OneMedForum SF 2O12 - The New Markets Movement

© Grant Thornton and Capital Markets Advisory Partners

David [email protected]@cmapartners.com

The Need For New Stock Markets:The Loss of the Revenue Model Needed to Support Stocks is Destroying Capital FormationThe New Markets MovementOneMedForum SF 2012San Francisco, CAJanuary 9-12, 2012

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

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

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A catastrophic fall in the number of listed companies (43%)As seen in the study "A wake up call for America"*

(100)

(50)

0

50

100

150

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

Ind

ex

ed

va

lue

of s

ele

cte

d g

lob

al e

xc

ha

ng

e li

sti

ng

s

(19

97

= 0

)

China

Australia

Germany

Tokyo

London Toronto

United States

Hong Kong

Sources: Grant Thornton LLP, Capital Markets Advisory Partners, World Federation of Exchanges and individual stock exchanges


• 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)

DisclosureStandards

Current bills before Congress primarily address cost to issuers and the private market

Aft

erm

arke

t S

uppo

rtIssuer

Costs

• H.R. 1070 (Reg. A) • H.R. 2930 (crowdfunding)

© Grant Thornton and Capital Markets Advisory Partners. May be used in whole or in part, with attribution.4

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

• H.R. 1965—Passed House: 420-2– Raises threshold for banks from 500 to 2,000 shareholders before

registration is triggered• H.R. 2940—Passed House: 413-11

– Repeal of the prohibition against general solicitation in Reg. D offerings• H.R. 2930—Passed House: 407-17

– 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


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

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

Success rate of trailing 30 IPO filings


0%

1%

2%

3%

4%

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

Closing price volatility

0%

1%

2%

3%

4%

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

Intraday price volatility

Excluding2008 and 2009

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

*Analysis through 9/30/11

Source: Grant Thornton LLP, Capital Markets Advisory Partners and Capital IQOriginal analysis from "Market Swings are Becoming New Standard," New York Times, September 11, 2011


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)


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"

Sources: Grant Thornton LLP, Capital Markets Advisory Partners and DealogicData includes corporate IPOs as of 6/30/11, excluding funds, REITs, SPACs and LPs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

Transactions raising less than $50 million

Transactions raising at least $50 million

Percent of total U.S. IPOs

Sarbanes-Oxley (2002)

OHRs (1997)

Manning Rule (1996)Allegations of Spread Fixing (1994)

Regulation ATS (1998)

Decimalization (2001)

Reg. NMS (2005)


$0

$20

$40

$60

$80

$100

$120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

U.S

. Ven

ture

Cap

ital

Rai

sed

(In

Bill

ion

s)

0

100

200

300

400

500

600

700

800

900

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

Nu

mb

er o

f U.S

. IP

Os

U.S

. Un

emp

loym

ent

Rat

e

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

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We should have enjoyed a venture-backed post 1990s 'IPO Echo Boom,' but the OHRs and Reg. ATS short-circuited it Source: National Venture Capital Association

Data as of 6/30/11

Sources: Grant Thornton LLP, Capital Markets Advisory Partners, Dealogic and U.S. Department of LaborData includes corporate IPOs as of 6/30/11, excluding funds, REITs, SPACs and LPs


0

100

200

300

400

500

600

700

800

900

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

Nu

mb

er o

f U.S

. IP

Os

U.S

. Un

emp

loym

ent

Rat

e

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

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



We should be approaching 1,000 IPOs/year and < 5% unemployment

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.


-

100

200

300

400

500

600

700

800

900

1,000

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Est.

2012 Est.

2013 Est.

Nu

mb

er o

f U.S

. IP

Os

U.S

. Un

emp

loym

ent

Rat

e

U.S. IPOs (Actual) U.S. IPOs (Projected)

U.S. Unemployment Rate (Actual) U.S. Unemployment Rate (Projected)


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

Success rate of trailing 30 IPO filings with proceeds of at least $500 million



$0

$1,000,000,000,000

$2,000,000,000,000

$3,000,000,000,000

$4,000,000,000,000

$5,000,000,000,000

$6,000,000,000,000

$7,000,000,000,000

$8,000,000,000,000

Tier 1

Tier 2

Tier 3

Tier 4

Tier 5

Tier 6

Tier 7

Tier 8

Tier 9

Tier 10

Tier 11

Tier 12

Tier 13

Tier 14

Tier 15

Tier 16

Tier 17

Tier 18

Tier 19

Tier 20

Tier 21

Tier 22

Tier 23

Tier 24

Tier 25

Tier 26

Tier 27

Tier 28

Tier 29

Tier 30

Tier 31

Tier 32

Tier 33

Tier 34

Tier 35

Tier 36

Eq

uit

y A

sset

s

Market Value ≤ $2 billion Market Value > $2 billion

2010

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By 2010 – Small cap shifting out of Top 100Distribution of fundamentally oriented U.S. institutions in 2010Each tier = 100* institutions ranked by equity assets (e.g., 1st tier = top 100 institutions)

*36th tier = 43 institutions


Smaller accounts have larger interest in small capDistribution of fundamentally oriented U.S. institutions in 2010:Equity assets less than $1 billionEach tier = 100* institutions ranked by equity assets (e.g., 1st tier = top 100 institutions)

*36th tier = 43 institutions

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

Tier 32 Tier 33 Tier 34 Tier 35 Tier 36

Eq

uit

y A

sset

s

Market Value ≤ $2 billion Market Value > $2 billion

2010


. Loss of the Ecosystem: Underwriting Groups

Microsoft’s IPO (1986) vs. LinkedIn’s IPO (2011)

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© Grant Thornton and Capital Markets Advisory Partners. May be used in whole or in part, with attribution.Source: Microsoft IPO Final Prospectus

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


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Microsoft IPO: $58,695,000 March 13, 1986Underwriter Table from Final Prospectus 116 underwriters (p. 2 of 3)


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

© Grant Thornton and Capital Markets Advisory Partners. May be used in whole or in part, with attribution.Source: LinkedIn IPO Final Prospectus

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


• 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”)

An Issuer Bill of Rights

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Appendix

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

Success rate of trailing 30 IPO filings with proceeds < $50 million



IPOs that raise $50-$100 million

Success rate of trailing 30 IPO filings with proceeds of $50-$100 million




Success rate of trailing 30 IPO filings with proceeds of

$100-$250 million




Success rate of trailing 30 IPO filings with proceeds of $250-$500 million



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

Success rate of trailing 30 IPO filings with proceeds of at least $500 million



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



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



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



H.R. 1070Small 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


H.R. 1965To 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• 10/26/11 Markup: Bill passes full HFSC• 11/2/11 Vote: Passes the House 420-2


H.R. 2940Access 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

• 10/26/11 Markup: Bill passes full HFSC• 11/3/11: Passes the House 413-11


H.R. 2930Entrepreneur 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


H.R. 2167Private 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

• 10/26/11 Markup: Bill passes full HFSC


About Grant Thornton

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Grant Thornton International LtdAbout Grant Thornton International Ltd

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Grant Thornton LLP at-a-glance

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• the U.S. member firm of Grant Thornton International Ltd, founded in 1924

• 52 offices nationwide• serving 10,000+ clients

Grant Thornton International Ltd* Grant Thornton LLP**

Revenues US $3.7 billion $1.1 billion

Personnel 29,974 5,094

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Statistics as of: Sep. 30, 2010 July 31, 2011

* Collective figures of Grant Thornton International Ltd member firms

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Grant Thornton LLP at-a-glanceCapital Markets Resources

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The Capital Markets Series provides periodic reports and studies on today's capital markets issues

Subscribe at www.GrantThornton.com/subscribe


About Capital Markets Advisory Partners

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Capital Markets Advisory PartnersAbout Capital Markets Advisory Partners, LLC

Capital Markets Advisory Partners is an advisor, thought leader and innovator in the capital markets. We serve issuers, investment managers, investment banks and stock exchanges in areas that intersect capital formation, including initial public offerings, follow-on offerings, mergers and acquisitions, fund launches, fund raises and investor outreach. Collectively, we bring hundreds of years of experience from leading institutions.

Studies authored by two of our principals (David Weild and Edward Kim) and supported and published by the major accounting, tax and advisory firm of Grant Thornton have been entered into the Congressional Record and the Federal Register and our principals have participated in or testified in front of:• The NYSE and National Venture Capital

Association’s (NVCA) Blue Ribbon Panel to restore liquidity in the US venture capital industry (2009)

• The CFTC-SEC Joint Panel on Emerging Regulatory Issues (2010)

• The House Financial Services Committee’s Subcommittee on Capital Markets (2011)

• The U.S. Treasury’s Capital Formation Conference

(2011).

These studies, supported and published by Grant Thornton, have been cited by Members of Congress and Regulators in the US and overseas and by leading publications including, The Economist, Forbes, The Financial Times, The New York Times and The Wall Street Journal.

Recently, this work was also cited in:• The President’s Council on Jobs and

Competitiveness (Jobs Council) Interim Report led by Jeffrey Immelt of General Electric

• The IPO Task Force Report to the US Treasury, led by Kate Mitchell, past Chairman of the National Venture Capital Association.

Capital Markets Advisory Partners was founded by David Weild, the former vice chairman and head of listed companies and related businesses at NASDAQ and former head of equity capital markets and corporate finance at Prudential Securities. David also serves as Chairman of the Small Business Financing Crisis Task Force of the ISEEE (International Stock Exchange Executives Emeriti).40

OneMedForum SF 2O12 - The New Markets Movement

Economy & Finance

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