Recently, at a meeting of the SEC’s Small Business Advisory Committee, a panel provided an update on the state of play of the IPO market. While IPO activity—traditional IPOs, SPACs and direct listings—was off-the-charts in the second half of 2020 and throughout 2021, geopolitical upheavals, market volatility, inflationary pressure, economic uncertainty and fears of recession have put a dent in the data. Quite a dent—the number of equity capital markets offerings has decreased 73% compared to a year ago, according to one of the panelists. But does that mean the IPO market is broken? Not at all. Despite the recent relatively moribund market, companies are continuing to prepare for IPOs and submit confidential filings to the SEC with the intent of going forward when an opening is in sight. As one of the two panelists observed, “despite the 2022 IPO drought, the pipeline for companies looking to access the public markets at some point in the future remains strong.” According to SEC Chair Gary Gensler’s statement at the meeting, “naturally, the number of IPOs ebbs and flows over the course of different economic and market cycles. We are living in one of those transitional times right now, shaped by economic uncertainty relating to the war in Ukraine, the pandemic, and central banks shifting from an accommodating to a tightening policy stance. What I am most interested in is the advice you might have for the long-term regarding traditional IPOs, Special Purpose Acquisition Companies (SPACs), and direct listings.” And he did hear some of that advice, albeit preliminarily, from the Committee.
In her opening statement, Commissioner Hester Peirce observed that a recent report found that the U.S. is expected to report the lowest proceeds from IPOs since 2003. With that in mind she asked the panel:
- “Are these recent market trends a short-term phenomenon or indicative of broader, long-term developments? Market trends should inform Commission action, but only if they are long-term structural market changes, not flash-in-the-pan trends.
- Is any of this drop-off attributable to an uncertain and increasingly costly regulatory environment for public companies, caused by new and pending SEC regulations and guidance?
- Do these recent market trends speak to how the SEC can properly calibrate rules for traditional IPOs, direct listings, reverse mergers, and SPACs, without overly discouraging any particular method of going public, or creating unnecessary opportunities for regulatory arbitrage?”
Commissioner Mark Uyeda expressed his concern about the decline in the number of publicly traded companies, which reduces economic opportunities for retail investors. Are regulatory compliance costs a factor? “Although higher regulatory compliance costs may not be the sole factor driving this decrease,” he suggested, “we should aim to improve the regulatory balance to incentivize companies to go or remain public.” The current SEC agenda, “if finalized, will impose further reporting and disclosure obligations on public companies.” He raised the question of whether the climate and human capital disclosure proposals, which would impose significant addition compliance costs, would even elicit financially material information that is decision-useful for investors. He advocated that the SEC’s “rulemaking proposals should consider the cumulative impact of the entire regulatory agenda. The Commission should also revisit the assumption used in many recent Commission rulemakings, that the costs for outside legal counsel to comply with SEC reporting obligations is $400 per hour, an estimate that has remained static since 2006.”
The first panelist, from Refinitive, a provider of financial market data and infrastructure, characterized the current period as the “resetting stage.” For many years prior to 2020, there was a lot of hand wringing about the dwindling number of public companies. For example, in congressional testimony in 2017, SEC Chair Jay Clayton expressed concern regarding the decline in the number of public companies, contending that it is Mr. and Ms. 401(k) who bear the cost of this trend because they now have “fewer opportunities…to invest directly in high quality companies.” (See this PubCo post.) The topic has also been taken up by various House committees, SEC advisory committees and SEC forums, as well as by securities and industry organizations. (See this PubCo post, this PubCo post and this PubCo post.) Then, 2021 saw the largest number of equity offerings (of all types) ever—over 1,400. That was first time that the number had even climbed over 1,000. Moreover, 318 U.S. companies went public on US exchanges, the largest number since 2000.
With regard to traditional IPOs, he reported, in 2021, the number of U.S.-listed was the largest since 2000. So far in 2022, that number was under 100. According to the speaker, that was the lowest number of deals since 2009, during the financial crisis, and, with regard to proceeds, it was “slowest first nine-month period for US-listed traditional IPOs since 1990 with just $6.6 billion in proceeds raised so far this year, a 94% decline compared to a year ago.” Traditional IPO performance has also been negative in the last year, he said.
SPAC IPOs have been around for a while, but, the speaker said, only 11 weeks into 2021, SPACs had already set an all-time record. However, restatements and other regulatory concerns led to a sharp decline in April. Although they rebounded again later in 2021, the number fell again in 2022 as the “market absorbed supply,” he said.
There is some light at the end of the tunnel. According to the speaker, while traditional IPO filings dropped in the midst of volatile market conditions throughout 2022, September 2022 witnessed the largest monthly filing volume since January 2022, as companies looked to reengage with their advisors and the investor community, “potentially thinking about an on-ramp for an IPO, potentially this year or into next year.”
For the next presentation, a partner in PwC’s capital-raising practice discussed his findings from conversations with a number of market participants, including pre-public companies, recently public companies and various advisors. He began by noting the positive effect on capital-raising of various efforts by the staff pursuant to the JOBS Act, as well as the extension of the concept of confidential draft registration statements for non-EGCs. He also echoed many of the findings from the prior speaker about the state of the public capital markets, including the strength of the current pipeline for future deals, citing “many companies that have filed confidentially with the staff, and [it’s] a matter of time, of when not if, these companies publicly flip the registration statements and look to go effective. Further, we continue to advise numerous private companies on public company readiness who are looking to confidentially submit a draft registration statement in Q4 2022, or during ’23. Many marketplace participants are evaluating their options for that launching their IPOs in ’23 into ’24.”
With regard to SPACs, he commented that “marketplace participants do believe SPACs will continue to be a part of the going-public ecosystem, as the SPAC product has been around for decades. However, the peak of SPACs is likely behind us.” His feedback on the SEC’s SPAC proposal was that the overwhelming majority of market participants supported the alignment of financial reporting requirements for de-SPAC mergers and traditional IPOs. He noted, for example, that, in some de-SPAC deals, the target of a de-SPAC that would qualify as an EGC was still required to provide an additional (third) year of audited financials, which prevented or delayed a deal. A similar issue existed regarding the ability to defer SOX reporting. Finally, he reported that most participants disagreed with a reduced timeframe to complete a de-SPAC transaction.
With regard to the proposed climate disclosure regulations, he found that most market participants favored the increased transparency and greater integration of climate information with broader disclosures; however, they also voiced concerns over the timing of disclosures for any potential first-time issuer. Some viewed the disclosures as a potential barrier to entry to the capital markets for companies already resource-stretched as a result of IPO compliance. Most will not have that type of climate information readily available for an SEC filing, and the time and effort required for preparation could delay or derail an offering altogether. Accordingly, most potential first-time issuers advocated exclusion of the new climate disclosure requirements from new issuer registration statements. They also advocated transition relief (similar to SOX 404) for newly public companies, including de-SPACs, to the second 10-K post-IPO, with prospective-only information required, to allow time to develop formal processes and controls for climate-related information.
He ended by expressing his appreciation for the staff’s balanced approach to reasonable waiver requests, under Rule 313 of Reg S-X, which he said have undoubtedly facilitated cost-effective and efficient capital-raising by marketplace participants, while providing meaningful information to investors.
A Committee member responded that, in his experience, while the regulatory requirements may be a factor on the margin, he really didn’t think it was a “big obstacle.” Certainly it’s a “big lift,” but the decision not to go public now, in his view, had much more to do with macroeconomic conditions and IPO pricing. That’s why there were so many offerings last year but not this year. With regard to SPACs, he thought the big SPAC advantage was the ability to provide forecasts and to communicate in a different way, especially for pre-revenue, emerging companies. He wasn’t sure that some of the companies that went public via SPACs could have gone public through a traditional IPO route, because they may not have been able to tell enough of their stories. And that differentiation may well disappear under proposed new rules, he said. While there was no assurance provided for the communications, the loss of that ability to offer the “wild west of forecasts” might be missed. One of the panelists agreed that that was a concern. Another Committee member expressed concern about the difficulty for small or mid-size companies to access the public markets to raise “patient capital” for growth, given the costs, data and other things that just make it unattractive.
A Committee member asked whether the panelists thought that the performance of recent IPOs and SPACs was a function of the macroeconomic environment, the caliber of the company or the mechanism through which these companies went public? A panelist responded that it was probably a mix, given that many quality companies have been affected adversely by macroeconomic conditions. He had not heard any concerns raised by market participants that regulatory activity by the SEC or others might make it more difficult for companies to go public. Another Committee member observed that a number of companies that went public last year at “rich valuations” have not performed well as the market has declined, reducing the appetite to go public. That has nothing to do with the regulatory requirements, he contended, as much as macroeconomics. Investors “overbought” last year, were “burned a little bit, and they’re probably not willing to pay the same multiples. I think that’s what is really driving the decline right now, based on my observations and talking to participants.”
One Committee member observed that, with regard to the decline of de-SPAC deals, it may be a result of “regulatory overhang.” That is, until SEC rulemaking clarifies the requirements, especially the issue of underwriters’ liability, no one “really wants to engage.” Some people even think, he suggested, that these companies might be subject to incremental regulatory scrutiny. He recommended that the SEC just lay out the rules. He also argued that highly regulated agents and underwriters should be accountable for the roles that they are supposed to play under the ’33 Act—for “delivering companies that are in compliance.” He also advocated that there be a harmonization of rules and responsibilities across SPACs, traditional IPOs and direct listings that could eliminate “regulatory arbitrage,” that would allow companies more choice. One of the panelists agreed.
In conclusion, a Committee member offered a paean to the ’33 Act as “probably the single greatest piece of legislation that unleashed the growth of the United States as the preeminent economy.” And he insisted that wasn’t even remotely an overstatement. The ’33 Act, in his view, helped to establish market fairness, investor protection and capital formation, all of which encouraged capital from all over world to invest in the US economy. Then, when a couple of big companies broke the law, Congress passed SOX, which mandated “good stuff,” but it was one size fits all, with the brunt of the cost falling on smaller companies. It wasn’t until the JOBS Act that there was a focus on helping smaller capital-intensive emerging growth companies that needed the public markets to build their businesses.
The Committee agreed to work on recommendations that the SEC harmonize and clarify the rules for the three different approaches to going public—traditional IPOs, SPACs and direct listings—which would include increased disclosures and holding intermediaries accountable for their primary role as underwriters and that the SEC promptly move forward on its SPACs rulemaking to clarify those rules.