Christopher Roehrig joined Practical Law from Torys LLP, where he was a senior associate in the corporate and capital...
Renee Karibi-Whyte, a Director with the Legal Know-How group (Practical Law, Practice Point, West LegalEdcenter) of Thomson Reuters, has...
2016 was a slow year for Initial Public Offerings (IPOs), but 2017 holds more promise, especially with larger companies, like Airbnb and Spotify, expected to go public. In this episode of Thomson Reuters: Down the Hall with Practical Law, host Renee Karibi-Whyte discusses IPOs with Chris Roehrig, senior legal editor at Practical Law. In their discussion, they cover what IPOs are, their future market, and how lawyers are involved. Additionally they discuss dual class share structures and investors’ increasing interests in foreign stock markets.
Christopher Roehrig joined Practical Law from Torys LLP, where he was a senior associate in the corporate and capital markets practice groups.
Down the Hall with Practical Law
A Lawyer’s Guide to IPOs
Intro: Welcome to Thomson Reuters: Down the Hall with Practical Law, the show that provides practical insights and expert know-how in trending legal issues. No legalese, just expertise, with you host, Renee Karibi-Whyte.
Renee Karibi-Whyte: Hi and welcome to the first 2017 episode of Down the Hall with Practical Law. I’m your host Renee Karibi-Whyte and today we are going to talk about initial public offerings otherwise known as IPOs. Our resident expert here at practical law, Chris Roerich, is going to provide a look back at what happened in 2016 and provide some insight on what might happen in 2017, given the political and economic climate. Welcome Chris.
Chris Roerich: Thank you Renee.
Renee Karibi-Whyte: So Chris is a senior legal editor here at the Practical Law Capital Markets Group and he came to us after having years of experience in Capital Markets and M&A with Sherman Sterling and at Torys. So Chris, our audience is lawyers of all different kinds so to level the playing field for those in our audience who don’t specialize in capital markets, can you explain a little bit about what IPOs are?
Chris Roerich: Yeah, I think that’s a great idea. Really you’re just starting at the beginning. We really have to look back at the purpose of securities laws which the primary purpose is to create confidence in the capital markets for investors and to ensure that there’s no perception of widespread fraud and so this applies to all securities laws and in particular to the securities laws applicable to IPOs.
And so I think a great question to start with is what is an IPO for those of our listeners who don’t know what an IPO is and really what an IPO is, is the first registered offering of a company’s common equity. So, the question becomes what does that mean and really under the US Securities Laws anytime, any person, be that an issuer or someone holding securities offers or sells the securities, they either have to register that offering or sale with the SEC or there has to be an available exemption from these registration requirements.
Renee Karibi-Whyte: And by registering that means they end up on a stock exchange correct?
Chris Roerich: Well, not exactly what registration is, is you’re basically filing what’s known as a registration statement with the SEC. The majority of a registration statement is what’s called prospectus which I think most people would be familiar with and basically it’s a disclosure document that discloses all of the details of the issuer and the offering to the public.
And the SEC has a series of registration forms available to issuers and they’re very detailed in terms of what the issuer has to provide and most of the information relates to, there are two sets of information. One is the non financial information, so this relates to the nature of the business, the management of the company, related party transactions, and things like that and then the rest of the disclosure are the financial statements and this is what a lot of investors really look at because that, at the end of the day, determines the profitability of the company and you’re looking at the financials to make a decision as to whether this is going to be a profitable investment or not.
Renee Karibi-Whyte: So just to clear up a little bit because IPOs initial public offerings?
Chris Roerich: That is right.
Renee Karibi-Whyte: So the registration statement applies to all organizations that are doing that registration or is it like if it’s going to be a closely held corporation where it might not be public, do they still have to go through the same steps?
Chris Roerich: Yeah, closely held corporations are just entities where someone or a group of people own either a majority or a substantial stake of the company and thereby have an outsize control over the company and that can happen in an IPO. Recently a number of tech companies in particular, have issued what are called dual class share structures and that’s where the founders of the company basically keep one share structure where one share has more than one vote, but the investing public receives a class of shares that only has one vote per share.
And so this gives the founders continued control over the company, but diffuses the economic rights in the company to the public and it’s created a lot of controversy and discussion, most recently Snap, a technology company, is thinking about going public and they’re thinking about offering a class of shares that do not have any voting rights and that would be a very interesting step and it’s creating a lot of controversy.
A lot of asset managers and a lot of corporate governance specialists are questioning whether this is something that’s good for the market and it’s really one of the things that it’s going to affect the IPO market in 2017 because tech companies have really been a great source for IPOs. There is an obviously a gap during the tech bubble or after the tech bubble but in the late 1990s and more recently, tech companies have really been conducting a lot of IPOs, companies like Google, Facebook, etc. and they really like that structure because their founders can keep control over the company but the investing public obviously only gets a set of rights that are different from other companies.
Renee Karibi-Whyte: So are there no regulations that limit the ability to give out –
Chris Roerich: No –
Renee Karibi-Whyte: — shares that don’t have any voting rights?
Chris Roerich: No this is really — this is primarily something that’s State Corporate Law —
Renee Karibi-Whyte: Okay.
Chris Roerich: — driven and at the end of the day when someone buys a security such as a share in a company, what you’re really buying is a bundle of rights and this is just sort of basic property law and that’s how in theory the idea is that you value those rights and so for example when you buy any security be it a share, a preferred share, or a debt security, what you’re receiving as the rights that are included in the document that governs those so typically when you buy common shares of the most basic type of securities typically and what you usually buy with that, purchase a value — buy the right to one vote per share and then you buy certain economic rights in the company.
Renee Karibi-Whyte: Okay.
Chris Roerich: And — but we live in sophisticated times, the capital markets in-particular have become very sophisticated so now you have a whole spectrum of securities ranging from the very simple one vote per one share, common equity all the way to sort of hybrid securities, preferred stock that sometimes has voting rights, sometimes it doesn’t, sometimes it only has voting rights in certain instances, sometimes it doesn’t all the way to debt securities where you typically don’t have voting rights except as provided in the indenture and so in certain instances even debt security holders can receive voting rights when a company does something material to its existence or something economically material.
Renee Karibi-Whyte: So that brings me to our next question. It sounds like there are a lot of creative ways to structure these. Is that the role that lawyers play and if not what will do lawyers play in IPOs?
Chris Roerich: Yeah that’s a great question. Lawyers play a very important role in the IPO process and the form that really takes is structuring the transaction within the confines of the law. They really tell issuers and the underwriters, the bankers advising the issuer in the IPO process, how the IPO can be completed within the regulatory framework.
And this framework, it’s a shifting framework depending on the nature of the issuer or the nature of the transaction. So for example foreign private issuers, companies that meet the definition of foreign private issuer, are subject to less onerous requirements than US domestic issuers and the policy reasons behind that is that the is to encourage foreign companies to enter the US Capital Markets and raise capital in the United States.
For US domestic issuers there was a whole spectrum of levels of company based on the size of the company, etc. For example in 2012, President Obama enacted the JOBS Act which created a new class of issuers called emerging growth companies otherwise known as EGCS and basically this new class of company is subject to less onerous requirements as well they have a number of advantages that they can use that makes it easier to access the capital markets.
And EGCS are typically smaller companies because there’s a lot of discussion in the United States currently that the level of regulation has discouraged smaller companies from going public because unlike the late 1990s when you had an IPO boom of a lot of companies including a lot of smaller companies particularly in a tech industry going public since then a number of additional regulations have been enacted. The Sarbanes-Oxley Act, Dodd-Frank, etc. that have imposed a number of additional burdens on companies, on public companies in particular, and the problem with this is that typically the costs of complying with these additional regulations are not really scaled based on the size of the companies.
So there’s an undue amount of burden placed on smaller public companies vis a vis much, much larger companies and so in many cases, this has discouraged smaller companies from going public and in the past, smaller companies were really sort of the lifeline of the IPO process and really the IPO process is designed in many ways to facilitate smaller companies to raise capital.
So, obviously we have to find an equilibrium between providing sufficient regulation to satisfy one of the primary purposes of the US Securities Laws which I mentioned in the beginning was creating confidence in the capital markets and at the same time not imposing so many regulatory burdens that it becomes too costly or too difficult for companies and in particular smaller companies to become public companies.
Renee Karibi-Whyte: So based on what you said it sounds like we’re going to have some really interesting things to talk about when we talk about what’s going to happen in 2017 but before we get there, let’s get to the meat of the discussion. Practical Law recently published the “What’s Market Roundup” of IPOs in 2016, what trends did your team discover?
Chris Roerich: We found a number of interesting trends, trends that I’ve actually been continuing in the recent past and basically since the 1990s. Some of the highlights from this roundup are that basically 2016 was a fairly lackluster year in the IPO market. There were approximately a 102 IPOs by US domestic issuers and foreign private issuers, raising approximately $16.6 billion.
Now both of these totals were down from 2015 where there were a 153 IPOs that raised $23.9 billion but that was also a lackluster year because 2014 had 254 IPOs that raised $73.3 billion dollars, so that’s a pretty dramatic drop-off in the last three years, but that’s part of a long-term trend that’s been continuing since the late 1990s.
Renee Karibi-Whyte: So, it sounds like it’s about from 2014 to 2015, 2015 had about a third of the number of deals and then from 2016 to 2014 it seems like it dropped, so the first set of years it dropped two thirds and then next year it almost dropped by another third?
Chris Roerich: Yeah, the drop off between 2014-2015 wasn’t that dramatic, but well in terms of the amount of money raised, the number of IPOs it wasn’t that large of a drop off. That’s actually indicative that smaller companies were actually doing a lot more IPOs which in a way is a good thing but really at the end of the day, one of the primary measurements of the health of the IPO market is the average deal size and that is basically dropped between 2014 from $288.7 million to $163.6 million.
This could be representative of a number of facts. It could mean that more smaller companies are going public or it could mean that larger companies are only IPOing a smaller slice of their capital or their common equity. When a company goes public, they don’t necessarily sell all of their common equity in the IPO. They can sell as little as 5% or even less depending on whatever the market wants and the founders or whoever controls the company at the time, keep the controlling stake.
Renee Karibi-Whyte: So do you think that JOBS Act had a positive influence on the number of deals.
Chris Roerich: Well, it’s hard to say. There are a number of factors that come into play when determining the health of the IPO market. In theory the JOBS Act helped the IPO market, but it’s difficult to tell. Obviously, there’s still a downward trend but because there are so many other factors affecting the market, it’s really sort of a relative analysis that can only be done in theory and the question is how many IPOs would there have been without the JOBS Act and so if there were fewer IPOs today then obviously the JOBS Act would have helped to the market but if there were less, then it really wouldn’t have had any effect but that’s a theoretical question because we don’t know what the answer that would be.
Renee Karibi-Whyte: So, can we tell based on the number of companies that filed under the EGC status whether the JOBS Act had an impact on the number of filings?
Chris Roerich: Yes, Renee that’s actually a great question and again it’s a theoretical question. I don’t have the specific number but I know that a majority of companies conducting IPOs are EGCs but I do have specific statistics relating to the number of companies, the number of EGCs that are taking advantage of one of the requirements that being that a company only provides two years of audited financial statements as opposed to three and in 2016, 76.7% of EGCs that conducted IPOs included two years of audited financial statements; however, 22.1% chose not to take advantage of this accommodation and instead included three years of audited financial statements.
Renee Karibi-Whyte: And that’s to ensure that they’re marketable that the investors have the information they need.
Chris Roerich: That’s right, again one of the interesting things about conducting an IPO is there’s a dynamic between the legal requirements and then the market requirements, so the legal requirements are obviously the bare minimum that ensures us to satisfy but in many instances depending on the state of the market or the industry that the issuer is in among other factors companies underwriters may come to them and say that we actually have to go above and beyond what the minimum legal requirements are.
And so in these instances companies may produce three years of audited financial statements for various reasons; one being that investors may demand this and two being that other companies in that company’s industry provided three years of financial statements or even you might want to provide three years of audited financial statements because the third year was a great year and it just makes the company look better and more marketable.
Renee Karibi-Whyte: Okay, so when we’re looking back at 2016, were there any IPOs that blazed new trails in terms of how they were structured or anything that might be a harbinger or something to come in 2017?
Chris Roerich: Well we discussed this briefly before but the dual class structure is one of the primary topics right now and this is a topic that cuts across various different areas of the law and not just securities law but corporate law, property law, etc. and there are a number of like even broader overarching social dimensions to this as well. The question of one share one vote has all sorts of democratic principles involved in it, etc.
And there are overarching questions that a number of people are asking about what will happen to the capital market says the investing public’s ability to vote and thereby influence public companies is reduced. What affect that will have on not just the capital markets but society as a whole and I know a number of tech companies that have implemented dual-class share companies have included sunset provisions for those dual-class share structures and that eventually will just go away.
Renee Karibi-Whyte: So what goes away the lack of ability to vote?
Chris Roerich: Well the number of, I don’t know the exact specifics, but it’s basically the number of votes that the class of shares that have more votes per share, will either, I think it’ll either fall away or be slowly reduced and this is really a —
Renee Karibi-Whyte: To equalizer playing field —
Chris Roerich: That is right eventually. I think the idea is that they’ll be one-to-one but again it’ll be interesting to see again Snap which recently announced its plans to go public, they’ll be offering a class of shares that don’t have any votes per share and so that’s a much different step.
Obviously there’s a sliding scale here, but at least the reduced number of votes you have some sort of vote in the company even if it is less than 50% but no votes is a very different type of share and in many ways, it’s part of this spectrum of securities in that it is in many ways it’s almost like a preferred share because you’re just getting economic rights but the thing is with most preferred shares is that they have an almost debt like element to them in which they pay out a regular amount, like a regular division.
Renee Karibi-Whyte: Almost guaranteed.
Chris Roerich: Well, some of them are guarantee but most of them aren’t, so that’s the problem, one of the primary differences between a preferred share and a debt instrument whereas in a debt instrument you’re guaranteed, subject of the company’s ability to pay it you’re guaranteed an amount, preferred shares, many of them are just like a dividend and the company can reduce it or stop it at any time.
And again it depends on the what’s in the instrument governing the preferred shares but many preferred shows don’t have voting rights or they only have voting rights in certain instances and that’s why they sit in a sort of hybrid position between common equity and debt instruments and then so common equity that doesn’t have any voting rights and just as economic rights, rights to a dividend or rights upon a liquidation event you’re sort of sliding more to words almost the preferred share instrument rather than more traditional common equity.
Renee Karibi-Whyte: So outside of the large organizations like CalPERS and those big kind of I’m going to call them institutional investors because I’m not probably not using the phrase properly, does the common person vote? Like what percentage of kind of mom-and-pop shareholders actually vote?
Chris Roerich: Yeah, well that’s an interesting question. It’s a real sort of corporate governance question that’s been asked recently. I don’t have any specific statistics as to how many people actually vote at a company’s annual meeting or in special meetings, but it’s a major issue because these institutional shareholders that you mentioned which include not just CalPERS, etc. which are actually some of the more active institutional investors many of them sort of are at the forefront of limiting executive compensation, arguing against dual-class share structures, etc. or even social investing tactics.
For instance a number of institutional investors, they no longer invest in certain industries such as oil or tobacco or things like that. Whereas on the other side you have a different set of institutional investors, the black rocks, the vanguards of the world, these asset managers that in this day and age with the rise of things like ETFs and mutual funds, they control vast sums of money.
The problem that has arisen in the last decade or so is that many of these institutional investors don’t want to get involved with the corporate governance of the company. They generally vote with management. The NYIC a couple of years ago even changed their voting rules to reflect this and it’s a major issue because I think a lot of retail investors otherwise known as mom-and-pop investors, I think a lot of them feel what these very large companies that their votes don’t really matter. That there’s such a tiny individually such a tiny percentage of the company that they don’t vote I’m sure.
Even then a lot of them own their shares indirectly through mutual funds and ETS, so they don’t even have the right to vote it’s the ETF, the asset manager that runs the ETF or the mutual fund or a hedge fund or any type of investment pool that has the right to vote, so there are really these sort of stages of investing.
Originally in the 19th century, you had you know companies were owned by their founders and their operators they’re directly involved and so you didn’t have a principal agency problem, but then with the invention of the public company shares were sold directly to the investing public but again people owned shares directly in companies and so they are much more involved.
And the market was smaller and I think people felt like they had a bigger influence on the company but we’ve entered the next stage of investing where the ultimate investor is one step removed from the actual ownership through ETFs and hedge funds and mutual funds, etc. and so they don’t even really have the right to vote, instead these pooled investment companies, the asset managers that have the right to vote now obviously the ultimate investors can vote with respect sometimes within mutual funds, etc. They can vote in that situation but that’s only with respect to the mutual fund itself.
So the shares that are being voted in the public companies are actually being voted by the asset managers and so yeah this increase in principal agency problem and with each layer of investment decision that’s being inserted between the actual company and then ultimate investors where the money is. So, it’s an interesting question and a philosophical question and a corporate governance question but it’s one that’s at the forefront of a lot of people at the moment so.
Renee Karibi-Whyte: So let’s move more deeply into your 2017 outlook. To put it mildly we’re entering into a new era given the significant philosophical change we as a country are going through. Are we entering uncharted territory with respect to IPOs? What impact will the new administration and the direction it seems to be going have on IPOs?
Chris Roerich: This one it’s hard to tell. I think again there’s a balance between I think certain people in the investment community are enthusiastic and excited about what the new administration is going to do for business in general. Obviously, the new administration has indicated that it’s a very pro-business administration. Now whether that’s actually going to play out in the markets and increase the value of the stock market, etc. is another question but at the same time, they’re going to be a lot of changes and that creates a lot of uncertainty and the market doesn’t like uncertainty that’s one thing it doesn’t like.
So there’s sort of this counterbalance here what’s going to happen and like all trends and forecasting, you can only take what you have at the moment and look forward but I think in addition to the regulatory landscape, you’re always going to have the overarching market landscape, what’s happening with respect to markets, etc. We obviously live in very interesting times and so the question is on the regulatory side, what is the new administration going to do?
And getting back to what we discussed earlier obviously things like the JOBS Act and FAST Act which was another act that was implemented in 2015, there was also designed to decrease the burdens on companies going public, they were implemented but we still see a continued trend downward in the number of IPOs and the amount of money raised in those IPOs.
Now what you could have is, this could have also created a gigantic backlog of companies that want to go public but have just been waiting for the right perhaps regulatory conditions and/or market conditions, so it would be interesting to see what happens. If the new administration does in fact eliminate or reduce a number of the regulations in the IPO market, what affect that will have on the market and whether more companies will go public and whether more capital will be raised in the IPO process.
Renee Karibi-Whyte: So, one of the things that seems to be clear about this current administration is that there are some protectionist tendencies and you did mention that there were several foreign private issuers that did IPOs. Will that protectionism have an impact on the IPO market? I just don’t know the connection between the two.
Chris Roerich: Yeah and it’s interesting. Again, it’s a difficult question to answer but it’s a very important question and foreign private issuers play a very large role in the US Capital Markets. The US Capital Markets are the largest and most liquid in the world and I think to a certain extent in many areas of the world they’re still considered the gold standard in the regulatory sphere at least there’s an idea that the US Securities Laws are the most onerous in the world and therefore if a company can satisfy those requirements, it creates a gold standard.
Now not everyone agrees with that but I know that in my practice in particular, there was a very strong focus on foreign private issuers. So, I’m quite familiar with this area but in addition to this sort of, I don’t know what affect the protectionist stance is going to have on the capital markets and the IPO market in particular, it could have the effect of discouraging some foreign companies from wanting to access the market and thereby be subjected to all of the different regulations that a company that’s a registered company in the United States is subject to.
Examples are there the Foreign Corrupt Practices Act, which is very strict. Things like that. There are a lot of foreign companies and I advise a number of foreign private issuers that were conducting IPOs in the United States, you really had to sit them down and make sure that they were comfortable with subjecting themselves to the whole spectrum of US Regulatory Law in addition to the securities laws and just and just to make sure that they were comfortable with the ongoing reporting requirements, etc.
But I think in a general — in a non-regulatory sense, I think the foreign market is also having a large influence on the US. I think one of the reasons that the number of IPOs in the United States has been decreasing is the increasing attractiveness of foreign stock markets. So for example, a lot of Chinese companies now are choosing to list in their home market be at Shanghai or Shenzhen or even in Hong Kong and a lot of these stock markets are now looking, they’re being seen as an alternative to the New York Stock Exchange or the NASDAQ or other US stock exchanges whereas maybe 10 to 15 years ago that might not have been true and as the number of foreign companies list in their home markets or even choose to list in a market other than their home market, they choose not to list in the United States but somewhere like London for example which has a very large capital market as well.
Renee Karibi-Whyte: Do those other jurisdictions have lighter requirement generally?
Chris Roerich: I think it depends on how you look at it. I think the general idea and this is obviously from a US-Centric standpoint is that the US Regulatory Regime is the strictest whether that’s true or not is a matter of opinion, but the US does impose a number of laws. I do know from my experience that when you sit down and you explain to foreign companies all of the different requirements of being a public company in the United States, many of them are quite surprised that the burden even, even when they’re already public companies in their home jurisdiction.
And again it’s a trade-off, right? It goes back to confidence in the markets versus applying too many regulations to public companies thereby discouraging them from becoming public and so it’s a balance you have to achieve and as you can see with the JOBS Act the FAST Act and then potential with whatever the new administration does it could be seen that maybe the US went a little bit too far after the scandals of the early 2000s and the implementation of Sarbanes-Oxley.
And perhaps the regulations became too onerous or too costly and it’s all about finding a balance and that balance is constantly moving based on market demands and so it could be that they didn’t go too far in the early 2000s, maybe that was right for that time, but the state of the market requires maybe a lighter regulatory touch now perhaps. There’s argument to be made on both sides.
Renee Karibi-Whyte: So looking on the horizon for 2017 are there any you mentioned Snap, are there any other big IPOs or are there industries that we think might make a huge impact this year?
Chris Roerich: Yeah, there are number of large IPOs maybe in the process at the moment and it’s also because one of the new items that was introduced under the JOBS Act was the ability for emerging growth companies to submit their initial registration statements confidentially to the SEC and foreign issuers, many foreign private issuers, also have that ability to submit a confidential registration statement to the SEC. We don’t know —
Renee Karibi-Whyte: And the purpose of that is that they can get an opinion before they –
Chris Roerich: That’s right. What happens is generally you have two situations, two theories underlying this for EGCs. There are smaller companies that don’t necessarily have the resource of much larger companies. They don’t have huge in-house legal departments. They’ve never been public companies. They’re not familiar with what’s required and usually that’s the job of their underwriters and their lawyers to advice them but in a number of instances, they don’t necessarily know what they’re supposed to include in the registration statement.
If they’re perhaps a very unique company or they have a unique set of financial statements. In many instances you would have smaller companies file their initial registration statement with the SEC and then the SEC would respond with many, many comments some of which were sometimes embarrassing, sometimes just a little burdensome and the problem with the SEC registration process which for those of our listeners that don’t know, a company files an initial registration statement. The SEC will review it, provide comments, the issuer will revise the registration statement and respond to the SEC’s comments, both through the revised registration statement and through a comment letter where they answer, they directly address each of the SEC’s concerns. The SEC will review the revised registration statement, provide additional comments.
Renee Karibi-Whyte: So, they’re doing this anyway.
Chris Roerich: Yes but when you have a confidential process, all of that is confidential initially so the market doesn’t see this.
Renee Karibi-Whyte: So they just end up seeing what would be effectively the second round once the more embarrassing things might be cleared.
Chris Roerich: No in the confidential submission process, a number of rounds can be confidential and when the filing is not confidential, the registration statement itself is seen, it’s available to the public immediately upon filing anyone can see it and in many instances that’s how the market is notified that a company’s doing an IPO that suddenly a registration statement appears for a new company that’s not public, but the common letter process is also made public but that’s made public at a later date.
The SEC usually at some point after the IPO process finishes releases all of the comment letters and they just appear on the company’s SEC page but just the revisions that are visible in each round of registration statements, sometimes it can be a little difficult a little drawn out and sometimes embarrassing for the issuer or the underwriters and their counsel.
So the confidential submission process both for EGCs and foreign private issuers, allows companies to work through some of the initial items prior to releasing into the market and eventually all of their filings will be released in the market but it just creates a more discreet process.
And for foreign private issuers one of the issues of that they have often arises for them if they’re public in a foreign country where they’re required to make filings and they’re making filings in the United States is a very large burden to make sure that there’s no inconsistent disclosure or more selected disclosure sometimes in the United States, additional disclosure will be required. That’s not required in their home jurisdiction where they’re making disclosure and so that can create selective disclosure issues.
Renee Karibi-Whyte: So how do we find out who’s going to be filing this year based on that process? Are there any clues we can get?
Chris Roerich: Well, you know, they’re always rumors in the market, etc. in the Wall Street Journal etc. but eventually companies are required to make a public filing, have the registration statement before actually marketing the IPO. For example for EGCs, they have to make a public filing of their registration statement at least 15 days prior to beginning the road show which is the marketing process.
Now, that in itself is a reduced regulatory burden. Initially under the JOBS Act it was 21 days but the FAST Act reduced that to 15 days, so again makes it a little bit easier for everyone and it’s all designed to facilitate the process but again this is the competing interests in the securities laws that regulators obviously want to make it easier for companies to go public but at the same time, they want to ensure that the investing public has given enough time to review the registration statement and to make an informed investment decision.
Renee Karibi-Whyte: So what for both capital markets lawyers and lawyers who are not involved in capital markets, what’s the most important takeaway?
Chris Roerich: The most important takeaway would be that the number of IPOs is decreasing and the question is why is that? Again we mentioned earlier that there are a number of factors. A lot of focus, there’s been a lot of focus particularly among lawyers because we are lawyers of other regulatory burden but the market at the end of the day determines how many IPOs there are.
There are things like valuations, alternative sources of financing, private equity, venture capital those areas have been very strong recently, a very high valuations in the private market and again this goes back to the bundle of property rights that you receive when you investment in a security and it’s not just the instrument governing that security, for example you can have plain vanilla common share that is a common share of a public company versus a common share of a private company.
If someone buys the common share of the public company, they’re also receiving the right to go on a stock exchange and sell that share which provides a lot more liquidity and allows them to divest that share much easier whereas if you own that same share and issuer is a private company, your ability to resell that share is much more restrictive, so typically the valuations for private companies were lower than for public companies.
But in the last couple of years, private equity venture capital in these markets have been become very developed and very popular with investors. A lot of funds have been flowing into these areas. So a lot of companies have stayed private longer or just haven’t gone public at all because they can receive high valuations in the private market and really at the end of the day one of the primary reasons that you conduct an IPO is to raise capital and if you are going raise capital in the private market just as easily at the same valuation or a slightly reduced valuation but however not having to incur all the costs, etc. and there problems associated with becoming a public company, you know many companies choose the private path.
Renee Karibi-Whyte: Okay, so as we wrap up, Chris we like to ask all of our guests a question about advice. So you can have three choices. You can either choose to share the best advice you’ve ever been given, the best advice you wish you have followed, but didn’t, or the best advice you’ve ever given someone.
Chris Roerich: I think I choose the last question and I think the best advice I’ve given my clients in the past when they’re contemplating conducting an IPO is they really you have to sit down with a lot of very experienced advisors not just lawyers but the bankers as well and auditors because the financial statement process is one of the most complex aspects of an IPO, they really have to sit down and put together a very detailed drawn-out roadmap of how they’re going to conduct the IPO and complete it.
And they have to be very well versed in the obligations that are going to be incurred after the IPO is completed because I think that can be overlooked. The IPO process itself is very complicated, very drawn-out, and I think that sometimes some companies conducting IPOs can lose sight of what they have to do once they become public, which actually the requirements of public companies begin the minute that companies registration statement goes effective.
For a lot of companies the effective date is almost like is the end of a very long process and a lot of the participants in that process are very exhausted, etc. but the problem is that the minute you become a that the registration statement goes effective a whole new set of issues arise and the company has to be prepared right away to deal with those in terms of periodic reporting, etc. and just making sure that they’re well aware of all the requirements of being a public company.
Renee Karibi-Whyte: Okay, thank you Chris. This wraps up another episode of Thomson Reuters Down the Hall with practical law. Thank you to our special guest IPO expert, Chris Roerich who’s a senior legal editor in the Capital Markets Group here at Practical Law.
To access the IPO roundup from 2016 as well as other helpful resources, please check out our show page at Legal Talk Network or you can find it at downthe hallwithpracticallaw.com and please feel free to rate us in iTunes if you like the show. If you have any comments, feedback, or suggestions, you can reach out to us at DTHPL at thomsonreuters.com. Until next time, thanks for listening.
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