Evolving Capital Markets & Crowdfunding Symposium

8/8/2019 Evolving Capital Markets & Crowdfunding Symposium

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© Grant Thornton LLP. All rights reserved.

Evolving Capital Markets

Crowdfunding Symposium

New Legis lat ion , New Markets, New

Opportuni t ies

David Weild

212-542-9979

Atlanta


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David Weild

• Leader, Grant Thornton's Capital Markets group

• Chairman & CEO, Capital Markets Advisory Partners

• Chairman of the Small Business Crisis Task Force for the International Stock

Exchange Executives Emeriti (non-profit)• Former vice-chairman and executive vice-president of NASDAQ

• Numerous senior management roles at Prudential Securities, including:

– President of PrudentialFinancial.com

– Co-Head of strategy (banking, research, institutional sales and trading)

– Head of corporate finance

– Head of equity capital markets and equity syndicate globally

– Head of technology investment banking

– Commitment Committee member


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Equity capital marketsThought leadership citations and public policy activity

“ The problemsdocumented by [Weild & Kim's] studies led to the

JOBS Act (HR 3606)."

"Broken Markets "

Sal Arnuk and Joseph Saluzzipage 198FT Press

May 2012


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"The financial system has been wounded by a

flood of so-called innovations that merely

promote hyper-rapid trading…Individual

investors are being shortchanged."John C. Bogle, founder of VANGUARD

"A Mutual Fund Master, Too Worried to Rest"

By Jeff SommerThe New York Times

August 11, 2012


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"Markets are still adjusting to regulatory

changes like the Order Handling Rules and

Regulation ATS that were made over a

decade ago."Professor Robert Schwartz

Baruch College

Marvin M. Speiser Professor of Finance and University Distinguished Professor of Finance atthe Zicklin School of Business


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"The irony of all this is that the change in Order Handling Rules [in 1997]

that were instituted under my watch at the [SEC] has resulted in the

proliferation of markets, technologies and automation that brought about

the flash crash and yesterday's [Knight Securities] events. I think publicconfidence is severely shaken by things of this kind."

Arthur Levitt, former chairman of the SEC

Bloomberg Surveillance with Ken Pruitt and Tom Keen August 2, 2012


7/30© Grant Thornton LLP. All rights reserved.

"I think many of our problems with market liquidity in small- and mid-caps

can be traced right back to decimalization [tick sizes]," said Dennis Dick ,

prop trader at Br ig ht Trading in Detroit. "Where decimalization has

helped to reduce spreads in the large-cap space, it has actually harmedliquidity in the small- and mid-cap space."

For blocks, "it's nearly impossible to execute any sizable order without

significant price impact," Dick said.

"SEC to Examine Tick Size for Small Caps"By John D’Antona Jr.

Traders Magazine Online News April 17, 2012



" Larry Tabb, chief execut ive of th e Tabb Grou p , said dime spreads

shouldn't be off the table and considered as well. This, he added, would

incentivize brokers to trade and provide research for smaller and new

companies.

" [Professo r James] Angel believes issuers, not the regulators, should

decide what the spread should be in stocks. But if a company trades better

with sub-penny pricing, 'then sub-penny should be permitted.'"

"Wider Spreads and Fees Could Help Restore Investor Confidence"By John D’Antona Jr.

Traders Magazine Online NewsJune 1, 2012



Some past publicationsFoundational arguments behind The JOBS Act (but much left to be done!)

- Cited in Congress - Cited by the U.S. Treasury - Cited by the SEC

- Cited by the Senate - Cited by The President's Jobs Council

Subscribe to the Capital Markets Series at www.GrantThornton.com/subscribe

November 2008 November 2009 June 2010 October 2011



The JOBS ActSeminal events • NYSE/NVCA Blue Ribbon Task Force2008

2009• Senator Kaufman speech on the floor of the U.S.Senate

• CFTC-SEC Joint Panel on Emerging RegulatoryIssues2010

2011Title IV - House subcommittee on capital markets(testimony 3/16)• President Obama cites IPO market problems

(9/8 speech)

• SEC Small Business Forum (testimony 11/17)

• Signing of The JOBS Act

• SEC Advisory Committee testimony(Decimalization)

• Congressional testimony (Decimalization)

2012

"How can we create a market structure that works for a $25

mil l ion IPO —both in the offer ing and the secondary

aftermarket. If we can answer that quest ion, th is country

wil l be back in business."

Title I - Met with to interest Kate Mitchell who laterChaired the IPO Task Force for the US Treasury

Why are IPOs in

the ICU? (11/2008)

Titl es II, V, VI - A wake up call for America(11/2009)

"We’re also planning to cu t away the red tape

that prevents too m any rapid ly growing

startup companies from rais ing capita l andgoing public ."



(100)

(50)

0

50

100

150

200

250

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Indexed value of selected global exchange listings (1997 = 0)

Hong Kong

China

Australia

United States

Deutsche BörseTokyo

Toronto London

Sources: Capital Markets Advisory Partners LLC and World Federation of Exchanges

Based on the number of listed companies at year-end, excluding funds. Data as of Dec. 31, 2011.

U.S. has lost 43.5% of all listed companies since 1997.First published in A Wake-Up Call for America (November 2009)



The U.S. IPO market collapsed

0

100

200

300

400

500

600

700

800

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

N u m b e r o f U . S .

I P O s

Price/share < $5.00 Deal size < $50 million Deal size ≥ $50 million

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of December 31, 2011, excluding funds, REITs, SPACs and LPs

*Christie, William G., and Schultz, Paul H., “Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?”Journal of Finance

, Vol. 49, No. 5, 1994.

520 averageIPOs/year pre-bubble

539 averageIPOs/year bubble

128 averageIPOs/year post-bubble

Pre-bubble Bubble Post-bubble A B C D E F G H I J

A Christie-Schultz study*B First online brokerageC New Order Handling RulesD Regulation ATSE Online brokerage surges

and stock bubble inflates;Gramm-Leach-Bliley Act

F Regulation FDG DecimalizationH Sarbanes-Oxley ActI Global Research Analyst

SettlementJ Regulation NMS


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Small IPO collapsed with SEC changes to theeconomic model that paid for small-cap support.Chapter 2 of the JOBS Act—Title 1, Section 106(b): Tick Sizes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

P e r c e n t a g e o f t o t a l U . S .

I P O s

Tick size

12-1/2 to 25 cents

Order Handling Rules

1/100thof 1 cent

Regulation NMS

Regulation ATS

3-1/8 cents

Decimalization

1 cent

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic

Data includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.

Transactions raisingless than $50 million

Transactions raisingat least $50 million

Smaller tick sizes undermined U.S. small-company IPOs

Sarbanes-Oxley


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Why do we care about IPOs? A vibrant IPO marketimproves private investment activity and M&A values.

Large-cap public (symmetricalorder book)

Small-cap public (asymmetricalorder book)

IPO (“canary in the coal mine”)

Venture B, C, D round, etc.

Angel | venture A

Startup: Friends, family, angel


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The JOBS Act focused on limiting cost for issuersand improving communications with investors. It has

yet to address aftermarket support.


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The "one-two punch“[Order Handling Rules (1997) and Reg. ATS (1998)]

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

T i c k s i z e s

P e r c e n t a g e o f t o t a l U . S .

I P O s

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.11992: $0.125 for NASDAQ stocks ≥ $10, AMEX stocks ≥ $5 (≥ $10 in 1995) and NYSE stocks > $1; 1997: $0.0625 for NASDAQ stocks ≥ $10, AMEX stocks ≥ $0.25 and NYSE stocks ≥ $0.50.21992: $0.03125 for NASDAQ stocks < $10, AMEX stocks < $0.25 and NYSE stocks < $0.50.

A Order Handling RulesB Regulation ATSC DecimalizationD Sarbanes-Oxley ActE Regulation NMS

A B C D E

Quote-driven market (pre-Reg. ATS)

Effective tick size > minimum tick size

Electronic order book market (post-Reg. ATS)

Effective tick size collapsed to minimum tick size

Transactions raisingless than $50 million

Transactions raisingat least $50 million

Tick size for higherpriced stocks1

"Bankable" spreador effective tick size

Tick size for lowerpriced stocks2


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JOBS ActSEC resources

SEC JOBS Act portal:

http://www.sec.gov/spotlight/jobs-act.shtml

FAQs:

Emerging Growth Companies (Title I)General Applicability of Title 1:http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm Confidential Submission Process for Emerging Growth Companies:http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm

Crowdfunding (Title III)

Crowdfunding Intermediaries:http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm Notice: Use of the Crowdfunding Exemption:http://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htm

Exchange Act Registration and Deregistration (Titles V –VI)Changes to Registration and Deregistration Requirements:http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm

http://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htmhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtmlhttp://www.sec.gov/spotlight/jobs-act.shtml


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• Emerging Growth Companies (EGCs): ‒ Category defined ‒ IPO process reforms ‒ Reduced public company reporting

requirements ‒ Research restrictions loosened

• Shareholder registration threshold raised

for companies to 2000 • "Held of record" definition revised—no

deadline for SEC rulemaking• Shareholder registration threshold raised

for banks—SEC rule due April 5, 2013

The JOBS ActImplementation timeline

April 5, 2012 (signing)

• General solicitation and advertisingpermitted for accredited investorsand QIBs (Reg. D and Rule 144A)

• SEC study on decimalization'simpact on small companies due toCongress (public companies)

• GAO report on impact of Blue Skylaws on Reg. A offerings

October 2, 2012 (180 days)

• SEC authorized to increasetrading in EGC stocks from onepenny to nine cents

• Review of Reg. S-K to decreaseEGC registration and reportingburden

July 5, 2012 (90 days)

• SEC to issue rules exemptingcrowdfunding offerings of up to$1 million annually (aggregate)

• Crowdfunded shareholdersexcluded from shareholder count

December 31, 2012 (270 days)

No deadline

• New registration

exemption on offerings upto $50 million


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• Emerging Growth Companies (EGCs): ‒ Category defined

‒ IPO process reforms ‒ Reduced public company reportingrequirements

‒ Research restrictions loosened• Shareholder registration threshold raised

for companies to 2000• "Held of record" definition revised—no

deadline for SEC rulemaking• Shareholder registration threshold raised

for banks—SEC rule due April 5, 2013


April 5, 2012 (signing)

"News You Can Use"Please consult your attorney.

• "Confidential filings" for IPOs becoming the

norm.

• "Testing the waters" to become the norm fortechnologically complex businesses.

• Likely more parallel pathing of privateplacements and IPOs. Check with attorneyson "integration."

• Companies able to stay private longer andmake more aggressive use of Rule 144A,Rule 506 of Reg. D and other privateplacement exemptions (shareholder capincreased from 500 to 2000).


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• General solicitation and advertisingpermitted for accredited investorsand QIBs (Reg. D and Rule 144A)

• SEC study on decimalization'simpact on small companies due toCongress (public companies)

• GAO report on impact of Blue Skylaws on Reg. A offerings

July 5, 2012 (90 days)



• Deadlines missed. Reg. D expected shortly.

• Definition of accredited investor

• Rules governing advertising

• Debate over what restrictions may be placedon advertising content to accredited investorsand QIBs under Reg. D.

• Likely to see firms advertise (esp. funds) andsolicit via email.

• Point of control shifted from solicitation toverifying that the investor is duly qualified.

• Reg. A—Blue Sky may be an impediment.Lots of back channel discussion to ensue withstock exchanges and SEC (TBD).


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October 2, 2012 (180 days)

• SEC authorized to increase

trading in EGC stocks from onepenny to nine cents

• Review of Reg. S-K to decreaseEGC registration and reportingburden



• Deadlines aggressive—likely to be missed by

SEC. Please monitor.• Increased “tick sizes” will increase support for

small cap public companies, but needs to beextended well beyond simply EGCs.

We recently spoke to the SEC Advisory

Committee on Small and Emerging Companies.They are taking this seriously.

SEC report to Congress on the impact of

Decimalization on capital formation concluded

that they needed to study the issue further.


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• SEC to issue rules exemptingcrowdfunding offerings of up to $1million annually (aggregate)

• Crowdfunded shareholdersexcluded from shareholder count

December 31, 2012 (270 days)


• Deadlines aggressive—likely to be missed by

SEC. Please monitor.• Limited to $1 million.

• Regulation not yet settled—likely to go toFINRA.

• Broker/dealers and crowdfunding portalsprohibited from acting until SEC gives

approval.• Likely to be used to satisfy 400 shareholder

requirements on IPOs (TBD)!


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No deadline

• New registrationexemption on offerings upto $50 million


• "Reg. A+"

• Needs to be fleshed out.• Currently in discussions with one stock

exchange and a known tech securities lawfirm on providing some advice to SEC.

• Hoping for a construct (no guarantees) that:

‒ Limits Blue Sky

‒ Provides streamlined disclosure

‒ Provides and exchange listing

• Advantage: investors receive tradablesecurities.


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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Success rate of IPOs maintainingissue price one month after going public

Source: Capital Markets Advisory Partners LLC, All rights reservedIncludes only corporate issuers, excluding funds, MLPs, SPACs and REITs.Based on the average success rate of the last 30 filed deals, up to one month ago. A successful deal is defined as trading at or above issue price one month after pricing.

IPOs that are trading at or above issue price 30 daysafter pricing(Trailing 30 IPOs)

• FaceBook – Not an anomaly

– Unintentional

– Underlying causes

• Deteriorating coverage ofinvestors

• Unreliable feedback

• Poor placement


25/30


Increased economic incentives (e.g., tick sizes) arethe third leg of the stool

Improve economic

incentives to support

especially small-cap

stocks

(increases in tick sizes)

Lowered cost

for issuers

Improved issuer

communication

with investors


26/30


Collapse (Before and after structural changes)

Small-capitalization companies and capital formation

Before 1997 After 2001 % changeTick sizes $0.25 per share $0.01 per share -96%

Investment banks (acting as a bookrunner) 167 (1994) 39 (2006) -77%

Small company IPOs 2,990 (1991-1997) 233 (2001-2007) -92%


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A major contributor to employment

-

5

10

15

20

0

200

400

600

800

1,000

1,200

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

A d d i t i o n a l j o b

s

M i l l i o n s

D o m e s t i c c o m p a n i e s g o i n

g p u b l i c i n t h e U . S .

Minimumadditional jobs(direct plusprivate marketeffect)*

+3.1 million jobs (direct)

*Best estimate of the multiplier effect in the private market of more companies going public

Sources: Grant Thornton LLP, Dealogic and the U.S. Department of Commerce Bureau of Economic AnalysisDomestic corporate companies going public in the U.S. as of Dec. 31, 2011, excluding funds, REITs and other trusts, SPACs and LPs. Assumes an annual growth rate of 2.57% (U.S. real GDP growth, 1991-2011) and 822 jobs created on average post-IPO (see "Post-IPO

Employment and Revenue Growth for U.S. IPOs," Kauffman Foundation).

+6.2 million jobs (direct plus private market effect)

+9.4 million jobs (direct)+18.8 million jobs (direct plus private market effect)

Minimumadditional IPOs

Actual number ofdomestic IPOs

Maximumadditional IPOs

Minimumadditional jobs(direct)

Maximumadditional jobs(direct plusprivate marketeffect)*

Maximumadditional jobs(direct)


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© Grant Thornton LLP All rights reserved

U.S. member firm of Grant Thornton International Ltd

This presentation is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, and is in all respectssubject to negotiation, agreement and signing of specific contracts. The information contained within this document is intended only forthe entity or person to which it is addressed and contains confidential and/or proprietary material. Dissemination to third-parties,copying or use of this information is strictly prohibited without the prior written consent of Grant Thornton LLP.

David [email protected]@cmapartners.com212-542-9979


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While 81% of all public companies are sub-$2 billionin market value…

0%

20%

40%

60%

80%

100%

Nano-cap(sub $100 million)

Micro-cap($100 to $500 million)

Small-cap($500+ to $2 billion)

Mid-cap($2+ billion to $10 billion)

Large-cap($10+ billion)

52.0%

15.6%

12.5%6.4%

81.1% of listed companies

13.5%

Percentage of total number of listed companies

Sources: Grant Thornton LLP and Capital IQIncludes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.


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0%

20%

40%

60%

80%

100%

Nano-cap(sub $100 million)

Micro-cap($100 to $500 million)

Small-cap($500+ to $2 billion)

Mid-cap($2+ billion to $10 billion)

Large-cap($10+ billion)

0.3% 1.3%

19.1%

74.3%

6.6% of total market value

5.0%

Percentage of total public company market value

…sub-$2 billion companies represent less than 7% oftotal public company market value

Sources: Grant Thornton LLP and Capital IQIncludes NASDAQ, NYSE (including AMEX) and OTC listings. Corporate issuers only, excluding holding companies, funds, MLPs, SPACs, REITs and other trusts.

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Evolving Capital Markets & Crowdfunding Symposium