markets
– There should be strong representation for both small companies and large
companies in decisions that impact the trading and support of their shares.
• Issuers (and Americans) deserve a sub-$2 billion market cap stock market
structured to create focus on capital formation and job creation (see Wall Street
Journal Op-ed dated October 28, 2011, entitled “How to Revive Small-Cap
IPOs”)
20

Appendix

21

Less than one-third of very small IPOs (< $50
million) are successful in today’s market

with proceeds < $50 million

22

IPOs that raise $50-$100 million

with proceeds of $50-$100 million


23


Success rate of trailing 30
IPO filings with proceeds of
$100-$250 million


24


with proceeds of $250-$500 million


25

IPOs > $500 million have demonstrated the
steepest decline of all

with proceeds of at least $500 million


26

IPOs that have priced within 1 year of filing—
trailing 30 filings


27

IPOs that have priced at or above the low end of
the range—trailing 30 filings


28

IPOs that are trading at or above issue price 30
days after pricing—trailing 30 filings

29

H.R. 1070
Small Company Capital Formation Act of 2011

• Sponsored by David Schweikert (R-AZ)
• Enhanced Regulation A bill raises the offering amount threshold that
triggers registration from $5 million to $50 million
• Authorizes the SEC to require an issuer to make periodic disclosures
available to investors regarding the issuer, its business operations,
its financial condition, and its use of investor funds
• Requires the SEC to review the offering amount limitation
periodically and raise it as appropriate
• 5/4/11 Markup: Bill passes subcommittee
• 6/22/11 Markup: Bill passes full HFSC
• 11/2/11 Vote: Passes the House 421-1

30

H.R. 1965
To amend the securities laws to establish certain thresholds for
shareholder registration, and for other purposes
• Sponsored by Jim Himes (D-CT)
• Raises the threshold that triggers registration from 500 to 2,000
record shareholders for banks and bank holding companies
• Changes the threshold of assets from $1 million to $10 million
• Modifies the threshold for deregistration in the Exchange Act for a
bank or bank holding company from 300 to 1,200 shareholders
• Requires the SEC to conduct a cost-benefit analysis of shareholder
registration thresholds
• 10/5/11 Markup: Bill passes subcommittee
• 11/2/11 Vote: Passes the House 420-2

31

H.R. 2940
Access to Capital for Job Creators Act

• Sponsored by Kevin McCarthy (R-CA)
• Requires the SEC to eliminate the prohibition against general
solicitation or general advertising as a requirement for exemption
under Regulation D
• 10/5/11 Markup: Bill passes subcommittee with Waters (D-CA)
amendment that would require an issuer to verify investors are
accredited; using SEC parameters
• 11/3/11: Passes the House 413-11

32

H.R. 2930
Entrepreneur Access to Capital Act

• Sponsored by Patrick McHenry (R-NC)
• Crowdfunding exemption for offerings up to $1 million per year
without an audit and $2 million per year with an audit, so long as an
individual‘s investment is equal to or less than the lesser of $10,000
or 10% of the investor‘s annual income
• Exempts crowdfunding from shareholder caps and preempts state
laws
• 10/5/11 Markup: Bill passes subcommittee without Dem support
• 10/26/11 Markup: Bill passes full HFSC; amendments by McHenry,
Maloney, Stivers, Green and Grimm
• 11/3/11: Passes the House 407-17

33

H.R. 2167
Private Company Flexibility and Growth Act

• Sponsored by David Schweikert (R-AZ)
• Increases from 500 to 1,000 the threshold number of shareholders
for required SEC registration
• Exempts employees and qualified accredited investors from
definition of shareholder of record
• This bill was discussed during a HFSC hearing on Capital Formation
on September 21
• If adopted, it would be the first time the threshold had been adjusted
since originally adopted in 1964
• 10/5/11 Markup: Bill passes subcommittee with Garrett (R-NJ)
amendment that would eliminate exemptions for unlimited number of
accredited investors

34

About Grant Thornton

35

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Capital Markets Resources

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About Capital Markets Advisory Partners

39

Capital Markets Advisory Partners
About Capital Markets Advisory Partners, LLC

Capital Markets Advisory Partners is an advisor, thought leader and These studies, supported and published by Grant Thornton, have
innovator in the capital markets. We serve issuers, investment been cited by Members of Congress and Regulators in the US and
managers, investment banks and stock exchanges in areas that overseas and by leading publications including, The Economist,
intersect capital formation, including initial public offerings, follow- Forbes, The Financial Times, The New York Times and The Wall
on offerings, mergers and acquisitions, fund launches, fund raises Street Journal.
and investor outreach. Collectively, we bring hundreds of years of
experience from leading institutions. Recently, this work was also cited in:
• The President’s Council on Jobs and Competitiveness (Jobs
Studies authored by two of our principals (David Weild and Edward Council) Interim Report led by Jeffrey Immelt of General Electric
Kim) and supported and published by the major accounting, tax • The IPO Task Force Report to the US Treasury, led by Kate
and advisory firm of Grant Thornton have been entered into the Mitchell, past Chairman of the National Venture Capital
Congressional Record and the Federal Register and our principals Association.
have participated in or testified in front of:
• The NYSE and National Venture Capital Association’s (NVCA) Capital Markets Advisory Partners was founded by David Weild, the
Blue Ribbon Panel to restore liquidity in the US venture capital former vice chairman and head of listed companies and related
industry (2009) businesses at NASDAQ and former head of equity capital markets
• The CFTC-SEC Joint Panel on Emerging Regulatory Issues and corporate finance at Prudential Securities. David also serves as
(2010) Chairman of the Small Business Financing Crisis Task Force of the
• The House Financial Services Committee’s Subcommittee on ISEEE (International Stock Exchange Executives Emeriti).
Capital Markets (2011)
• The U.S. Treasury’s Capital Formation Conference (2011).

40

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