Welcome to this fourth edition of Proskauer’s IPO Study. In it you will find our analysis of market practices and trends for U.S.-listed initial public offerings (IPOs). Our proprietary database and analyses now cover 376 IPOs that priced between 2013 and 2016.
The 2016 IPO Market*
The U.S. IPO market got off to a very slow start in 2016. No IPOs priced in January. The market remained muted throughout the year as only 30 IPOs priced in the first half of 2016, a 60% decrease from 75 IPOs for the same period in 2015 and the lowest since 2009. In total, 79 IPOs priced in 2016, which is roughly the number that priced in the first half of 2015 alone. A number of factors, including Brexit and the U.S. presidential election, contributed to market slowness and volatility. The average base deal value in 2016 was $214 million, the same as 2015, both of which were the lowest average base deal value since 2005.
2017 So Far*
2017 is shaping up to be a much better year than 2016, with 20 IPOs priced through the first quarter of 2017 compared to only six IPOs for the same period in 2016. Nevertheless, the start is still slower than recent years, with fewer IPOs in the first quarter than in any year from 2010 to 2015. We have seen relatively fewer health care IPOs than in previous years. Energy & Power (E&P) and Technology, Media and Telecommunications (TMT) were the sectors in the first quarter with the most IPOs. The biggest news of the year to date has been the IPO of Snap Inc. (case study on page 43), which had a base deal value of $3.4 billion. This is the largest IPO since Alibaba in 2013 ($21.8 billion base deal). In addition, there have been indications that the SEC may take steps to make the regulatory environment more attractive for IPOs in 2017 and the near future. Priorities may include greater access to the U.S. capital markets for non-U.S. companies, as well as more investment opportunities for “Main Street” investors in IPOs. The timing and impact of any regulatory changes is uncertain.
Two relatively quiet years for mega-IPOs and decrease in average base deal size
In 2014, we reviewed nine mega IPOs that had base deal values of more than $1 billion and constituted 8% of IPOs in our study. In 2016 (similar to 2015), our study included only three $1 billion+ IPOs, comprising only 4% of the overall IPOs in our study. At the same time, for the second year in a row, we saw the average and median deal size decrease (average base deal size of $214 million in 2016 compared to $259 million in 2014, a 17% decrease)¹. There is speculation that the Snap IPO will open the door to more mega-IPOs in 2017, particularly as a number of significant prospective IPOs have been announced or are rumored to be in the pipeline.
Greater market acceptance of less financial information
The market appears to be more comfortable with less financial information from emerging growth companies (EGCs). In 2016, almost five years since the passage of the JOBS Act, 75% of EGCs included two instead of three years of audited financial statements (a 92% increase since 2013) and 60% of EGCs included only two years of selected financial statements (a 67% increase since 2013). Only 15% included five years of selected financial statements in 2016, compared to 28% in 2013. We also saw a 47% increase in foreign private issuers (FPIs) including two years, instead of three years, of audited financial statements since 2013, up from 43% to 63%.
Testing-the-waters communications predominately used by health care and TMT issuers
While underwriters and issuers appear to have become comfortable with using pre-IPO testing-the-waters communications to obtain feedback from potential investors, the use of these communications appears to be predominantly by biotech and biopharm issuers in the health care sector and TMT issuers. In our 2016 study, 100% of disclosed testing-the-waters communications were by issuers in these sectors. Similarly, from 2013 to 2016, 90% of the issuers that disclosed testing-the-waters communications in our study were in these sectors. Issuers in these sectors may make greater use of testing-the-waters communications because they often have shorter operating histories, lack revenue or net income or have untested marketing stories.
Continued decrease in SEC comments…..
We continue to see a decrease in the average and median number of SEC comments in the first comment letter. Since 2013, there has been a 40% decrease in the number of first-round comments. This decrease appears to be partially related to issuers receiving fewer boilerplate comments, i.e., comments that are not issuer specific and relate more to general process requirements. In addition, the only JOBS Act-related comment that appears to still be issued consistently is the request for testing-the-waters communications materials. 2016 also saw a significant decrease in the maximum number of comments issued in a first comment letter, decreasing to 55 from 78 in 2015 and a three-year average of 85 from 2013 to 2015. The average number of comment letters received by an issuer during the SEC review process was four. The average number of comments in the first, second and third comment letters were 25, six and four, respectively.
..…but issuers took longer to go public in 2016
Although the number of SEC comments has continued to decrease over the last few years, the average time that it took issuers from first submission / filing to pricing significantly increased in 2016 to 221 days, up from 156 days in 2015 and 123 days in 2014. This development was likely driven by general market volatility and uncertainty created by the geopolitical environment with issuers and underwriters taking a wait-and-see approach.
SEC hot button comments driven by sector
Certain types of comments have become SEC staff hot buttons for different sectors. For example, from 2013 to 2016, 66% of health care issuers received a cheap stock comment, 83% of TMT issuers received a revenue recognition comment, 61% of industrials issuers received an operating segment comment, and, from 2014 to 2016, 70% and 64% of TMT and E&P issuers, respectively, received a back-up support request comment. In the health care sector, cheap stock comments are likely more common given the significant use of equity as a compensation tool and the continuous fundraising activity in which biotech/biopharma issuers are engaged. In the TMT sector, revenue recognition comments reflect the complex accounting issues raised by contractual arrangements typical for TMT issuers. Further, we suspect that industrials and consumer issuers are more likely to receive operating segment comments given the potential for these issuers to have multiple discrete business and geographic units.
SEC focused on non-GAAP financial measures
IPOs have not been spared the SEC’s increasing scrutiny of the use of non-GAAP financial measures. In 2016, 47 of 66 (71%) issuers in our study disclosed at least one non-GAAP measure. Of these 47 issuers, 26 (55%) received at least one comment on non-GAAP measures. In our study, sponsor-backed issuers were more likely to disclose at least one non-GAAP measure (96% of sponsor-backed IPOs disclosed a non-GAAP measure vs. 44% of non-sponsor-backed IPOs).
Ongoing trend of issuers disclosing a material weakness in internal controls
The trend that we identified in last year’s study of issuers disclosing a material weakness in internal controls has continued. In 2013, 17% of issuers disclosed a material weakness. In each of 2014, 2015 and 2016, approximately one-third of issuers disclosed a material weakness. Notably, our study indicated no material effect on pricing or aftermarket performance for these IPOs.
More almost-independent boards of controlled companies
Although the average percentage of board independence has remained relatively stable, between 60% and 65% over the last four years, we have seen an increase in the average percentage of board independence for controlled company boards. In 2013, the average percentage of board independence was 37% for controlled companies; this percentage was 47% in 2016.
Sponsor-backed deals with a secondary component remain consistent; secondary sales by management continue to decrease.
While sponsor-backed IPOs with a secondary component have remained stable over the last four years (32%, 34%, 30% and 39% in 2013, 2014, 2015 and 2016, respectively), the percentage of non-sponsorbacked deals with a secondary component has dropped dramatically from 21% in 2013 to 7% in 2016. There has also been a 71% decrease in the percentage of IPOs with a secondary component that included sales by an issuer’s management, from 52% in 2013 to 15% in 2016.
Insider purchasing continues to increase
We have seen a significant increase in insider purchasing in IPOs from 21% in 2013 to 45% in 2016. Insider purchases are most prevalent in the health care and TMT sectors and are being driven overall by the significant percentage of deals these two sectors have contributed over the last four years. We have identified a four-year trend showing that these deals have frequently priced below the range, but then demonstrated relatively strong aftermarket performance. In 2016, IPOs with insider purchasing, insiders purchased an average of 34% of the shares sold in the IPO. This is up from 21%, 27% and 21% in 2015, 2014 and 2013, respectively.
Multiple classes are trending towards better pricing and performance
In each year from 2013 to 2016 (except in 2014), we saw IPOs with multiple classes of common stock price above or in the range more frequently than IPOs without multiple classes of common stock. In each of those years, aftermarket performance was similar; however, 2016 marked the first time that for each measurement period, IPOs with multiple classes of common stock outperformed those without. For the same four-year period, IPOs in TMT and financial services comprised 57% of the IPOs with multiple classes of common stock, and IPOs in these two sectors generally outperformed the average of all other sectors.
We hope you enjoy the 2017 IPO Study and welcome your feedback. Please feel free to contact any of our lawyers listed inside the front cover.
* Source: Dealogic: SEC registered IPOs with initial deal value greater than $50mm+ and excludes BDCs, BCCs/SPACs and REITs.
Trend statistics presented in the executive summary are from our four year analysis dataset, which excludes FPIs and MLPs for comparability purposes.