Though the number of IPOs completed so far this year is below the elevated levels evidenced during 2014 and 2013, IPO activity still remains above 2008-2012 levels. As a direct reflection of the higher number of IPOs completed during the period 2013-15, we are also now seeing an increase in the numbers of IPO-related securities lawsuit filings. IPO-related suits were an important part of the 2014 securities class action lawsuit filings, and they represent an even more significant part of 2015 YTD securities suit filings.
According to data from Renaissance Capital (here), 168 companies completed IPOs on U.S. exchanges as of December 1, 2015. These numbers are down significantly (approximately 36%) from the 262 companies that completed offerings in the first eleven months of 2014. However, the 275 completed IPOs in the full year of 2014 was the highest annual number of completed IPOs since the dot com boom year of 2000. Though the 2015 IPO filing activity is below last year’s elevated levels, it still remains above the levels that prevailed during the period 2008-2012 before IPO activity picked up substantially in 2013. (There were 222 completed IPOs in 2013.) Of the IPOs completed this year, a little less than half (44%) have been in the health care sector.
Along with the increased numbers of IPOs in the period 2013-15 has come increased numbers of IPO-related securities suits, as discussed in greater detail here. This was certainly true in 2014, when there were 17 IPO-related securities class action lawsuits (including lawsuits filed in state court under the concurrent jurisdiction provisions of Section 22 of the Securities Act), representing about 10% of all 2014 securities suit filings.
This heightened level of IPO-related securities lawsuit filing activity has increased in 2015. So far in 2015, there have been 27 IPO-related securities class action lawsuit filings (including the state court filings), representing more than 15% of YTD securities suit filings.
A recent lawsuit filings involving a company that completed its initial share offering earlier this year provides an example of these suits. On November 18, 2015, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Party City Holdco, Inc., and its CFO and CEO, on behalf of a class of investors who purchased shares in or traceable to the company’s April 16, 2015 IPO. A copy of the plaintiff’s complaint can be found here. The complaint alleges that the company’s offering documents “failed to disclose certain risks in the Offering Documents, including the impact on the Company due to: (1) soft consumer traffic trends; (2) lapping of the extraordinary performance of the Disney Frozen franchise from the prior year; and (3) the store reset initiative.”
The Party City lawsuit is one of several filed already this year against companies that completed their IPO during 2015. Of the 27 IPO-related lawsuits filed YTD, one involved a 2012 IPO, four involved 2013 IPOs, fifteen involved 2014 IPOs, and seven involved 2015 IPOs.
Of the 275 companies that completed IPOs during 2014, 22 have been involved in securities class action lawsuits. Because of the three-year statute of limitations under the ’33 Act for actions against IPO companies, we won’t know until the end of 2017 for sure how many of the IPO class of 2014 ultimately will be hit with securities suits. But at this point, already about 8% of the 2014 IPO companies have had securities suits filed against them. This frequency figure for IPO-related companies presents an interesting contrast with the frequency figures for companies generally. According to data from Cornerstone Research (here, page 9), the average annual frequency for all companies listed on U.S. exchanges during the period 1997-2013 was 2.9%. If we extrapolate that annual frequency period over a two-year period, the implied frequency is roughly 5.8% (using a two-year period by way of rough comparison with the two-year period of 2014-15 for 2014 IPO companies). Of the 168 companies that had completed 2015 IPOs (as of December 1, 2015), seven have already been hit with securities suits.
Given the increase in the number of IPOs during 2013 and 2014 and in light of the usual lag time between the IPO date and the date of lawsuit filings, it seems probable that there will continue to be significant numbers of filings in the months ahead involving IPO companies. Even when we get to the point where the IPO-related litigation risk for 2013 and 2014 IPOs starts to age out, IPO-related litigation will likely continue, even if a reduced levels, owing to the continued IPO activity in 2015.
Of the 27 IPO-related securities suits filed YTD in 2015, at least six were filed in state court. (Several others were initially filed in state court and subsequently removed to federal court). An interesting guest post on this blog earlier this year discussed this phenomenon of state court IPO-related securities class action lawsuit filings, as well as the reasons why some plaintiffs may refer state court as well as the split in the circuits on the question of whether or not concurrent state court jurisdiction for ’33 Act cases survived Congress’s enactment of SLUSA.
Is the JOBS Act a Factor in the Increased IPO Activity?: Although the extent of the effect is hard to calculate, there is no doubt that part of the increase in IPO activity during the period 2013-15 is attributable at least in part to the IPO on-ramp provisions that Congress enacted in the JOBS Act in 2012. In April 2015, the Wall Street Journal reported that of the nearly 660 companies that went public after the Act became law through the beginning of April, 539 companies (about 82%) completed their IPOs under the JOBS Act’s provisions. Of those 539 companies, 454 were U.S. companies and 85 were domiciled outside the U.S. The increased numbers of completed offerings during the period 2013-15 are clearly due to the recovering economy and the healthy state of the equity markets. But even if the JOBS Act is not the direct cause of the increased IPO activity, its provisions are helping to facilitate the activity.
An interesting March 17, 2015 report from the Proskauer Law firm entitled “2015 IPO Report” (here) took a very detailed look at the 2014 IPOs, by focusing on the 119 U.S.-listed IPOs completed in 2014 with a deal size of $50 million or greater. The 144-page report analyzes these larger IPOs based on a number of criteria, including whether or not the offering priced in the target range; how many comments the SEC has about the companies’ offering documents; how much the companies incurred in fees and expenses; and how the companies fared post-offering.
The report also examines the extent to which the IPO companies took advantage of the JOBS Act provisions in connection with their offering. The report notes that of the 119 IPOs analyzed, 77% were emerging growth companies. 60% of the firms that qualified as emerging growth companies took advantage of the JOBS Act provision allowing them to submit only two years of audited financials and 52% took advantage of the JOBS Act provision allowing them to submit only two years of selected financial data. (Firms that do not qualify as emerging growth companies are required to include three years of audited financials and five years of selected financial information.)
The JOBS Act provision that the emerging growth companies really like is the Act’s provision allowing them to submit their draft registration statement on a confidential basis. Of the IPOs the law firm analyzed that involved emerging growth companies, fully 96% elected to submit their draft registration statement confidentially. The report also notes that on average, the emerging growth companies that submitted their draft registration statement confidentially made their first pubic filing 76 days after their first confidential submission and their offering priced 49 days after the public filings.
Interestingly, the report notes that a greater percentage of emerging growth companies priced above range than companies that did not qualify as emerging growth companies, and also that the emerging growth companies generally outperformed non-emerging growth companies.