BRIDGING THE FUNDING GAP

IN THE ERA OF THE VANISHING MIDDLE MARKET IPO

Fundamental Changes In IPO market Over Last Two Decades:

1990s 2000s

# Of Companies: > 4,000 < 1,400Total Gross Proceeds: approx. $290 B approx $323 BAvg. IPO Size: approx. $70 MM approx. $200 MMAvg. Market Cap: > $25 MM approx. $1 B

THE VANISHING MIDDLE MARKET IPOFundamental Changes

THE VANISHING MIDDLE MARKET IPOSome Theories Why

• Caused By Government Overregulation: – Additional costs of compliance with government regulations

(SBOX, SEC, Blue Sky, etc.) too burdensome for small/mid-sized companies

• Including audit, legal and related fees with initial offering, as well as, continued compliance fees

– Regulation ATS (Rule 301) - Increased Tick sizes making small and mid-size cap stocks unprofitable for brokers

• Caused increase in self-directed online brokerage accounts making market for small and mid-size cap stocks even smaller

– Litigation resulting from heightened regulatory enforcement • ‘If you go public, you get sued’; Litigation increases direct costs (e.g.

legal, insurance, etc.) and indirect costs (e.g. time and effort it takes to litigate)

THE VANISHING MIDDLE MARKET IPOSome Theories Why

• Caused By Shifts In Market: – Market demand shift to favoring big firms over small firms

• Small IPOs (< $75 MM Market Cap) more likely to voluntarily/involuntarily delist !!!!!

• Small IPOs largely remain small IPOs even if they do not delist • Investors simply tired of investing in small IPOs (< $75 MM Market Cap) due to their

inability to survive and grow in the public markets – Market shift toward indirect ownership of securities

• Today most people own stocks in companies through mutual funds (401ks, IRAs, etc.) not directly in the stocks of companies

• As a result, mutual funds are currently driving the IPO market • Mutual funds invest in larger companies (> $300 MM Market Cap) to remain profitable

BRIDGING THE FUNDING GAP Alternatives

With the slow death of the IPO as a financing/exiting strategy for Middle Market companies, they are increasingly looking to traditional and new alternatives which include: • Venture Capital;

• Private Placements: – Angel Investors; – Crowdfunding;

• Private Equity/Mergers & Acquisitions

BRIDGING THE FUNDING GAP Venture Capital

• Traditional VC’s look for companies with rapid growth potential and the ability to get to IPO quickly – Results in a greater % of today’s VC money being invested in

later stage companies and in later funding rounds

BRIDGING THE FUNDING GAP Venture Capital

• Over the past several years, one of the most significant trends in venture capital has been the rise of smaller micro VCs (< $100 MM)

– Filling the gap left by traditional VCs with respect to smaller sized companies, early stage rounds and smaller deal sizes

– Internet and mobile dominate micro VC investments (> 85%) with eCommerce marketplaces, apparel firms, accessories firms and Educational tech firms rounding out the top 5

BRIDGING THE FUNDING GAP Private Placements

• Private placements represent the largest source of funding for middle market companies today

– Reg. D Private Placements represented an almost $1 Trillion industry in 2012 – Rule 506 Offerings dominate (94% of total offerings; > 99% of total amounts raised) – Rising trend in # and total amount of Reg. D Private Placements since the 90’s,

particularly, within the last 4 years

BRIDGING THE FUNDING GAP Private Placements

• Current Sources Of Funds – Angel Investors; – Crowdfunding (Rule 506(c)(3) Offerings)

• Potential Future Sources Of Funds – Intrastate Crowdfunding – General Crowdfunding (Title III)

• Issues: – Final SEC Crowdfunding rules (when/scope) – July deadline for SEC’s review of “Accredited Investor”

definition

BRIDGING THE FUNDING GAP Private Equity/Mergers & Acquisitions

• Many small firms are choosing not to remain independent, but instead merging as a way of getting big fast

– Small firms can often create greater operating profits by selling out in a trade sale rather than relying on organic growth

– Importance of getting big fast has increased over time as a result of increased technological innovations; Many profitable opportunities potentially lost not quickly seized

– Leading to a increasing trend of M&A activity both as an exit strategy and for continued growth

• Coupled with piles of current PE “dry powder,” professionals expecting an overall increase in M&A deal activity in 2014/2015

– Significant dry powder increasing company valuations across the board – KPMG Survey: 63% of surveyed professionals expect their U.S. clients to make at least

1 acquisition in 2014 and 36% expect their companies will complete a divestiture in 2014 – Expected to be a very few megadeals in 2014/2015, with middle-market deals

dominating M&A activity

BRIDGING THE FUNDING GAP Effects of Regulations

• Regulations – J.O.B.S. Act; – SEC’s Tick Size Pilot Program

• Effects On The Middle Market IPO Market – Will it cause a significant increase in the Middle Market IPO market? Only if the

cause of the decline was primarily as a result of regulatory matters/costs – Title I of the J.O.B.S. Act may cause an uptick in Middle Market IPOs in the short

term but long term viability of the market is still in question • Effects On Middle Market Access To Capital

– Regulations (particularly Title II) making it considerably easier and more cost effective for Middle Market companies to access capital then ever before

– Any changes in “accredited investor” definition may tighten available capital

TAKE-AWAYS

1. IPO Market will be continue to be dominated by large, later stage companies for the foreseeable future

2. Middle Market companies increasingly looking to traditional and alternative forms of private capital – Including venture capital (particularly Micro-VC capital) and private placements (Angel Investors & Crowdfunding)

3. The Future Effects of JOBS Act and similar regulations are uncertain – Whether they have a significant impact on the Middle Market IPO Market depends on the underlying cause of the decline. They will, however, continue to pave the way for easier and cheaper sources of capital for Middle Market companies

4. Middle Market IPO Market NOT coming back in the near future – Even if current regulations help this IPO market, it will take a significant amount of time

5. Expect to see an increase in Middle Market M&A activity in 2014 & 2015 – Particularly with respect to strategic acquisitions

THANK YOU

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QUESTIONS??

Contact Info: !Anthony J. Zeoli, Esq. Ginsberg Jacobs LLC (773) 983-9133 azeoli@ginsbergjacobs.com www.ginsbergjacobs.com www.IllinoisCrowdfundingNow.com