Category Archives: IPO

Going public is not always a snap to raise capital (pun intended)

New tech company IPOs are always a cause for excitement in the financial market. Talk of Unicorns and big money deals abound, and industry gossip mavens wait with bated breath for news of Zynga- or Facebook-style shenanigans. But sometimes the story isn’t much of a story, at least at first, and a well-known company’s much-anticipated IPO just does not live up to the hype. This is exactly the case with Snap Inc. (NYSE: SNAP), when the creators of messaging app Snapchat publicly released their IPO filing through the SEC in February of 2017.

Known primarily for the hit social media app Snapchat, Snap Inc. was founded by Stanford students Evan Spiegel and Bobby Murphy in July of 2011, boasting more than 30 million users just one year later.

Snapchat added video messaging in 2013 and “stories” or sets of serial messages thereafter. Expanding to Android phones significantly expanded the app’s customer base and had investors as eager to see an offer from Snap as from other IPO white whales like Airbnb and Uber – and a bellwether to help those companies plan their own offerings, or perhaps abstain from making one this year. Given Snap’s disappointing performance, those two unicorns might decide to stay in their magic forest a little while longer and wait for better conditions to make their offers.

Snap’s IPO has seen a mixed reaction from investors. Valued at between $25 billion and $35 billion, the company expects to raise only $4B. These numbers are low for the tech sector, but other factors also play into a lack of investor enthusiasm. For one thing, Snap’s attempt to sell photo-ready branded glasses called Snaptacles has thus far been unsuccessful, causing the company to plan and increase distribution in hopes the new product will take off. Snap has always positioned itself as a media and camera company first and hopes to reinvent the way modern people use and enjoy photography. As such, an initial foray into photography outside the app should have done better numbers to please investors.

Also problematic is the founders’ unusual stranglehold over the controlling shares. Together, Murphy and Spiegel will hold roughly 89% of the available voting shares, which means Snap is offering non-voting shares, an unheard-of move for an IPO in the United States and one that has made investors quite nervous. Competition is also a factor as Facebook and Instagram (both arguably more recognizable brands than Snapchat) are launching products which ape Snapchat’s functionality. Most of Snapchat’s users are between 18 and 34 years of age, and as such are more prone to switch from brand to brand based on trends, making it more difficult for Snap to maintain a bedrock of users long into its history. As such, Snapchat has seen a steady slowing of revenue.

Of course the world of IPOs and SEC filings is always changing and evolving , and can be something of a minefield for companies who do not engage a specialized financial printing company in a major fiscal hub like New York City. Financial printing firms employ experts in IPOs, SEC filings, EDGAR, XBRL and more, and are ready to smooth any major reported events like a merger or IPO.

SEC comment letters prepare companies to become “transparent”

Submitting an S-1 or 1-A file to the SEC for your IPO can be nerve-wracking. However, the SEC is not grading your paper like it’s your senior thesis. In fact, the SEC actually WANTS companies to thrive. To succeed. What they don’t want is investor fraud. The working team (especially the corporation) needs to understand this. The comments you receive back are meant to guide and sculpt your communications as you move from private to public. To learn about “transparency.”.

Time is on my side, yes it is.

The SEC’s time-frame objective is to provide initial comments on a Form S-1 within 30 days after the initial filing. They don’t commit to any specific timing for the staff to review and comment on the company’s responses to their initial and subsequent comments. The time necessary for SEC review depends on the depth and nature of their staff’s comments and the company’s changes to the Form S-1, the quality of the company’s response, staff workloads and other workflow variables. On average, it’s safe to plan for a two week “ping-pong” per each round of amendments.

Dance this mess around.

To perhaps keep a step ahead of the SEC, companies can research the trends found with peer and sector companies’ comment letters. After an S-1 Registration Statement becomes Effective, the letters from the company, or its securities counsel, are visible on the SEC’s EDGAR.gov site. Simultaneously, when responding to SEC Comments, a company also amends its S-1 from the guidance provided in the SEC’s Comments. Those amendments are also posted to EDGAR.

Below is a chart of the comments made by the SEC in Q1 and Q2 2016. As we all know, GAAP v non-GAAP was a top priority for the SEC in 2016. Assume 2017 to be the same.

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CLICK IMAGE TO ENLARGE. Audit Analytics is the superb data source.

One note: Non-GAAP comments have more than doubled in two years. Mind the GAAP. Pardon the tired pun.

To get an illustrative “visual” and tactical explanation of the workflow for S-1 and 1-A registrations with the SEC, I recommend THIS GUIDE. It is one of our most popular whitepapers.

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The WSJ and Vintage agree… “The IPO market is perking up.”

As reported in the WSJ’s optimistically titled article Flurry of IPOs Poised to Test Market for New Offerings, “the IPO market is perking up after the slowest year for new U.S. listings in more than a decade. Nine companies began to pitch their initial public offerings to prospective investors so far this week. That is the most since 13 did so in one week in June 2015.”

v-redthe-irwhitepaperOur transaction team is experiencing this optimism and has been actively counseling pre-IPO companies through the S-1 draft registration process. THIS WHITEPAPER is a core (and illustrative) document for that.

But even before the drafting, our conversations revolve around converting from a private company into a public company… and extremely burdensome for your accounting team… soon to rebranding as “your financial reporting department,” BTW. Often, the process of converting to public company financial statements is long and complex, and can reveal unexpected challenges. Allowing sufficient preparation time for this process is important. Commencement of this process as soon as an IPO becomes an optional strategy for the company is recommended.

Mike Gould, Partner at PwC explains in this video snippet.

Giving your financial teams ample time to prepare AND learn the IPO financial vocabulary is key as they will be responsible for the documentation of critical and judgmental accounting policies related to all the financial statements.

  • Revisiting/enhancement of accounting policies in footnotes
  • Incremental disclosures to comply with SOX e.g., segments, earnings per share (EPS), pro forma info for business combinations
  • Preparation of documentation in anticipation of SEC comments
  • Increased attention on auditor independence, requiring company to prepare its own documentation of key accounting policies

For more depth, watch the complete IPO webinar HERE.

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Start your IPO Readiness Assessment Review 24 months in advance: video clip

Converting from a private company into a public company is extremely burdensome of your accounting team… soon to rebranding as “financial reporting,” BTW. Often, the process of converting to public company financial statements is long and complex, and can reveal unexpected challenges. Allowing sufficient preparation time for this process is important. Commencement of this process as soon as an IPO becomes an optional strategy for the company is recommended.

Mike Gould, Partner at PwC explains in this video snippet.

Giving your financial teams ample time to prepare AND learn the IPO financial vocabulary is key as they will be responsible for the documentation of critical and judgmental accounting policies related to all the financial statements.

  • Revisiting/enhancement of accounting policies in footnotes
  • Incremental disclosures to comply with SOX e.g., segments, earnings per share (EPS), pro forma info for business combinations
  • Preparation of documentation in anticipation of SEC comments
  • Increased attention on auditor independence, requiring company to prepare its own documentation of key accounting policies

For more depth, watch the complete webinar HERE.

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VIDEO: What makes a company a strong IPO candidate

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As you’ll hear from our experts, the decision to go public, whether traditional IPO or mini-IPO, is a mosaic of many factors:

Business

  • —Does the business provide a unique service or product that doesn’t have direct competitors?
  • —If the business has publicly traded competitors, what makes it unique?
  • Cost structure (e.g. more efficient manufacturing, differentiated geographic footprint)?

Size / Scale

  • —Does the company currently have size and scale?
  • If no, is there an opportunity and plan to reach a sufficient size to be meaningful for institutional investors?

Rational

  • —Use of proceeds
  • —Additional capital required to grow
  • —Employee recruitment and retention

Company Readiness

  • —Adequacy of internal financial reporting and accounting controls (Sarbanes-Oxley)
  • —Short-term and long-term business outlook
  • —Financial performance trends and metrics for valuation
  • Predictability of operations and confidence in projections

Management Readiness

  • —Quality and depth of management team
  • —Public company experience
  • —Performance expectations

Successful IPOs can make founders, owners and senior executives millionaires overnight, at least on a spread sheet. Equally, millions of equity financing can also be raised overnight—dollars that will be essential for fueling growth initiatives: new products, expanded markets, employee hires, research and development and acquisitions

If you enjoyed the brief snippet, listen to the complete webinar HERE.

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Ping-ponging with the SEC as the IPO optimism pipeline grows

This past week, we’ve seen some positive pundit-isms towards what has been a sad year for IPOs.

Kathleen Smith, a principal at IPO-focused Renaissance Capital, expects a uptick the remaining of the year, but doesn’t expect 2016 to match the 170 IPOs and $30 billion raised in 2015, which itself was down from the 2014’s big IPO year.

“The enemy of a healthy IPO market is uncertainty and volatility. We’ve had some high volatility in the past year, but that’s moderated back down to normal levels.”

The IPO window is ready to open, “it’s just a matter of when,” said Garvis Toler, global head of capital markets at the New York Stock Exchange. “The enemy of a healthy IPO market is uncertainty and volatility. We’ve had some high volatility in the past year, but that’s moderated back down to normal levels. People need to perceive that it’s a hospitable environment.”

Liz Myers, JPMorgan’s global head of equity capital markets, reported that JPMorgan has 20+ IPOs in their global pipeline in September, and a “full pipeline” for the balance of 2017. Additionally, JP Morgan expects to see more than a dozen tech IPOs before the end of the year. Venture capitalists count more than 150 unicorns (privately held companies valued above $1 billion) in the US. IPOs bring big gains to VC firms and other early investors, allowing them to invest in the next star companies.

What do companies, especially Emerging Growth Companies, do as they prepare for their IPO?

Well… they prepare. One place to start is to understand the actual drafting registration process you’ll experience with the SEC. THIS WHITEPAPER ILLUSTRATES THAT PROCESS.

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What you’ll see illustrated in the whitepaper is that the SEC will absolutely PONG back your PING, looking for sharper definition on one, some or all (eek!) of these topics:

  • Acquisitions
  • Contingencies
  • Divestitures
  • Estimates
  • Fair value
  • Goodwill impairment
  • Income taxes
  • Internal controls
  • MD&A
  • Non-GAAP abuse / reconciliation
  • Segment reporting
  • Stock compensation

As your securities lawyers will clearly express, “don’t take it personally.” SEC letters are a part of the process and the back-and-forth can take months, with an average of 8 months.

Lastly, although it is a bit of a ping pong match, its NOT a competition. The SEC wants companies to succeed while simultaneously protecting investors.

 

Experts for corporate exit execution

As of last week, in 2016, only 55 companies have rung the IPO bell on Wall Street (or in Times Square). This is 45%, YOY, of 2015 and 30%, YOY, of 2014. The money raised is the same percentages.

So, with such dramatic reductions in S-1 filings, what has kept our Capital Markets Operations Team so busy? Mergers.

EXITSIGNS

2016’s domestic M&A, although down one-fourth from last years’ tremendous activity, has kept our transactions pros working all three shifts.** SEC form S-4 can be as complicated as an IPO’s S-1 and, absolutely, the production precision needed is equal.

Prior the S-4, our team is onboarding and training the appropriate working groups to manage their virtual data room (VIEW DEMO VIDEO) – assuring the right content gets into the right folders and that the wrongs eyes don’t have access. Security and administrative permissioning is paramount.

Why are companies exiting via M&A rather than an IPO? The Wall Street Journal states several factors, including the soft market performance of many IPOs, buyers’ appetite for great targets and, notably, the underlying patience of Private Equity.

From the WSJ:

“Trader Corp., an online automotive marketplace owned by private-equity firm Apax Partners, was days away from publicly unveiling its IPO plans in early July when it announced a deal to sell itself to Thoma Bravo LLC for about $1.2 billion, according to several people close to the deal. The move surprised many of the company’s IPO bankers, who expected the company to fetch a higher valuation in a public offering, according to people familiar with the matter.”

Regardless of a company’s individual exit strategy, we’re pleased so many are allowing us to help them execute their plan.


**NOTE: By operating three shifts – typesetting, EDGARizing, production – we mitigate rush charges to clients. We KNOW filings are always on deadline. It’s the nature of the business. Charging “rush” charges rarely makes sense.

IPOs slower to price regardless of fewer SEC comments in S-1 registration workflow

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Click to download the S-! workflow whitepaper

Nothing is more certain than death, taxes and comments back from the SEC on your S-1 registration’s first draft.

It’s part of the vetting process that protects investors from, on the light-side of the spectrum, overly enthusiastic corporate projections and on the dark-side… straight up fraudulent disclosures.

To view an illustration of the process, download this whitepaper.

Comments generally fall into these eight categories:

  • Back-up (third party) verification
  • Cheap stock
  • Executive compensation and executive employment agreements
  • Financial & accounting
  • Market positioning claims
  • Non-GAAP financial measures
  • Revenue recognition
  • Segment reporting

As you see in the chart below, with data from Proskauer’s 2016 IPO Study, the lowest number of SEC comments received in a first round comment letter was 11, the average was 31 and the highest was 78. One point is clear when you juxtapose the different sectors: financial services companies received the highest number of comments. Click image to enlarge.

IPO-comments

All sectors did have fewer overall comments from previous years, which (hopefully) indicates their internal diligence is steadily improving – although the pace from initial filing to final pricing is 20% slower. Market conditions are assumed the cause. Slow and steady wins (raises) the race (capital).

Should I stay or IPO now? (In 2016, it could depend on your sector)

When planning an IPO, proper timing and pricing are perhaps the most important decisions to be made. However, with volatile markets, interest rate increases and an ongoing economic recovery, significant questions exist about whether the current environment is conducive to going public. The answer is that at any time, IPOs in some sectors are more likely to succeed than others due to a combination of factors.

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In 2015, 173 U.S. companies held IPOs and their stocks are trading at an average of 5% below their IPO price. This suggests that investors – especially large, institutional investors – don’t have a strong appetite for IPOs at this time. Furthermore, the Federal Reserve’s recent interest rate hike may affect the immediate demand for IPOs.

But the fact is, a company’s prospects will vary depending on the market conditions in its specific industry. Consider ttechnology and healthcare…

A PwC report on Q3 U.S. technology IPOs found the market was quiet. The two U.S. tech IPOs in Q3 were worth $168 million – a sharp drop from the same period last year, when the equivelent number brought in $524 million. Certainly, several tech startups that had been planning IPOs recently decided the timing wasn’t right and dropped their plans to go public, citing poor or unstable market conditions that wouldn’t support the share valuations they felt their companies deserved. Many others that have gone ahead with their plans are pricing shares at the lower end of their projected ranges.

It’s worth noting, however, that the prospect of a lower share prices shouldn’t necessarily scupper plans for an IPO. Online payment startup Square, for example, recently decided to proceed with its listing despite drastically cutting its share price to $9 – an amount that valued the company billions of dollars lower than what private investors estimated only last year. However, on the day it went public, Square’s stocks jumped by 45%, demonstrating that investors could simply be skeptical of the potential overvaluation of tech companies, rather than of market conditions in general.

In comparison, the healthcare sector is experiencing a boom of IPO activity. Health care accounted for more than half of the U.S. IPOs in Q3 and has been by far the most popular sector for deals each quarter for more than a year. The sector even traded slightly up during Q3 – posting a 2% return on average – making it a relative bright spot compared to the overall negative trend in 2015.

Ultimately, investor confidence will be the largest determining factor in the strength of the IPO market in the months ahead. While stronger economic fundamentals and more stable markets are expected for the 2016, companies would be well-advised to focus on sector-specific conditions, rather than the overall market, when determining the ideal time to go public.

Companies need to understand the dark side of an IPO (video)

Successful IPOs can make founders, owners and senior executives millionaires overnight, at least on a spread sheet. Equally, millions of equity financing can also be raised overnight—dollars that will be essential for fueling growth initiatives: new products, expanded markets, employee hires, research and development and acquisitions.

That’s the optimistic side. The pessimist view on an IPO is important to discuss as well – not to derail any aspirations you may have, but to help your teams be prepared for the dramatic change a private company will experience.

  1. Higher costs
  2. Less control
  3. Pressure to meet third-party expectations
  4. No “privacy”

Our Bloomberg BNA / Vintage video discusses ALL aspects of an IPO – tapping in the expertise of Barclays, PwC, Baker & McKenzie and our president, Liam Power.

If you enjoyed the brief snippet above, listen to the complete webinar HERE.

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