MoFo Classics Series:

Late Stage Private Placements

Tuesday, September 19, 2017 8:30 AM – 9:30 AM EDT

Morrison & Foerster Seminar

Presenter: Anna Pinedo, Morrison & Foerster LLP

1. Presentation 2. Late Stage Private Placements: A Life Sciences Sector Survey 3. Infographic – U.S. Late Stage Financings

© MORRISON & FOERSTER LLP 2017 | mofo.com

Late-Stage Private Placements

September 2017

• According to various reports, there are now at least 215 private companies valued by venture capital firms at $1 billion or more

• Uber has been able to raise significant amounts (reportedly $5 billion) in private financings, giving it a value of close to $62.5 billion

• Many privately held companies have been able to raise capital from “crossover investors” (as we will discuss later) that traditionally invested only in IPOs and in publicly held companies

• These companies, often referred to as “unicorns,” have a median valuation after their most recent investment in 2017 of $2 billion (CB Insights)

• However, various sources report that the pace of unicorn formation has slowed and the pace of investment in unicorns has subsided

• 2017 has proven challenging for venture-backed technology IPOs: In the first half of 2017, 16 venture-backed companies went public, raising $1.8 billion (PitchBook)

Venture-Backed Companies Delaying IPOs

• Companies are choosing to defer their IPOs and rely on private financing for much longer than in the past

• This is evident from various IPO reports

• For example, the median market cap for IPO issuers was approximately $484 million in 2016 and the median size of IPOs was $95 million

• Fewer than 2.3% of IPO issuers have a market cap of $50 million or less

• While the number of unicorns has increased, the number of financings and average deal size has declined

• In 2017, to date, there have been 43 financings for U.S.-based unicorns, raising $10 billion; last year, unicorns raised $18.2 billion in 68 deals and 2015 saw 118 deals raising $20.4 billion

• There are 17 companies that achieved unicorn status in the U.S. during 2017, to date

• On average, it took 6.7 years for these 17 companies to reach unicorn status since their founding; looking at all U.S. unicorns, the companies have an average age of 8.8 years

• In 2017, to date, there have been eight exits by unicorns valued at $8.7 billion

Unicorns

• Venture-backed companies have raised more in the private market than the public market in recent years (National Venture Capital Association and Thomson Reuters)

• Venture-backed tech companies’ total average funding ($182 million) and median funding ($105 million) are up 64% and 42% from last year (CB Insights)

• 56% of startups eyed acquisition by a larger company as the long-term goal compared to just 17% that still want to go public (Newsweek/Silicon Valley Bank 2016 Survey)

Venture-Backed Companies

Delaying IPOs, cont’d.

Market Trends

U.S. LATE-STAGE ACTIVITY BY QUARTER

Market Trends

Market Trends, cont’d.

Recent High Profile

Late-Stage Private Financings

$500M $1.5B $526M

$1.0B

$367M

$350M

$275M $300M

$366M

$1.81B

$794M $5.6B

$300M

• There are a number of dedicated late-stage investors, some of which were once only IPO investors. These investors believe that by investing in a late-stage or pre-IPO private placement, they will be able to benefit from an “IPO bump” in valuation and have secured a significant position in the stock

Frequent Investors in Late-Stage Private Placements

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Why Undertake a

Late-Stage Financing?

• There may be a variety of different motivations for a late-stage or pre-IPO private placement

• A company may want to defer an IPO and need to raise additional capital prior to the IPO

• A company may want to take out early friends & family and angel investors and “clean up” its balance sheet or provide partial liquidity for longstanding holders

• A company may want to bring in strategic investors

• A company may be advised that it should prepare itself for the IPO by gaining support and validation from key sector investors that are opinion leaders

Rationale

• A company and bankers may want to “de-risk” an IPO by bringing in crossover investors that will also invest in the IPO

• A company may be advised that an up round will make higher IPO pricing easier for IPO investors to accept

• May be quite sector-dependent

Rationale, cont’d.

Late-Stage Investments

• Typically made in existing, relatively mature companies

• Proven product viability

• Exhibit signs of increasing adoption and revenue growth

• Cash flow is dependable

• Past initial hyper-growth period and reasonable expectations of a sale or IPO within 12 to 24 months

Late-Stage Investment Characteristics

• Larger and more diverse groups of existing shareholders

• Founders, current/former management, employees, seed, family, high net worth, early-stage institutional venture and professional angels

• Each group has different levels of involvement, varying rights and protections tied to equity and divergent objectives for investment

• Founders/management may be significantly diluted by investment— need to create alternative incentives for them

• Startup, seed investors may desire a quicker exit at lower valuation

• Liquidation preference of the investor’s preferred stock

• Typically senior to all other outstanding classes or series of common stock and preferred stock

• Sometimes pari passu to an existing series of preferred stock, particularly if the investment is priced as a flat or up round (using the same or higher pre-money valuation as the previous financing round)

• Typically includes all accrued and accumulated dividends in the liquidation value of the preferred stock

• Usually participating (sharing in any residual liquidation value of the common stock on an as-converted basis)

• If participating, generally not capped in a down round investment, but usually capped (by dollar amount or multiple of return on investment) in a flat or up round investment

Liquidation Preference

• Dividend terms for preferred stock:

• Typically accrue a fixed dividend on the original liquidation value, with the dividend rate typically higher than in early-stage deals (which typically have lower fixed dividend rates if they accrue a dividend at all)

• Are more likely than those in an early-stage deal to be payable periodically in cash and, if not, are usually cumulative, unlike those in early-stage deals, which are usually non-cumulative even when they do accrue a dividend. In addition, the cumulative dividend is often compounding (earning a dividend on the accrued dividends) on a quarterly or annual basis (whether or not declared by the board)

Dividend Rights

• Often allow accumulated dividends to be convertible into common stock or, in some cases, are payable in cash on conversion (rather than forfeited on conversion as with many early-stage deals that have cumulative dividends)

• Participating, with the right to share pro rata on an as-converted basis in any dividends paid on the common stock

• Specific issues for late-stage private placements include:

• Price for late-stage investor that triggers rights — particularly if have to pay a much higher valuation

• Full ratchet versus weighted average — can negotiate full ratchet if high valuation; however, this is very unusual; previous investors usually require weighted average using same formula as previous rounds

• “Pay to play”— much less common in later stage rounds (unless down-round) but may be required as condition to consent from early investors; if don’t participate, then lose anti-dilution protection: latestage investor more likely to receive anti-dilution rights in such cases

Anti-Dilution Rights

• Exempt securities — issuances that trigger anti-dilution; much more heavily negotiated in late-stage; issuer often desires to use equity in acquisitions and third-party partnerships without triggering anti-dilution

• Right of first refusal (ROFR)

• Mirrors rights of previous investors to have the right to buy when designated stockholders sell

• Issues around percentage trigger for stockholders that are subject to the right

• Usual threshold is 1 to 5%; however, if they retain the same threshold, (a) aggregation of sales can have material impact and (b) they may exclude senior management (if you don’t want them to sell out) because of dilution in round

• Late-stage investors are typically not subject to ROFR

Participation Rights and Restrictions

• Right of first offer

• Typical right to have securities offered by the issuer first to investors prior to third parties

• In a later stage, because of lower percentage and higher valuation, can also include a right to buy up to maintain ownership percentage in all securities issuances (including those that would previously be exempt)

• Particularly important because of use of equity in M&A and partnerships and for employee/management consideration

• Pricing is the key given typically high valuation for late stage (i.e., do the purchases outside financings need to be at the investment valuation?)

• Also make sure to add an evergreen true-up provision to provide flexibility in terms of timing and deal terms

Participation Rights and

Restrictions, cont’d.

Crossover Investors

• Provisions are generally negotiated in a charter

• Senior liquidation preference

• Separate series votes on

• Waiver of treatment of change of control transactions as deemed liquidation events

• Waiver of anti-dilution protection

• Automatic conversion in an IPO that is not a “qualified IPO”

• Deemed liquidation events where neither a return of investment nor minimum return is achieved

• Any adverse changes to terms (not just disproportionate changes vis-à-vis other series of preferred)

Charter Provisions

• Qualified IPO will have a minimum price and/or minimum valuation

Important to review the definition of “IPO” included in these types of provisions

• Specific IPO conversion price adjustment

• Ensures achievement of investment back or some minimum return

• Investors’ Rights Agreement Provisions

• Lock-up provision

• Limited to IPO only (180 days)

• Limited to pre-IPO shares only (i.e., does not apply to shares acquired in the IPO or in the open market following the IPO)

• Directors, officers, and 1% stockholders must be subject to similar restrictions

• MFN with respect to release from lock-up—if any stockholder gets released, then investors are released to the same extent and in the same percentage

IPO Protections

• Consent right over adverse changes

• Information rights

• Critical to crossover investors for valuation purposes

• Need information regardless of size of holdings

• Board observer—crossover investors are generally passive investors and do not ask for board seats, but will often ask for observer right to monitor investment

• Preemptive rights

• Want preemptive rights, regardless of size of holdings

• If rights are waived, and waiving stockholders then participate, investors will want the right to also participate to the same extent

Additional Investors’ Rights

• Voting agreement:

• Drag-along provision

• Generally, late-stage investors will not want to be subject to the drag, except under certain conditions

• Class vote where either a return of investment or minimum return is not achieved

• Class vote if proceeds will not follow liquidation waterfall in the charter

Voting Agreement

Involvement by Strategics

• Transfers to competitors

• More heavily negotiated definition of competitors to whom investor may not transfer—current and future competitors

• Negotiated “update” rights to list of competitors

• Related—negotiation of the right for strategic investor to make investment in competitors of company

• Particularly important to issuer if investment is coupled with strategic partnership

• Key is definition of competitor—by type of product and/or by name—and to update rights over time

• Also negotiation regarding steps to be taken if investor buys into a competitor either directly or indirectly

Transfer and Investment Restrictions

• Stand-still provisions are more common in M&A transactions

• Sometimes asked of investors in late-stage deals, particularly strategics

• Investor is obligated to refrain from actions that relate to acquisition of control of the issuer including making proposals to acquire the issuer, buying shares, or launching a proxy contest

• Exceptions

•Negotiated sale

•Agreed-to limits

•Other investor action

Stand-Still Provisions

Other Considerations

• Private company issues

• Board seat or observation rights?

• May have confidentiality issues with board seat if equity investment is combined with strategic partnership

• Need to carefully consider composition of board—particularly given approval of M&A—and incentives of early investors, particularly in a liquidation event

• Often necessary to push for removal of certain board members so early investors do not have too much control in M&A

Board Seat

• Secondary purchases often combine investments directly in issuer with purchases in secondary directly from existing stockholders

• “Cross-purchase” structure

• Less cash from investment is available for company

• Typically purchases of common stock from management and employees to provide liquidity

• Can also purchase preferred from previous investors particularly those that need an exit given LP demands

•Note issues particularly with liquidation preferences and other terms not desirable to late-stage investors

•Cannot change charter rights of class but can change contract rights

• In contract rights, it is particularly important to ensure that secondary shares can be bundled with primary securities for co-sale, tag, and registration rights

Secondary Purchases

• Disclosure and process issues under the tender offer

• Use of third-party platform (e.g., Nasdaq Private Market) can cause administrative hassle

• Not subject to tender offer rules but important that it be “fair” particularly if insiders are selling

• Information prepared by the issuer and included in OTP but it is investor effecting the purchase and taking

• Note issues with options (net exercise feature)

• Issues with international stockholders/employees—tender offer rules in different countries

• Risk mitigation through indemnification

• Also need true-up in company-issued securities recommended as opposed to allowing a “double dip” by participants

• Further risk-mitigation by purchasing directly from the issuer and requiring the issuer to effect tender

Tender Offers

Material Non-Public Information

and Valuation Issues

• Generally, most market participants associate concepts of insider trading with publicly traded securities

• However, the prohibition on insider trading stems from Rule 10b-5, which, by its terms, is not limited to public companies

• How should private companies think about insider trading and the information that they make public or that they are required (contractually) to share with certain parties?

• Information requirements?

• “Regulation FD” parallels?

• What constitutes “current information”?

• What can we learn from information requirements applicable to other exempt offerings?

• Should private companies implement trading windows?

Insider Trading

• How are the shares of privately held companies valued and who is responsible for valuations?

• The IPO prices for many companies that have gone public have been lower than the prices at which these companies had last raised capital privately and lower than the prices at which secondary private transactions were completed

• Private companies have also been able to raise money at higher premiums than their direct competitors that are public

• What does this suggest, if anything?

• Are investors no longer applying a “liquidity discount”?

• Is the premium associated with the liquidation preference that typically accompanies preferred stock rounds only?

Valuation

• In IPOs, investment banks in pricing the IPOs and IPO investors demanding an IPO discount (“IPO underpricing”)

•When VCs or crossover investors participate in successive private financing rounds, often they can negotiate downside protection for themselves, including protection should the company go public at a lower valuation—but what about participants in secondary private markets?

Valuation, cont’d.

• Many analysts have also noted that the fact that few unicorns are being purchased in M&A transactions suggests some skepticism regarding valuation levels

• There have been approximately 20 over $1 billion acquisitions of private tech companies this year, but only 2 involved unicorns

Valuation, cont’d.

• Can the late-stage investor/fund face any liability in connection with valuation issues?

• Is the investor buying newly issued shares or shares from an existing holder?

• Is the existing holder that is selling to the late-stage investor sophisticated? Can the holder evaluate the company and its value as well as the late-stage investor?

• What information is available to the existing holder? Does the late-stage investor have more information? Better information?

• Will the late-stage investor be shaping the IPO? Influencing the IPO price?

IPO Dynamics

• Timing between the private placement and the IPO

• Are expectations aligned between the late-stage investors and the company?

• What if the timeline for the IPO is extended?

• Will the late-stage investors need liquidity? Will other existing stockholders of the company or employees require liquidity?

• Valuation issues

• As discussed, most late-stage private placements include provisions providing for IPO price protection

• How will this work in a volatile market? What if IPO price is almost certainly less than the private price?

• How is the new valuation determined?

Preparing for the IPO

• Well recognized crossover investors may be helpful in promoting the issuer’s interests when dealing with the IPO bankers

• Will crossover investors participate in the IPO?

• Ideally, the pre-IPO round investors will be the “anchor orders” in the IPO

• No ability in the U.S. to obtain and secure cornerstone investors

• Only two options: either obtain an indication of interest from the crossover investor that can be disclosed in the IPO prospectus, or do a concurrent private placement to the crossover investor at the IPO price concurrent with the IPO

• There may be more uncertainty with the indication of interest option if the market remains volatile and IPOs price below stated ranges

Preparing for the IPO, cont’d.

• Did the crossover investors receive confidential information during the pre-IPO process? Has that information been disclosed in the IPO prospectus? Are they cleansed of material nonpublic information?

Preparing for the IPO, cont’d.

Direct Listings for Unicorns

• The new SEC confidential review process also applies to registration statements filed to register a class of securities under the Exchange Act (i.e., a Form 10 or a Form 20-F)

• Prior to the adoption of this policy, an EGC that was planning a traditional IPO would have been able to confidentially submit a Form S-1 for review by the SEC Staff, but if the EGC had opted to register under the Exchange Act (and not pursue a traditional IPO), the Form 10 filing would have been immediately public

• The new policy should level the playing field and make the process similar for issuers undertaking IPOs and those undertaking direct listings

• An issuer that confidentially submits an initial registration statement under Exchange Act Section 12(b) must file it publicly at least 15 days prior to the anticipated effective date of the registration statement

New SEC Policy for Exchange Act Listings

• A registration statement on Form 10 is an Exchange Act registration

• Form 10 enables an issuer to enter the SEC reporting regime

• After a Form 10 is cleared through the SEC, the issuer will be a reporting company, responsible for periodic SEC filings, as well as subject to Sarbanes-Oxley requirements

File a Form 10

• The Form 10 requires that the issuer prepare a substantial disclosure document

• The time and expense involved in preparing a Form 10 is comparable to the time and expense involved in preparing a Form S-1

• Depending on its size, the issuer may be able to provide “scaled disclosures” in the Form 10

• The SEC will review the Form 10; the staff of the SEC’s Division of Corporation Finance will provide comments, including accounting comments

• The review process is comparable to a review process for a Form S-1

• An issuer should expect the review process to take 45 to 60 days

• Once the SEC has cleared the comments on the Form 10, the issuer will request effectiveness

• Going forward, the issuer is then considered a voluntary filer

Preparing a Form 10

• An issuer that pursues voluntary Exchange Act registration under a Form 10, will still need to take additional steps to have a class of its securities listed on an exchange

• In parallel with the Form 10 registration process, the issuer and its counsel should review the listing requirements for Nasdaq, the NYSE and the NYSE MKT

• The issuer can pursue an exchange listing (filing the traditional exchange listing application) provided that it meets the objective listing criteria for the exchange

• The issuer also will have to contact at least three investment banks that are willing to be “market makers” in the security once it is listed. Each market maker will have to submit a letter to the exchange certifying that it is prepared to make a market.

Listing on an Exchange

• Listing on an exchange, without having done an underwritten IPO and having had the securities placed with investors, may not result in a liquid trading market for the issuer’s securities; and there may not be any banks committed to facilitating trading in the stock

Listing on an Exchange,

cont’d.

• So, if a company is a unicorn and does do not need to undertake an IPO in order to raise capital, why would that company want to become a “public” company?

• Having a class of equity securities that is listed on an exchange may be important for recruitment and retention purposes; employees may need liquidity, and private secondary markets may be insufficient

• Existing securityholders may want liquidity or may simply want a “quoted” market price for their securities

• A company may want to undertake acquisitions and having a class of securities listed on an exchange provides an acquisition currency

New Rationales for Exchange Act Registration

Rumored Direct Listing

48

• In the past, direct listings generally involved small-and mid-cap companies

• A unicorn that undertakes a direct listing with assistance from investment banks acting as financial advisers may be able to avoid the pitfalls that have been associated with direct listings in the past and may lead to a new path to the public markets

• Considerations for the issuer:

• The company can work with the financial advisers on a financial model, projections and a valuation.

• If there are direct comps, this process may be simpler

• The financial advisers may provide research coverage

• Depending on the company’s size, there may well be other banks that are prepared to provide research coverage, even without having participated in a traditional IPO

• The financial advisers may conduct non-deal roadshow type meetings with investors in advance of the listing

Proof of Concept

LATE STAGE PRIVATE PLACEMENTSA Life Sciences Sector Survey

May 2017

As many privately held companies choose to remain private longer and defer their initial

public offerings (IPOs), these companies are increasingly reliant on raising capital in

successive private placements. New categories of investors, including cross-over funds,

sovereign wealth funds, and family offices, have become significant participants in late-

stage (or mezzanine) private placements. Depending on the sector, a late-stage private

placement may be an important step for a company. In the technology sector, a late-

stage private placement may be an IPO alternative and provide growth capital that

allows the company to continue to execute on its business strategy. However, in the life

sciences sector, by contrast, a late-stage private placement may provide needed capital

to allow the company to defer its IPO until there is an IPO window. Also, a late-stage

private placement may serve to attract known sector investors to the company and

provide important support to take the company through to a successful IPO. Often, the

investors will express an interest in participating in a subsequent IPO and this may be

important to the IPO’s ultimate success. This may be important during periods of

volatility and when the IPO market is unpredictable. While life sciences companies

represented a significant percentage of IPO issuers in the last few years, and there

appear to be improved prospects for IPOs in 2017, there might still be fewer healthcare

deals as a percentage of the total number of IPOs.

In this survey, we have examined the late-stage private placements that preceded life

sciences IPOs undertaken in 2015 and in 2016. In 2015, there were 61 life sciences IPOs

completed. Overall, in 2015, there were 185 IPOs completed. Life science IPOs

represented approximately 33% of the IPOs for 2015. In 2016, there were 42 life

sciences IPOs completed. Overall, in 2016, there were 117 IPOs completed. Life

sciences IPOs represented approximately 36% of the IPOs for 2016.

2

LATE-STAGE PRIVATE PLACEMENTS

Explanatory Note: Unless otherwise indicated, our findings below regarding late-stage private placements also include private placements that were undertaken concurrently with the IPO.

How many months prior to the IPO was the last private placement completed?

Approximately 91% (94/103) of the companies surveyed undertook a private placement shortly prior to their IPO.

For those companies that undertook a private placement shortly prior to their IPO, the average time period between the final private placement and the IPO was approximately 7.99 months and the range was from 1 to 45 months (excluding those private placements that were undertaken concurrently with the IPO).

What were the gross proceeds from the last private placement shortly prior to the IPO?

• Average gross proceeds: approximately $39.9 million

• Range: $0.01 million to $550 million

• Below $5 million: approximately 18% (17/94)

• $5 million to $20 million: approximately 21% (20/94)

• $20 million to $50 million: approximately 33% (31/94)

• Over $50 million: approximately 28% (26/94)

91%

9%

Time Frame

Shortly prior to IPO

Longer period oftime prior to IPO

18%

21%

33%

28%

Private Placement Size

Below $5 million

$5 million to $20 million

$20 million to $50 million

Over $50 million

3

What type of security was offered in the last private placement before the IPO?

• Common stock or common stock with warrants: approximately 21% (20/94)

• Preferred stock or preferred stock with warrants: approximately 31% (29/94)

• Convertible preferred stock or convertible preferred stock with warrants:approximately 36% (34/94)

• Convertible promissory notes: approximately 12% (11/94)

There were no issuances of non-convertible promissory notes. One company that issued convertible promissory notes also issued warrants exercisable for common stock.

Did investors receive dividend rights? If so, were dividends cumulative?

Yes, investors in offerings of common stock, preferred stock and convertible preferred stock were entitled to receive dividends. Of the offerings of preferred stock and convertible preferred stock, 60% (30/50) specified cumulative dividends and 40% (20/50) specified non-cumulative dividends.

21%

31% 36%

12%

Securities Issued in Last Private Placement

Common stock or common stock withwarrants

Preferred stock or preferred stock withwarrants

Convertible preferred stock or convertible preferred stock with warrants

Convertible promissory notes

60%

40%

Cumulative Versus Non-Cumulative Dividends

Cumulative

Non-cumulative

4

What was the specified dividend rate (for those companies that issued dividend-paying securities)?

Approximately 85% (39/46) of the companies specified a dividend of 8% per annum, one company specified a dividend of 12% per annum, one company specified a variable dividend ranging from 5%-10% per annum and five companies (approximately 11%) specified a dividend of 6% per annum.

Did investors receive anti-dilution protection?

Approximately 95% (60/63) of the companies provided investors with anti-dilution protection and approximately 5% (3/63) did not.

85%

11%

2% 2%

Dividend Rate

8% per annum

6% per annum

5%-10% per annum

12% per annum

95%

5%

Anti-Dilution Protection

Provided

Not provided

5

Of those companies that provided investors with anti-dilution protection, approximately 18% (11/60) provided “full-ratchet” anti-dilution protection and approximately 82% (49/60) provided “weighted-average” anti-dilution protection.

Did investors receive registration rights?

• Demand registration: Approximately 85% (67/79) of the companies provided investors with demand registration rights and approximately 15% (12/79) did not.

• Piggyback registration: Approximately 85% (67/79) of the companies provided investors with piggyback registration rights and approximately 15% (12/79) did not.

18%

82%

Type of Anti-Dilution Protection

"Full-ratchet"

"Weighted-average"

85%

15%

Demand Registration

Provided

Not provided

85%

15%

Piggyback Registration

Provided

Not provided

6

Did investors receive co-sale rights? Drag-along rights?

• Co-sale rights: Approximately 46%(38/83) of the companies providedinvestors with co-sale rights andapproximately 54% (45/83) did not.

• Drag-along rights: Approximately 24% (20/83) of the companies provided investors with drag-along rights and approximately 76% (63/83) did not.

Did investors receive a right of first offer? A right of first refusal? Pre-emptive rights?

• Right of first offer: Approximately 43% (36/83) of the companies providedinvestors with a right of first offer and approximately 57% (47/83) did not.

• Right of first refusal: Approximately 57% (47/83) of the companies providedinvestors with a right of first refusal and approximately 43% (36/83) did not.

43%

57%

Right of First Offer

Provided

Not provided

57%

43%

Right of First Refusal

Provided

Not provided

46%

54%

Co-Sale Rights

Provided

Not provided

24%

76%

Drag-Along Rights

Provided

Not provided

7

• Pre-emptive rights: Approximately 82% (68/83) of the companies provided investors with pre-emptive rights and approximately 18% (15/83) did not.

Did investors receive voting rights?

All of the companies issuing preferred stock or convertible preferred stock provided for voting as a separate class on certain matters (for example, board members) and voting with other common stockholders or other classes of preferred stock on general matters presented to stockholders.

Did investors receive board rights?

Approximately 47% (39/83) of the companies provided investors with board rights and approximately 53% (44/83) did not.

Did investors receive observer rights?

Of those companies that did not provide investors with board rights, approximately 39% (17/44) provided investors with observer rights, typically non-voting, and approximately 61% (27/44) did not.

82%

18%

Pre-emptive Rights

Provided

Not provided

39%

61%

Observer Rights

Provided

Not provided

47% 53%

Board Rights

Provided

Not provided

8

Did investors receive information rights?

• Right to financial reports: Approximately 80% (66/83) of the companies provided investors with a right to receive financial reports and approximately 20% (17/83) did not.

• Inspection rights: Approximately 78% (65/83) of the companies provided investors with inspection rights and approximately 22% (18/83) did not.

Did investors receive IPO price protection?

No. Unlike tech company late-stage private placements in which IPO price protection has become more common, none of the life sciences companies provided investors with IPO price protection.

78%

22%

Inspection Rights

Provided

Not provided

80%

20%

Right to Financial Reports

Provided

Not provided

9

Did insiders participate in the last private placement before the IPO? If so, what was the amount of their investment as a percentage of the gross proceeds of the private placement?

• Approximately 86% (81/94) of the companies had insider participation in their last private placement shortly prior to the IPO. Approximately 11% (10/94) of the companies did not disclose whether they had insider participation in their last private placement shortly prior to the IPO. Three companies (approximately 3%) did not have insider participation in their last private placement shortly prior to the IPO. “Insiders” refer to directors, executive officers, officers or employees with policy-making functions, and 10% beneficial holders.

• Of those companies that had insider participation in their last private placement:

o The amount invested by insiders relative to the gross proceeds of the last private placement was on average approximately 75%.

o The amount invested by insiders relative to the gross proceeds of the last private placement ranged from 5% to 100%.

86%

3% 11%

Insider Participation

With

Without

Not specified

10

IPOs

We also reviewed the IPOs following the last private placements in order to identify trends related to insider participation. Our findings are set forth below.

How many IPOs had insider participation?

Approximately 70% (72/103) of the IPOs had insider participation and approximately 30% (31/103) did not.

What types of insiders participated?

Insiders participating in the IPOs generally were 10% beneficial holders, including through an affiliation with a director or officer. “Insiders” refer to directors, executive officers, officers or employees with policy-making functions, and 10% beneficial holders.

Did the IPO prospectuses include disclosure regarding the type of insider participation?

• Approximately 51% (37/72) of the IPO prospectuses did not disclose the names ofthose insiders participating in the IPO and approximately 49% (35/72) identifiedthose insiders participating in the IPO.

70%

30%

Insider Participation in IPO

With

Without

49% 51%

Insiders Identified Versus Non-Identified

Identified

Not identified

11

• Approximately 64% (46/72) of the IPO prospectuses disclosed the potential participation of insiders in the IPO and approximately 36% (26/72) disclosed the participation of insiders in the IPO.

For those IPOs with identified insider participation, what was the amount of insider investment as a percentage of the gross proceeds of the IPO?

• Range: approximately 1% to 80%

• Average: approximately 32%

Was there a jump in valuation from the last private placement to the IPO?

Yes, typically there was a jump in valuation for life sciences companies from the last private placement to the IPO. This jump was slightly higher in 2015 (an average of approximately over 150%) compared to 2016 (an average of approximately under 110%).1

How many of the IPOs had a concurrent private placement?

Approximately 10% (10/104) of the IPOs had a concurrent private placement. Of those companies with a concurrent private placement, eight also had insiders indicating an interest in participating in the IPO.

1 Data for 2016 only through June 30, 2016.

64%

36%

Potential Participation Versus Actual Participation

Actual

Potential

10%

90%

Private Placement Concurrent with IPO

Occurring

Not occurring

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For those IPOs that had a concurrent private placement, what were the gross proceeds of the concurrent private placement relative to the gross proceeds of the IPO?

• Range: approximately 8% to 38%

• Average: approximately 26%

The IPO market has been improving as 2017 progresses. Also, given rising concerns about the trend of private companies increasingly deferring their IPOs and depending more heavily on private financing transactions, there are various proposed legislative measures introduced that aim to relieve the burdens associated with being a U.S. public company. To the extent that the IPO market continues to improve and some of the proposed measures are ultimately adopted, certain of the trends and dynamics we describe in this survey may change.

For more information regarding late-stage private placements, see our infographic: https://goo.gl/54tcdC.

The Jumpstart Our Business Startups (JOBS) Act is intended to jumpstart capital-raising for emerging companies, as well as

facilitate capital formation for existing public companies of all sizes. Given our longstanding commitment to serve emerging companies and the breadth of our capital markets and corporate practices, we are fascinated by the possibilities that the JOBS Act may turn into reality. So fascinated that we decided to supplement our dedicated JOBS Act webpage with this blog. Our Jumpstart blog is intended to provide entrepreneurs, domestic and foreign companies of all shapes and sizes, and financial intermediaries, with up to the minute news and commentary on the JOBS Act. Visit www.mofojumpstarter.com.

The Short Field Guide to IPOs. In our recently updated IPO Field Guide we provide an overview of the path to an initial public offering and address a number of recent developments. Our guide is available here: https://goo.gl/Cvxa4S.

EGC Corporate Governance Practices. In our survey, we consider the characteristics of

emerging growth companies (“EGCs”) that completed IPOs and the corporate governance, compensation and other practices adopted by them. To access our survey, visit: https://goo.gl/tecAzW.

JOBS Act Quick Start. JOBS Act Quick Start provides a comprehensive overview of the provisions of the JOBS Act, including the changes brought about in market practice as a result of the IPO on ramp provisions. This update

describes the recent FAST Act improvements, the final rules relating to Regulation A, and the final rules implementing Regulation Crowdfunding.

To download your copy, click here. To request a hard copy, please e-mail tstarer@mofo.com.

13

CONTRIBUTORS

Kevin Erspamer Paralegal KErspamer@mofo.com +1 (212) 336-4135

Allan Fong Paralegal AFong@mofo.com +1 (212) 336-4113

CONTACTS

Ze’-ev Eiger Partner ZEiger@mofo.com +1 (212) 468-8222

Anna Pinedo Partner APinedo@mofo.com +1 (212) 468-8179

ABOUT MORRISON & FOERSTER

We are Morrison & Foerster—a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life sciences companies. We’ve been included on The American Lawyer’s A-List for 13 straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are committed to achieving innovative and business-minded results for our clients while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com.

© 2017 Morrison & Foerster LLP. All rights reserved. For more updates, follow Thinkingcapmarkets, our Twitter feed: www.twitter.com/Thinkingcapmkts.

The information contained in this report is the result of analysis that includes certain assumptions and compilations. There can be no assurance that this report is error-free. Neither Morrison & Foerster LLP nor any of its partners, associates, staff, or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion.

© 2017 Morrison & Foerster LLP

www.mofo.com

@ThinkingCapMkts

In the technology sector, there were740 late stage deals completed,which raised $24.7 billion.

$41.3 billion 1,750 Deals2016

CAPITAL RAISED - - - - NO. OF DEALS COMPLETED

$23.6 million [avg. deal size]

Software30.9%

Healthcare11.2%

CommercialServices

9.7%

Pharma./Biotech

9.6%

Comm. &Networking

5.9%

Hardware3.4%

VOLUME BY INDUSTRY GROUP IN 2016

UNICORNS"Unicorns" are private companies

valued at $1 billion and above.

As of January 2017 there were a totalof 100 Unicorns in the United States

valued at over $363 billion.

Other sectors: 19.6%

For more information about late stage financings, visit: goo.gl/QFR9tE

© 2017 Morrison & Foerster LLP | mofo.com

"Late Stage" references Series B through Series Z+ rounds.

Sources: Pitchbook, CB Insights

In the biotech sector, there were80 late stage deals completed,which raised $1.1 billion.

$44.9 billion 1,548 Deals2015$28.9 million

[avg. deal size]

[by deal count]

Media2.9%

CommercialProducts

3.6%

The information provided herein does not constitute legal advice and should not be actedupon; always obtain specific legal advice based on particular situations. The views

expressed herein shall not be attributed to Morrison & Foerster, its attorneys or clients.

As privately held companies choose to remain private longer and defer their initial public offerings orother liquidity opportunities, these companies are focused on raising capital in private placementsmade principally to institutional investors, cross-over funds and strategic investors. Late stage privateplacements have almost become a prerequisite to an IPO, or perhaps they are the new IPOs.

U.S. LATE STAGE FINANCINGS