For everyone involved in the public company D&O arena, IPOs are a continuing source of interest and concern. An important part of thinking about IPO companies and their D&O risk profile in understanding what is going on in the IPO marketplace. On March 6, 2019, the Proskauer Rose law issued its annual analysis of the 2018 U.S. IPO activity. The report provides an interesting overview of the important characteristics of 2018 IPOs. The IPO report can be found here. The law firm’s March 6, 2019 press release about the report can be found here.
The study is based on a review of all 2018 U.S. IPOs. Involving a listing on a U.S. securities exchange and a minimum initial base deal of $50 million or greater, and that priced in 2018, excluding blank check companies, SPACs, trusts, REITs, business development companies, and closed-end investment companies. There were 94 IPOs that met these criteria in 2018, 72 domestic issuers and 22 foreign issuers. The law firm’s data base, counting the 2018 IPOs, contains 456 IPOs relating to the period 2014- 2018.
Of the 2018 IPOs in the database, health care companies (primarily biotech and biopharmaceutical companies) make up 42% of the deal count. Companies in the technology, media, and telecommunicates sectors made up another 30% of the 2018 IPOs. Together these two sectors made up nearly three-quarters (72%) of the 2018 IPOs in the database.
From a geographic standpoint, the majority of U.S-based issuers that conducted IPOs in 2018 were based in just two states. The headquarters state of a third of the U.S.-based 2018 IPOs (33%) was California, while 21% had Massachusetts as their headquarters state. IPOs just in these two states represented over half (54%) of the U.S.-based 2018 IPOs. 83% of the California IPOs were located in the Bay area. Most of the U.S –based 2018 IPOs were organized under the laws of Delaware – 88% of the domestic IPOs are Delaware corporations.
24% of the 2018 IPOs were based outside the U.S. 16% of the non-U.S. IPOs were based in China. (This percentage of Chinese issuers is the highest percentage observed in the last five years.)
More than two-thirds of the 2018 IPOs (76%) had a deal size of below $250 million; 46% of IPOs had a deal size between $100 million and $249 million.
In terms of how the IPOs priced, 82 % priced in range or above range; 61% priced in range, and 21% priced above range. Only 18% priced below range. Interestingly, a full 46% of IPO companies in the Technology, Media, and Telecommunications industry grouping priced above range. By the same token, 40% of companies with an initial market cap of $1 billion or greater priced above range.
Almost all of the 2018 IPOs (99%) submitted their initial SEC filings confidentially. The average number of days from the initial submission to the date of pricing was 139 days. Approximately 86% of the 2018 IPOs were emerging growth companies. Many of these EGCs took advantage of the opportunity to submit scaled-down financial information; 81% of the EGCs submitted only two-years of audited financial statements. 13% of issuers included pro forma financial statements in connection with material acquisitions, dispositions, or other significant transactions.
A couple of statistics about the issuers’ accounting and internal control disclosures struck me as surprising. The study reports that 22% of the issuers among the 2018 IPOs had a “going concern” qualification, and almost half (46%) disclosed a material weakness in internal control over financial reporting. Even more surprisingly, of the companies that reported a “going concern qualification” 75% priced in or above range. Of the companies that reported a material weakness, 77% pricing in or above range.
15% of issuers conducting IPOs in 2018 maintain multiple classes of common stock. Nearly half (47%) of companies in the Technology, Media, and Telecommunications industry group maintain multiple classes of stock.
With respect to the board of the 2018 IPO companies, the average number of directors at pricing was 8, and the average number of independent directors at pricing was 5. 76% of 2018 IPOs had a majority of independent directors at pricing. 72% of 2018 IPO companies separated the CEO and Chairman roles.
In another interesting finding, the study reports that 87% of 2018 IPO companies had exclusive forum provisions in their bylaws or corporate charter.
There are a number of other interesting findings in this detailed report, which is worth reading at length and in full.
Those interested in IPOs will also want to review the annual Cornerstone Research report on securities class action lawsuit filings (which I separately reviewed here). Pages 19-25 of the report take a look at 2018 filing activity involving IPO companies, including state court lawsuits filed against IPO companies. Page 25 of the report shows that companies that conducted IPOs during the period 2009-2017 faced a significantly greater chance of getting hit with a securities class action lawsuit than was the case in the past.