SECs Advisory Committee on Small and Emerging Companies Panel - - PowerPoint PPT Presentation

SEC’s Advisory Committee on Small and Emerging Companies – Panel Discussion

Jeffrey M. Solomon, CEO Cowen and Company

September 17, 2013

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Introduction

Once Small Cap IPOs, Now Market Leaders Once Small Cap IPOs, Now Market Leaders Once Small Cap IPOs, Now Market Leaders Once Small Cap IPOs, Now Market Leaders

• The United States has been the single greatest

market for capital formation over the past century

• Market and regulatory framework has enabled

countless companies to fund growth by utilizing the equity capital markets

• As a result, countless growth­oriented companies

emerged as the global market leaders

Note: Prices as of September 6, 2013. Inflation adjustment calculation based on July 2013 CPI.

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Over the Past Decade, the IPO Engine that Fueled America’s Global Economic Dominance Has Slowed

• Change in market structure for small capitalization companies
• Increased listing requirements for public companies
• Changes in research ecosystem

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Significant Decline in Small IPOs on US Exchanges

• Significant decline in total and small IPOs on US exchanges
• New company price appreciation now going to private equity vs.

public market investors (401k, pensions, etc.)

• Negative impact on job growth

(Number of U.S. IPOs)

700 600 500 400 300 200 100 IPOs raising More than $60 million IPOs raising Less than $60 million 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: ECM Analytics as of September 6, 2013. IPO data excludes REITs, closed­end funds, SPACs, LPs and transactions with <$5 million in proceeds

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

A Depressed IPO Market Contributes to Increased Unemployment

US Unemployment Rate vs. # of US IPOs US Unemployment Rate vs. # of US IPOs US Unemployment Rate vs. # of US IPOs US Unemployment Rate vs. # of US IPOs

• Small businesses are important job creators in our

(Annual U.S. Unemployment Rate) (Number of U.S. IPOs)

economy

800 700 400 500 600 •

Historically, US unemployment has risen during periods coinciding with depressed IPO markets

300 200 100 •

According to a 2011 report by IHS Global Insight, 92% of a company’s job growth occurs

U.S. IPOs Annual U.S. Unemployment Rate

after it goes public

1 2 3 4 5 6 7 8 9 10%

Source: ECM Analytics, Grant Thornton and US Department of Labor. IPO data excludes REITs, closed­end funds, SPACs, LPs and transactions with <$5 million in proceeds.

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Job Growth Post­IPO

• According to a report by the Kauffman Foundation:1
• From the June 1996 ­ December 2010, IPOs created 2.3

million jobs (+45% from pre­IPO employment levels)

• Small company IPOs2 created 1 million jobs (+156% from pre­

IPO employment levels) during the same period

• Assuming IPO volume per year during the 1980­2000 period

had been maintained during the 2001­2011 period, an estimated 1.9 million jobs would have been created

1 Kauffman Foundation, “Post­IPO Employment and Revenue Growth for U.S. IPOs, June 1996­2010,” May 2012 2 Kauffman Foundation’s definition of Emerging Growth Companies differs from that of the JOBS Act. To avoid confusion in this presentation, we refer to Kauffman’s definition of Emerging Growth

Companies as “small company”.

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

JOBS Act – Positive Impact on Capital Formation

• The number of sub­$250 million market capitalization companies that have

gone public this year exceed the total for 2012 (39 vs. 34)1

• With an estimated 234 companies in the IPO backlog (including confidential

filers)2, this year could see the most active IPO calendar in recent years

I I I IPO Backlog PO Backlog PO Backlog PO Backlog Including Including Including Including Confidential Filers Confidential Filers Confidential Filers Confidential Filers

(Potential Proceeds, US$ in billions) (# of IPOs) 234 $36.0 30.0 24.0 18.0 12.0 6.0 0.0 $16.0 $35.2 $16.4 $11.7 $23.3 $21.5 $11.4 95 101 63 61 112 147 46 (Year End) 2006 2007 2008 2009 2010 2011 2012 2013E

1 ECM Analytics. IPO data excludes REITs, closed­end funds, SPACs, LPs and transactions with <$5 million in proceeds. 2 Based on Renaissance Capital Private Company Watchlist as of September 6, 2013.

250.0 225.0 200.0 175.0 150.0 125.0 100.0 75.0 50.0 25.0 0.0

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

JOBS Act – Who is Benefitting?

J J J JO O O OB B B BS S S S A A A Ac c c ct t t t a a a ac c c ch h h hi i i iev ev ev eved ed ed ed a a a a b b b ba a a al l l lan an an anc c c ce e e e b b b be e e et t t tw w w ween een een een c c c ca a a ap p p pi i i it t t tal al al al f f f fo

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• Companies
• Total $ raised for EGCs (all sectors): $16.1 billion
• Total $ raised for EGCs (biotech): $2.5 billion
• Biotech industry and their targeted patients, but it is still small relative

to our needs

• Helped to create a complementary source of financing to NIH

funding

• IPOs can open up additional funding for cancer research and
• rphan drug research – potential to grow exponentially
• $2.5 billion raised by 31 EGC biotechs under the JOBS Act vs.

$30.9 billion in NIH funding across 235 research/disease areas1

Note: Dealogic, ECM Analytics. IPO stats refer to the period April 1, 2012­September 6, 2013. Figures include IPOs with proceeds above $10 million and exclude REITs, closed­end funds, unit offerings, BDCs and BCCs.

1 NIH, 2012 figures

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

JOBS Act – Who is Benefitting? (cont’d)

C C C Cr r r ri i i it t t ti i i ic c c ci i i is s s sm m m ms s s s o

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f f f t t t th h h he e e e

• Individual and institutional investors

J J J JO O O OB B B BS S S S A A A Ac c c ct t t t h h h ha a a av v v ve e e e b b b be e e een en en en u u u un n n nf f f fo

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u u un n n nd d d ded ed ed ed

• Aftermarket performance: +64.4% average price appreciation

for EGC IPOs vs. +26.2% for non­EGC IPOs1

• Pensions are the largest investors in private equity2; allocations

have risen to an estimated 12.7% of total assets3

• JOBS Act has enabled pensions to realize increased value in

their private equity investments

Note: Dealogic, ECM Analytics. IPO stats refer to the period April 1, 2012­September 6, 2013. Figures include IPOs with proceeds above $10 million and exclude REITs, closed­end funds, unit offerings, BDCs and BCCs.

1 Offer price to current price performance. 2 Private Equity Growth Capital Council, “The Interdependence of Pension Security and Private Equity,” April 8, 2013 3 Wall Street Journal, “Pensions Bet Big With Private Equity,” January 25, 2013

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Comments from Selected EGC Cowen Clients

O O O On n n n j j j jo

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w w wt t t th h h h: : : : O O O On n n n t t t th h h he e e e b b b be e e en n n ne e e ef f f fi i i it t t ts s s s o

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m m mp p p pan an an any y y y: : : : “The additional funding provided from the IPO will allow (our company) to aggressively increase our internal workforce by 20­25% over the next 12­18 months. The majority of

• ur new additions will be well­educated and/or highly skilled permanent employees.”

“The IPO directly correlated with our hiring plans. We are moving aggressively to hire folks against a broader agenda as our financial picture/horizon has changed due to the IPO.” “(The IPO provided us with a) longer runway to be successful with less time spent on fundraising to a super near­term/artificial inflection (point) and more time running the

• company. With success comes greater access to capital in a less dilutive manner and

ability to return value to shareholders in a much more liquid fashion. Perhaps most important to me and my management team is that we are now able to focus on a slightly longer horizon, allowing for a more thoughtful company build strategy.” “Without the IPO, we certainly would have had to postpone our Phase 3 clinical trial until we had raised a potentially dilutive round of venture financing or had sold (our company).” “For a small cap public company, the largest concern is building investor interest and maintaining liquidity in the stock. This is a constant and continuous effort, requiring significant attention of the company’s senior management team.” “In general, the challenges and concerns center around having the proper resources to ensure proper governance and compliance (as a public company).”

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Small Companies Still Have Challenges Raising Equity Capital

• Improving trading liquidity for small cap stocks is an essential element in

increasing capital formation

• Lack of research sponsorship and difficult market structure remain as the biggest

impediments to fundamental trading liquidity

• Smaller companies still face costly regulatory burdens when it comes to listing

publicly

• Certain other recommendations in the JOBS Act have not been implemented

for private companies

• JOBS Act does not apply to small companies that are already public

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Challenges Faced as a Small Cap Public Company

Addressed by JOBS Act

JOBS Act made progress in these

• areas. However,

more work needs to be done. Aspects have not been fully adopted by the marketplace, limiting the full benefit of the JOBS Act to be realized by EGCs and investors.

• Scaled regulatory requirements for small cap companies
• Access to capital under Reg A and Reg A+
• Regulatory restrictions, a consequence of the Global Research Settlement, for

small capitalization companies

• Pre­IPO research
• No blackout period for IPO research
• Increased communication between research analysts and investment

bankers, while preserving appropriate safeguards

• Many of the same issues apply to existing small cap public companies

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Trading Liquidity ­ Essential for Capital Formation

T T T Th h h he e e es s s se e e e a a a ar r r re e e e n n n no

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• Small cap companies typically have lower institutional ownership
• Difficult to build or exit a position at a desired value
• Lower liquidity and average daily trading volume (ADTV)
• Market valuation and liquidity a key consideration when determining a

company’s ability to raise capital as well as the amount and cost

• Liquid stocks can be valuable currency to fund acquisitions, employee

compensation or recruitment

NASDAQ NASDAQ NASDAQ NASDAQ Dollar Value ADTV ($ Mil.) Dollar Value ADTV ($ Mil.) Dollar Value ADTV ($ Mil.) Dollar Value ADTV ($ Mil.) Institutional Institutional Institutional Institutional & & & & Individual Individual Individual Individual Ownership Ownership Ownership Ownership All Major US Exchanges All Major US Exchanges All Major US Exchanges All Major US Exchanges

$80.0

Median Market Institutional Individual

70.0

Bucket Mkt Cap Range Cap Ownership Ownership 1 $0m ­ 50m $26.6 10.9 %

60.0

2 $51m ­ 100m 73.1 19.9 3 $101m ­ 250m 166.6 31.3 89.1 % 80.1 68.7 4 $251 ­ 500m 344.0 43.7 56.3 5 $500m ­ 1bn 708.3 62.4 37.6 6 $1bn + 3,244.7 83.5 16.5

Dollar Value ADTV ($ Millions) 50.0 40.0 30.0 20.0 10.0 0.0 $0.2 $0.3 $0.8 $2.2 $5.1 $72.4 $0.1 $0.3 $0.9 $2.4 $5.4 $74.6

$0m - 50m $51m - 100m $101m - 250m $251 - 500m $500m - 1bn $1bn +

30 Day $ADTV 90 Day $ADTV Market Capitalization

* Source: Bloomberg & CapitalIQ as of September 6, 2013.

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Lack of Sponsorship Among Small Cap Public Companies

• Economic model of the majority of investment banks built around larger

market capitalization companies

• Smaller cap companies generally lack sufficient research coverage
• Little or no research coverage generally corresponds with lower stock

liquidity

% of Nasdaq % of Nasdaq % of Nasdaq % of Nasdaq Companies Companies Companies Companies Without Research Analyst Coverage Without Research Analyst Coverage Without Research Analyst Coverage Without Research Analyst Coverage

% of Stocks Traded on NASDAQ with No Research Analyst Coverage 70% 60% 50% 40% 30% 20% 10% 0% 62% 40% 18% 8% 3% 1%

$0m - 50m $51m - 100

Collectively, 52% or 337

• f the 651 Nasdaq

companies below $100 million in market cap do not have research coverage

1 1 1 1

$101m - 250m $251 - 500m $500m - 1bn $1bn +

Market Capitalization

3 3 3 3 M M M Me e e ed d d di i i ia a a an n n n # # # # o

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f f f a a a an n n na a a al l l ly y y ys s s st t t ts s s s 4 4 4 4 7 7 7 7 1 1 1 14 4 4 4

* Source: CapitalIQ, as of September 6, 2013

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Cowen and Company SEC Advisory Committee on Small and Emerging Companies – Panel Discussion September 2013

Conclusion

• The JOBS Act has had a positive impact on small company capital

formation for EGCs, which is leading to increased job growth

• The JOBS Act has demonstrated that well crafted legislation and

regulation can balance the dual needs of fostering increased capital formation and maintaining investor protection

• There are additional steps to be taken to further promote capital

formation for all small capitalization companies that will benefit the dual mandate of promoting job growth and protecting investors

• Now is the time to move these improvements forward

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