SIFMA Insights:: US Equity Capital Formation Primer

Executive Summary
SIFMA Insights:
US Equity Capital Formation Primer
An exploration of the IPO process and listings exchanges
November 2018
SIFMA Insights Page | 1

Executive Summary
Contents
Executive Summary ................................................................................................................................................................................... 4
The Importance of Capital Formation ......................................................................................................................................................... 5
Declining Number of US Listed Companies and IPOs ............................................................................................................................... 9
Decreasing Number of Small Cap IPOs ................................................................................................................................................... 12
IPOs Not Keeping Pace with the Stock Market Run ................................................................................................................................. 14
Factors Driving Companies to Remain Private or Delist ........................................................................................................................... 16
Regulatory Dollar and Opportunity Costs ................................................................................................................................................. 18
Litigation Concerns ................................................................................................................................................................................... 19
Declining Research Coverage .................................................................................................................................................................. 20
Market Structure Updates......................................................................................................................................................................... 22
Growth in Passive Investments ................................................................................................................................................................ 24
Growth in Private Markets ........................................................................................................................................................................ 24
The IPO Process ...................................................................................................................................................................................... 26
Detailing Steps in the IPO Process .......................................................................................................................................................... 27
Alternatives to IPOs .................................................................................................................................................................................. 31
Direct Public Offerings .............................................................................................................................................................................. 31
Dutch Auction IPO .................................................................................................................................................................................... 32
Market Structure for Listings Exchanges .................................................................................................................................................. 33
Sector Breakout for Total IPOs ................................................................................................................................................................. 34
Sector Breakout Across Exchanges ......................................................................................................................................................... 36
Comparison to Other Regions .................................................................................................................................................................. 37
Legislation and Regulation to Attempt to Boost Capital Formation........................................................................................................... 39
Jumpstart Our Business Startups Act (JOBS, 2012) ................................................................................................................................ 39
JOBS Act 2.0 (2015) ................................................................................................................................................................................ 41
Additional Related Regulations and Laws ................................................................................................................................................ 42
Markets in Financial Instruments repealing Directive (MiFID II, 2011) ..................................................................................................... 42
Sarbanes-Oxley Act (SOX, 2002) ............................................................................................................................................................. 43
Appendix .................................................................................................................................................................................................. 44
Industry Classifications ............................................................................................................................................................................. 44
Terms to Know ......................................................................................................................................................................................... 46
Authors ..................................................................................................................................................................................................... 47

Executive Summary
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Executive Summary
Executive Summary
An initial public offering (IPO) is when a private company raises capital by offering its common stock (equity) to the
public in the primary markets for the first time. Companies may need capital for various business purposes – invest
in growth, fund mergers and acquisitions, etc. – and firms have several ways they can generate capital, including
issuing IPOs. IPOs allow businesses to grow, innovate and better serve their customers.
The number of U.S. domiciled listed companies has been on the decline since the mid-1990s. While the number of
listed companies peaked in 1996 at 8,090, the number is down to 4,336 as of the end of 2017, -46% since 1996.
The regulatory environment also led to a decline in IPO deal value and number of deals. The number of IPOs
peaked in 1996 at 860 but was down to 173 in 2017 (-80% from the peak, a -7% CAGR) and stands at 179 YTD
(through October 2018). The number of small capitalization IPOs as a percent of the total has also declined post
crisis. While in the low 90% range pre crisis, it remains in the low to mid 80% range over the past few years. The
decline in the number of small cap IPOs implies fewer innovative American companies see the benefit of going
public in today’s regulatory environment, which could have long-term negative effects on economic growth.
An SEC survey of CEOs showed that while 100% of participants noted a strong and accessible IPO market is
important the U.S. economy and global competitiveness, only 23% felt the IPO market is accessible for small
companies. Market participants, regulators, academics and legislators have weighed in over the years on the
reasons for the decline in listed companies and number of IPOs. This report reviews several of the suggested
factors, including: compliance burdens and costs, litigation concerns, declining research coverage, growth in
passive investments and growth in private markets. We also look at proposals and suggestions to change equity
market structure for low volume stocks to increase the efficiency of trading these stocks.
This report also explains the IPO process. Underwriting is the process during which investment banks (the
underwriters) act as intermediaries, connecting the issuing company (issuer) and investors to assist the issuer in
selling its initial set of public shares. The underwriters will work with the issuer to determine what the IPO should
look like and the best time to bring the deal to the market. Underwriters guide the issuer through the process, not
only handling all the required paperwork and performing a detailed analysis of the company, but also assisting
management in addressing investor concerns to get investors interested in the deal.
Finally, this primer assesses the market structure for listings exchanges. When a company decides to go public, it
will become listed on a national securities exchange. The listings exchanges have their own criteria for firms to
qualify to list on their exchange (financial status, number and types of shareholders, percentage of public float after
the IPO, etc.). The corporate listings business is highly competitive, with significant barriers to entry. As such, there
are only two main listings exchanges in the U.S.: the New York Stock Exchange and Nasdaq.

The Importance of Capital Formation

An initial public offering (IPO) is when a private company raises capital by offering its common stock (equity) to the
public in the primary markets for the first time. Securities are issued at an established price, and the process is
facilitated by investment banks acting as financial intermediaries. Shares then continue to trade in the secondary
market on exchanges or other trading venues (please see SIFMA Insights: US Equity Markets Primer for details).
Companies may need capital for various business purposes – earlier stage companies need additional capital to
grow to the next stage in the business life cycle, companies need capital to expand organically or via acquisition
(product or regional diversification) – and firms have several ways they can acquire capital:
Why do companies How do companies

need capital? acquire capital?
• Invest in organic growth • Issue equity
and expansion plans, • Generate cash flow from
including hiring employees operations
to achieve strategic • Obtain bank loans, lines of
objectives credit; issue debt or
• Fund mergers and commercial paper
acquisitions • Divest assets
• Finance operations
• Pay down existing debt
This report focuses on companies issuing IPOs to generate capital to grow their business. IPOs allow businesses to
grow, innovate and better serve their customers. Further, being public adds another level of legitimacy to the
business, as the requirements for public companies (earnings calls, public financial statements, etc.) provide
transparency into the firm’s strategy, financials and overall state of the industry in which it competes. Going public
also brings stability by providing a permanent and liquid source of capital. Additionally, an IPO can assist a private
company in:
• Incentivizing and rewarding employees who have worked hard to get the startup running by providing
liquidity opportunities, i.e. payouts at the IPO, helping employees generate wealth
• Marketing the company to new customers, partners or investors, especially if operating in a lesser known
industry

• Generating currency – most private company’s shares are not valued as highly as they would be in public
markets1 – to acquire other companies with stock (going public may make raising debt easier as well)
Looking to the SEC IPO Task Force August 2011 CEO Survey, the CEO’s interviewed noted the following reasons
they chose to go public:
Why Go Public?
I: Survey of Post IPO Companies
Strengthen Balance Sheet 89%
Access to Capital 83%
Improve Brand 63%
Acquisition Currency 60%
II: Survey of Pre IPO CEOs
Competitive Advantage 84%
Cash for Growth 63%
Premium Valuation 61%
Source: SEC IPO Task Force August 2011 CEO Survey

Note: Respondents could select multiple reasons, not meant to sum to 100%. I: Survey of post IPO companies – why go public? II: Survey of pre IPO
CEOs – why target an IPO to finance growth.
1
There are exceptions, such as the unicorns (private companies valued at greater than $1 billion).

From an economic perspective, capital formation benefits the economy and promotes job growth. According to the
same SEC report, on average since the 1970s, 92% of a company’s job growth occurs after the IPO, with most of
that occurring within the first five years. The post IPO employment growth figure dropped to 76% on average for the
2000s, as shown in the chart below. (In another SEC survey of 35 CEOs going public in 2006 or later – 57% IT, 29%
life sciences and 9% non-high tech companies – the average post IPO job growth figure was 86%.)
Post IPO Employment Growth

97%
100% 94% 92%
88%
90%
80% 76%
70%
60%
50%
40%
30%
20%
10%
0%
1970s 1980s Total 1990s 2000s
Source: SEC IPO Task Force August 2011 CEO Survey (also sourcing Venture Impact 2007, 2008, 2009, & 2010 by IHS Global Insight)
IPOs provide ways for innovative startups to become market leaders – think Amazon, Starbucks or Apple – which
create jobs and grow quickly, increasing their contribution to the economy. According to the same SEC study, public
companies originally backed by venture capital represented 21% of total U.S. GDP from 2008-2010. Revenue
growth at these same companies was 1.6% from 2008-2010, outpacing total U.S. sales growth of -1.5% for the
same time period.
However, with an estimated 70% of IPOs sponsor backed, these private equity or venture capital sponsors will have
a voice into the issuer’s decision to go public or not. An alternative for a small business to going public is to be
acquired by a larger company. M&A exits have become the primary liquidity vehicle for venture investors to exit their
positions, a reversal from the past where IPOs dominated. Looking at SEC data from 2001 to 2011, we estimate
IPOs represented less than 20% of private company exit transactions each year. This figure was around 50%+ for
most of the years in the 1990s.
Market participants note it is common for tech and life sciences firms to choose M&A, looking to be sold to a tech
giant or big pharma firm rather than IPO. The sector breakout for the S&P 500 indicates information technology and
health care represent 25.6% and 14.5% of the total companies respectively, cumulatively 40.1%. If this 40% were to
represent a proxy for the percentage of private firms deciding to exit via M&A rather than IPO, this could represent a
large part of the population lost to the public markets and therefore individual investors.

For individuals, IPOs provide an avenue for wealth creation. Private companies have a smaller number of
shareholders than public companies, consisting of: early investors (founder, family and friends) and institutional and
accredited investors (angel investors, venture capitalists, high net worth individuals). Most individual investors are
locked out of not only the private markets but also the IPO process (for regulatory purposes)2. When a company
IPOs, individual investors may only get access if their mutual funds or retirement plans – types of institutional
investors – received allocation of shares in the IPO. Individual investors may then buy/sell stocks in the secondary
markets to continue growing their investment portfolios.
2
Only accredited individual investors (income > $200K ($300K with spouse) in each of the prior 2 years or net worth >$1M, excluding primary residence)
may participate in an IPO.

Declining Number of US Listed Companies and IPOs

The number of U.S. domiciled listed companies has been on the decline since the mid-1990s, as shown in the
charts on the following pages.
Looking at World Bank data from 1980 to 2017:
• The number of listed companies peaked in 1996 at 8,090, reaching an all-time low in 2012 at 4,102
• The number of listed companies is down 46% since 1996 to 4,336, a -3% CAGR
• The average number of listed companies over this time period is 5,833, with a three-year average of 4,349
A more granular look at World Federation of Exchanges data from 2003 to September 2018 shows us:
• The number of listed companies is down 11%, with an average of 5,253
• During the financial crisis, rapidly declining market capitalizations triggered automatic delistings. NYSE and
Nasdaq both temporarily lowered minimum market capitalization requirements to prevent further delistings.
The regulatory environment also led to a decline in IPO deal value and number of deals, as shown in the charts on
the following pages:
• The number of IPOs peaked in 1996 at 860
• The number of IPOs is down 80% from the peak to 173 in 2017, a -7% CAGR
• The number of IPOs averaged146 per annum the last three years, and the YTD count through October is
179, already greater than the 2017 total
• Deal value is down 47% from 1996 to 2017 (-3% CAGR), with U.S. domiciled companies deal value down
37% (-2% CAGR)
• The U.S. represented only 10% of total global IPOs in 2017, despite averaging 51% in the 1990s
• Post the JOBS Act, the number of IPOs did increase from 2012 to 2014. According to the U.S. Treasury’s
report on capital markets, 87% of IPO filings since 2012 filed under the JOBS Act as EGCs. A SEC staff
report noted small IPOs (firms seeking proceeds up to $30M) were 22% of all IPOs from 2012-2016, up from
17% from 2007-2011. However, IPO activity had been relatively muted since 2015, until this year.
Both the number of listed companies and IPO activity has been on an upward tend since the spring of this year –
could we be turning a corner?

Number of Listed Companies in the US

# Trend Line
8,500
8,090
8,000
7,500
7,001 6,917
7,000
6,500
6,000
5,295
5,500 5,109
5,000 5,164
4,401
4,500 4,102 4,336
4,000
1981
1984
1987
1988
1990
1991
1993
1994
1997
2000
2003
2004
2006
2007
2009
2010
2013
2016
1980
1982
1983
1985
1986
1989
1992
1995
1996
1998
1999
2001
2002
2005
2008
2011
2012
2014
2015
2017
Changes in the Number of Listed Companies Driven by the Crisis & JOBS Act
6,100 1.0
5,985 0.9
5,900
0.8
5,700 0.7
0.6
5,500 5,413 5,414
5,303 5,334 0.5
5,300
0.4
JOBS
5,100 0.3
Act
0.2
4,900 4,986
Financial Crisis 0.1
4,877
4,700
Automatic Delistings 0.0
May 06
May 11
May 16
Feb 05
Feb 10
Feb 15
Oct 06
Oct 11
Mar 12
Mar 17
Apr 04
Apr 14
Oct 16
Mar 07
Apr 09
Jan 03
Jun 03
Nov 03
Dec 05
Jan 08
Jun 08
Nov 08
Dec 10
Jan 13
Jun 13
Nov 13
Dec 15
Jan 18
Jun 18
Sep 04
Aug 17
Aug 07
Sep 09
Aug 12
Sep 14
Jul 10
Jul 15
Jul 05
Source: (top) World Bank, (bottom) World Federation of Exchanges

Note: As of September 2018. U.S. domiciled companies listed on U.S. exchanges. The two charts are from different data sources, which use distinct
criteria to calculate total number of listed companies.

Decline in IPO Value ($B) and # of Deals

860
120 900
110
100 631
593
556
90 600
80 440
400
70 282
250 224
60 216 229 219 300
168 139 139 161 173 179
50 99 97 90 103
40 42 71
30 0
20
10
0 (300)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
YTD
US Firms Non-US Firms # Deals (RHS)
US Equity Markets Issuance
350
300
250 27 60 94
27 7 46 32
55 35 30 41
200 52 43 32 21
39
6 40 25 26
150 63 6
231 47
100 184 195 185 8
175 170 172 157
139 155
50 111
89
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD
Secondary Offerings ($B) Preferred Stock ($B) IPOs ($B)
Source: Dealogic
Note: As of October 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers

Decreasing Number of Small Cap IPOs

The number of small capitalization (or cap, i.e. market cap) IPOs as a percent of the total has also declined post
crisis. The decline in the number of small cap IPOs implies fewer innovative American companies see the benefit of
going public in today’s regulatory environment. These startups and smaller innovative companies enable faster job
creation and revenue growth to fuel the U.S. economy, as well as represent the next industry leaders. A continuous
decline in small company IPOs could have long-term negative effects on economic growth.
The charts on the following pages indicate the number of small cap IPOs:
• Small cap is defined as deal value less than $2 billion (mid cap $2-$10 billion, large cap >$10 billion)
• Peaked in 2000 at 382, troughing in 2008 at 37
• The average was 153 from 2000 to 2017, with a three-year average of 124
• The number of small cap IPOs is down 63% since 2000, a -5% CAGR
The trends in the decline of small cap IPOs as a percent of total IPOs show:
• The average was 89% from 2000 to 2017; pre crisis, this average was 91%, now down to 86% post crisis
• This compares to essentially no change in large cap IPOs: 1.5% average, 1.6% pre crisis and 1.5% post
• The data for mid cap names actually shows improvement: 9% average, 7% pre crisis and 12% post
Comparing deal value split between less than $50 million and greater than or equal to $50 million, we note the
following trends:
• Deals <$50 million averaged 119 per annum from 1990 to 2017, peaking in 1996 at 548 (troughing in 2009
at 5)
• Deals <$50 million declined 71% from 1990 to 2017, a -4% CAGR
• Deals >=$50 million averaged 151 per annum from 1990 to 2017, peaking in 1999 at 390 (troughing in 1990
at 16)
• Deals >=$50 million increased 725% from 1990 to 2017, a +8% CAGR

Small Cap IPOs as a Percent of Total

50% 100%
95%
93% 94% 94%
95%
91% 91% 92% 90%
40% 89% 88% 88%
86% 87% 90%
86% 85%
84% 84% 84%
30% 81% 85%
80%
20% 16% 75%
14% 14% 15%
13% 12%
10% 10% 11% 11% 70%
8% 9%
10% 7% 6% 6% 7% 7%
5%
3% 4% 4% 65%
2% 1% 1% 1% 2% 1% 2% 1% 2% 2% 1% 2%
0% 0% 1% 1% 1%
0% 60%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
YTD
Large Cap Mid Cap Small Cap (RHS)
IPOs Are Down… Particularly Smaller IPOs
900 844
800
700 619
584
600 547
504
500 447 438
390
400 350
275
300 241 216
211 209 215
206 158 153 158172
200 124131
91 94 86 82 98
63
100 33
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
YTD
Deal Size < $50M Deal Size >= $50M
Source: Dealogic
Note: As of October 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers

IPOs Not Keeping Pace with the Stock Market Run

While the number of listed companies and IPOs declined, market cap for the U.S. equity markets continues to grow.
As shown on the following page, we begin in 1993 with a market cap of $4.5 trillion. This has grown to $34.2 trillion
as of September 2018, +654%.
Looking more closely at the significant market runup since 2013, we see IPOs are not keeping pace with stock price
appreciation:
• Outside of a few peaks, IPO value averaged $11 billion per annum from 1Q09 to 3Q18; it was $12 billion as
of 3Q18
• The JOBS Act was signed into law in April 2012, and there was a pop in 2Q12 to $23 billion in IPO value
versus an average of $8 billion the prior three quarters
• IPO values were up from 2Q13 through 3Q14, as companies hurried to market to beat (what they thought
would be) the end of the bull run

35 Domestic Market Capitalization ($T) 34.2
$T Trend Line
30
25
23.7
20 17.5
15
14.0
10
10.5 10.1
5
4.7
0
Jan 93
Jan 94
Jan 95
Jan 96
Jan 97
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
1/2/09 1/2/10 1/2/11 1/2/12 1/2/13 1/2/14 1/2/15 1/2/16 1/2/17 1/2/18
50 IPOs Not Keeping Pace with Stock Market Run 400%
41
40 320%
30 27 240%
25
23 23
20 17 18 160%
15 14 15 15 15
14 13 13
12 12 11
10 7 7 6 8 9 9 7 7 80%
5 5 6 6 6 6 7
4 5
1 2 1
0 0%
IPOs ($B, LHS) Nasdaq Performance (RHS) S&P 500 Performance (RHS)
-10 -80%
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
Source: (top) World Federation of Exchanges, (bottom) Dealogic

Note: As of September 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers

Factors Driving Companies to Remain Private or Delist

As discussed above, companies have many reasons for wanting to go public. While companies still need capital –
and we discussed earlier in this report the importance of capital formation to U.S. economic growth and job creation,
in addition to wealth creation opportunities for individual investors – and view the IPO as an important event for their
company, the CEO’s interviewed in the SEC survey swayed to the negative when assessing their IPO experience:3
• 100% agreed a strong and accessible IPO

market is important to the U.S. economy The IPO Experience
and global competitiveness; in a second
survey, 94% agreed a strong and accessible Positive Negative
IPO market is critical to maintain U.S.
competitiveness
• 86% agreed it is not as attractive an option

to go public today as in 1995; 85% agreed
in a second survey
• 83% agreed going public has been a

positive event (but not experience) in the
company’s history
• 23% agreed the U.S. IPO market is

accessible for small companies; in a second
survey, 9% agreed the U.S. IPO market is
currently easily accessible for small cap
companies
• 17% agreed going public was a relatively

painless experience
Many market participants, regulators, academics and legislators have weighed in over the years on the reasons for
the decline in listed companies and number of IPOs. We grouped together results from several CEO interviews in
the SEC survey report, noting managing communications restrictions appears in all three surveys, ranging from 88%
3
SEC IPO Task Force August 2011 CEO Survey. First survey = public company CEOs; second survey = pre-IPO CEO sentiments on U.S. IPO market.
Econ = economy; compet = competitiveness.

for public companies to 60% for post-IPO survey responses. Throughout the lifecycle – pre IPO, post IPO,
established public company – restrictions on communications are always top of mind for CEOs. According to the
three surveys shown below, this concern appears to grow as companies move deeper into their public life. This
points to both regulatory requirements and litigation concerns as deterrents to going public.
• Administrative burden scores quite high, for both public reporting (92%) and regulatory compliance (89%)
• On the cost side, accounting and compliance as well as SOX and other requirements score high (86% and
80% respectively)
• The opportunity cost of reallocating the CEO’s time also scores very high (91%)
• Both size and vibrancy of investor universe and breadth and consistency of research coverage score high as
well (88% and 81% respectively)
IPO Challenges and Concerns with Going Public
SURVEY I: Public Company CEO Survey

Administrative Burden of Public Reporting 92%
Reallocation of CEO's Time 91%
Administrative Burden of Regulatory Compliance 89%
Managing Communications Restrictions 88%
SURVEY II: Post-IPO CEO Survey

Accounting & Compliance Costs 86%
Post IPO Liquidity 83%
SOX & Other Regulatory Risks 80%
Public Disclosure Impact on Business 72%
Meeting Quarterly Performance Expectations 66%
SURVEY III: Pre-IPO CEO Survey

Size & Vibrancy of Small Cap Investor Universe 88%
Breadth & Consistency of Research Coverage 81%
Costs/Risks of SOX and Other Requirements 80%
Lack of Long-Term Investors 77%

Note: Respondents could select multiple reasons, not meant to sum to 100%. I: Survey of public company CEOs – most significant IPO challenges.
II: Survey of post-IPO CEOs – biggest concerns about going public. III: Survey of pre-IPO CEOs – concerns regarding implications of going public.

In the remainder of this section, we walk through various arguments provided by market participants, legislators,
academics and regulators for the decline in IPOs.
Regulatory Dollar and Opportunity Costs

The SEC study showed the average cost of going public is $2.5 million, with another $1.5 million per annum to
remain public. These costs include SOX compliance and other legal and accounting expenses.
Initial Outlay Ongoing Costs Per Annum

$3-4M, >$4M,
6% 3%
>$4M,
14%
$1-2M, <$1M,
35% 14%
$3-4M, $1-2M,
20% 46%
$2-3M,
31%
$2-3M,
31%
There is an old investment banking adage, once a company has $100 million in annual revenue and two quarters of
profitability it is time to consider going public. Looking at the figures above, this means almost half of the $100
million revenue companies looking to IPO should expect to spend 1%-2% per annum just on SOX, legal and
accounting costs to adhere to regulations for public companies. In 2017, the average earnings before interest, taxes
and depreciation and amortization (EBITDA, a normalized proxy for ongoing profitability) for the S&P 500 was
$261.9 million, or 21.3% of total revenue. Extrapolating this percent to a company with $100 million in revenue,
SOX, legal and accounting costs would represent a 4.7%-9.4% hit to EBITDA.
What this analysis does not show is the opportunity cost of compliance to regulations for public companies.
Quarterly earnings take a substantial amount of time and staff to comply. Firms must: prepare fully compliant
presentations; update this information on their public website; perform the conference call; spend time with analysts
and investors after the call; etc. Management must also spend time meeting with analysts and investors throughout
the year, commonly called non-deal roadshows, as well as presenting at multiple industry conferences. These
actions are business as usual and do not include any one-off items that might require a disclosure of a Form 8-K,
etc.
This is all time a CEO must spend away from running the business. It is costly to IPO and remain public – in terms
of both dollar amount and management’s time – something management of a company must balance with the
benefits and returns of going public.

Litigation Concerns
In December 1995, the U.S. Congress passed the Private Securities Litigation Reform Act (PSLRA) to try to prevent
meritless securities lawsuits. Since PSLRA (through January 2014), 4,226 federal securities class actions have
been filed alleging trillions of investor losses, with over 40% of the companies listed on U.S. exchanges
experiencing a class action lawsuit.4 For the 1,456 settled securities fraud class action cases during this time period,
the aggregate settlement amount was $68 billion. However, the study showed news of the lawsuit destroyed $262
billion in shareholder value (includes cases where news of the lawsuit occurred within 30 trading days after the end
of the class period), almost four times as much as the settlements, given a cumulative stock price drop of 4.4%.
This figure excludes the 2,457 dismissed or not yet settled securities class action lawsuits during this time period.
The study estimates this group lost $701 billion in shareholder value. This figure is potentially underestimated since
the study focused on losses since the lawsuit announcement date. Investors actually anticipate lawsuit filings earlier
than this date, once the company issues corrective disclosures to financial statements which typically lead to class
action lawsuits. Additionally, this figure does not incorporate other negative impacts on shareholders (and the
economy), such as: reduced firm innovation and investment, higher insurance premiums for corporations and a
more conservative approach to voluntary corporate disclosures.
As has been reported by various sources5, litigation concerns are accused of driving away the potentially largest
IPO in history (if/when it happens). The latest market commentary on the anticipated Saudi Aramco IPO – expected
to raise ~$200 billion, creating a ~$2.0 trillion market cap company – is that it is potentially looking to list on an Asian
exchange. The reason noted is that a New York listing – despite having the deepest pool of investors – risks class
action lawsuits based upon violations of U.S. regulations on how and when to make disclosures (there are strict
rules on reserves and data disclosures for oil companies). Legal advisors to the company noted that, in addition to
potential class action lawsuits, the U.S. has “aggressive” shareholder lobby groups.
This could make its assets in the U.S., including Motiva, open to legal action. Motiva Enterprises is a fully owned
affiliate of Saudi Refining Inc. (controlled by Saudi Aramco), headquartered in Houston, Texas and operating as a
U.S. company. Motiva operates three refineries (1.1 million barrels of crude oil per day), including the largest oil
refinery in the U.S., Port Arthur Refinery (0.6 million barrels per day). It also holds stakes in 34 refined product
storage terminals (19.8 billion barrels storage capacity). It generates $3.5 billion in revenue per annum and employs
2,300 people in the U.S. Litigation could put its current operations and growth plans to invest in the U.S. – develop a
petrochemicals business, increase refining capacity and expand commercial operations – in jeopardy.6
4
U.S. Chamber of Commerce Institute for Legal Reform “Economic Consequences: The Real Cost of U.S. Securities Class Action Litigation”.
5
One such source includes CNN: https://money.cnn.com/2018/03/08/investing/saudi-aramco-ipo-new-york-london/index.html
6
Source (for Motiva data): company reports

Declining Research Coverage

For many asset managers to hold a stock, it needs to have coverage by research analysts. After the 2003 global
research settlement, resources to support sell side research declined, at a time when industry consolidation and
decreasing commissions were already pressuring the cash equities business. As shown below, cash equities
revenues at the largest investment banks are down 16% from FY12 to FY17:
Trends in Equities Revenues ($B)

Prime Derivatives Cash F&O
50
45
40 11.4
35 12.1 11.3 9.5 9.2
30
11.0
25
5.0
20
15
10
5
0
FY12 FY13 FY14 FY15 FY16 FY17 1H18
Source: Coalition, SIFMA estimates
Note: Based on revenues from the 12 largest investment banks. Prime = prime services; derivatives = equity derivatives; F&O = futures & options
As revenues declined, it became more difficult for analysts to pick up coverage of small and mid cap names. Junior
or emerging analysts looking to launch coverage would present a business case to management – for example, the
recommended company develops a niche product which competes in that segment with a larger company covered
by the senior analyst, so the new coverage would complement the coverage of the larger stock – and management
would have to make a call based on a cost/benefit analysis. It was not always an easy case to win. Now, the growth
in passive investments and MiFID II make the economics even harder. (Please see the additional regulations and
laws section at the end of this report for details on MiFID II.)
Research headcount and budgets are down, creating a vicious cycle as many institutional investors cannot invest
without research coverage. As shown on the next page, the number of research analysts is down 10% (from 2012 to
2016) and budgets are down 51% (from 2008 to 2016) at the largest investment banks:

Declining Numbers in Sell Side Research

Budget ($B) # Analysts (RHS)
9,000 6,800
8,200
6,634
8,000
6,600
7,000
6,000 6,282 6,400
5,000
4,000 6,200
4,000
3,000 6,000
2,000 5,981
5,800
1,000
0 5,600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Financial Times (citing Coalition for headcount), The Economist (citing Frost Consulting for budget), SIFMA estimates
Note: Headcount = number analysts at the 12 largest investment banks globally. Budget = research budgets at “major” investment banks.
Numbers not directly stated in the articles were estimated.
As shown below, the number of analysts covering a stock is linear from small cap to large cap companies. It is
therefore logical that as the number of research analysts continues to decline the impact will be proportionately
larger on small caps. Market participants indicate the average company with a market cap of $500 million or less
used to have three to four analysts covering it; this figure is moving downward to one to two analysts.
Analyst Coverage by Market Cap

% Total Companies # Analysts, Mean # Analysts, Median
25% 18
16
20% 14
12
15%
10
8
10%
6
5% 4
2
0% 0
$75-$100M
$1-$5B
$25-$50M
$50-$75M
$700M-$1B
>$10B
$100-$200M
$200-$500M
$500-$700M
$0-$25M
$5-$10B
Source: SEC Office of Economic Analysis

Note: Data includes 6,754 companies from Vickers, I/B/E/S & Compustat as of December 31, 2004 (market cap as of March 31, 2005); excludes ADRs.
The number of sell-side analysts is the number of 1-year ahead earnings forecasts; missing values for number of analysts are set equal to zero.
Sell side analysts play a critical role in guiding investors’ investment decisions. Decreased coverage creates
concerns investors are not as well informed and would, therefore, not be able to adjust quickly to shifts in market
trends or updates to company fundamentals or growth trajectories. This is particularly true for small cap companies,
which now have fewer analysts to help explain their story to investors. This can be a deterrent to going public.

Market Structure Updates

In the U.S. equity markets, low volume stocks are classified as those with ADV less than 100,000. For NMS stocks
of all types, 50% are low volume, while just under 30% of all corporate stocks currently listed on U.S. exchanges are
low volume. The low volume corporate stocks represent 15% of total NMS stocks, but <1% of total NMS trading
volume. For ETPs, low volume represents 18% of all NMS stocks, but <0.5% of total NMS trading volume. In a SEC
equity market structure roundtable7 held in April this year, Brett Redfearn, Director of the Division of Trading and
Markets, noted, “in general, securities with lower volumes exhibit wider spreads, less displayed size than higher
volume securities, and that can lead to higher transaction costs for investors.”
U.S. equity markets currently have a single market structure for all securities – large, mid and small cap. The SEC
continues to analyze whether a single structure is appropriate for all types of companies and investors. They are
utilizing formal market test pilots and hosting roundtables with market participants to discuss ideas to make it easier
to trade these stocks, allowing exchanges to innovate to serve issuers and investors and repatriate liquidity back
onto exchanges. Some of the ideas include:
• Tick Size Pilot – The two-year tick size pilot was designed by the SEC to assess the impact of wider
minimum quoting and trading increments (tick sizes) on the liquidity and trading of small cap stocks. Many
believed a wider tick increment might improve liquidity for smaller cap stocks, potentially increasing the
number of market makers trading the stocks, research analysts covering the stocks and overall trading in
these names. The pilot expired on September 28, and the SEC is reviewing the results. Back at our Equity
Market Structure conference in April, SEC’s Redfearn indicated increasing tick sizes “may not make sense
for the long haul,” but we might learn the relative changes in trading costs associated with wider spreads
and the costs/benefits associated with a trade-at provision, via the collected data.
• Roundtable on Market Structure for Thinly-Traded Securities – This roundtable assessed: (1)
challenges in market structure for low volume stocks – maintaining fair and orderly markets, why trading
tends to occur off-exchange; (2) potential improvements in market structure for low volume stocks – would
limiting unlisted trading privileges (UTP8) provide a better opportunity for exchanges to innovate to serve
less liquid securities, would any solutions need imposed restrictions on off-exchange trading to succeed,
how to address possible monopolistic pricing if competition is restricted; and (3) examining low volume
exchange-traded products – how differ from stocks, would solutions for stocks work for ETPs.
Additionally, market participants continue to suggest ideas to be considered to increase capital formation,
particularly for smaller companies. Some of these ideas include:
7
Roundtables are a form of academic discussion where participants agree on a specific topic to discuss and debate. Participants in the SEC roundtables
include: SEC commissioners and staff, senior managers from the exchanges, academics and representatives from broker-dealers, market makers,
trading firms, asset managers and other market participants. The SEC also allows for submission of public questions/comments via their website.
8
A right under the Securities Exchange Act of 1934 permitting securities listed on any national securities exchange to be traded by other exchanges.

• Venture exchanges – Venture exchanges have been discussed as an option in the U.S. for trading smaller
and startup company stocks to increase liquidity for early stage investors in these companies. These are
companies which would not meet the criteria and standards to list on a main stock exchange, given a lack of
history on the firm’s financial performance. The intent is these companies eventually graduate to trading on
the main stock exchanges. Several other countries (U.K., Italy, Canada, among others) already utilize
venture exchanges. For example, TMX Group in Canada operates a venture exchange, the TSX Venture
Exchange (TSXV), to help companies access the public markets earlier in their growth stage. Graduating
from TSXV is a way to eventually begin trading on the Toronto Stock Exchange (TSX), as an alternative to
waiting to IPO later in the company’s life. In 2017, TSXV represented 24% of all capital formation revenue
for the Toronto Exchange Group (64% Toronto Stock Exchange, 12% other issuer services). Currently,
TSXV graduates represent around 31% of TSX listed stocks.9
• Nasdaq report – In February 2018, Nasdaq published its blueprint to revitalize equities markets. One idea
discussed is to give small and medium growth issuers the choice to consolidate liquidity on a single
exchange and suspend UTP. Nasdaq believes creating a market for smaller securities where liquidity is
concentrated should reduce volatility and increase trading efficiency. It could also allow for other market
structures to develop (ex: intraday auctions to bring together supply and demand). Nasdaq notes off-
exchange trading represents 38% of small and medium growth company trading, providing value for the
trading of these stocks, especially for blocks and price-improved trades. Additionally, Nasdaq indicates it
would be important to ensure “fair and reasonable” pricing if UTP is revoked, so as to not advantage the
exchange. Further, Nasdaq’s report notes, while every stock trades with the same standard tick sizes,
today’s technology makes this standardization unnecessary. The exchange suggests implementing
intelligent tick sizes for small and medium growth companies, with the ability to trade on sub-penny, penny,
nickel or dime increments. They suggest transparent and standardized methodologies could be used to
determine optimal tick sizes to increase liquidity for these securities. Another suggestion in the report was to
consider establishing a rebate/fee structure for market makers to incentivize tight spreads, which should
lead to lower trading costs and increase trading efficiency.
9
As of June 2018; excludes CEFs, ETPs and SPACs.

Growth in Passive Investments

Over the last 12-18 months, ETFs as a percent of total U.S. cash equities volumes averaged 18.7%. Since 97% of
U.S. domiciled ETFs are index-based, ~18% of the market is in passive investments which trade less frequently.
Some market participants attribute this growth (along with MiFID II) as part of the reason behind the decline in
research for small and midcap companies. A lack of research is considered a deterrent to companies considering an
IPO.
In addition to potentially contributing to the decline in IPOs, market participants note a strong primary market for
single stocks is a contributor to building a healthy ecosystem for ETF investment products. As of FY17, 81% of U.S.
domiciled ETFs were equities, meaning individual stocks are the underlying assets for these products. As with single
stocks, vigorous issuance should promote efficient secondary markets.
Growth in Private Markets

Since the global financial crisis, private markets have been readily available for companies. In the private markets,
companies can obtain access to capital to grow their businesses with less administrative work than adherence to
public company reporting and other requirements. There is also less fear of litigation. Without this scrutiny, the
founders and management can take more risk in their quest for innovation and growing the company. In private
companies, the founders’ and general partners’ (deals are typically structured as limited partnerships) expertise,
desire to grow and hard work are essential to the company’s success. They generally seek limited partner funding to
spread the risk, enabling them to focus on growing the company.
Private equity (PE) firms enter deals with the expectation of a high-returning exit in a short to medium turnaround
time period, and they are paid via a return on their investment once selling the company. As PE firms fund many
transactions with debt – which they payoff with free cash flow generated from the acquired company – the low
interest rate environment has provided ample low-cost funds for these firms to take on deals. On the purchase side,
low rates spur demand and the accompanying easy capital increases competition for buying assets, increasing deal
prices.
Regardless of where the PE firm nets out on the rate impact, a concern around the use of private markets is there is
no guarantee they will remain robust. Public capital markets have more stable long-term investors and market
makers to keep markets functioning efficiently, in addition to a robust regulatory structure supporting these markets.
Without this structural support, some market participants wonder about the longevity and stability of private equity
investments, particularly under times of economic or market stress. As interest rates change, PE firms can pull
support for small companies and startups and look for other higher-yielding investments.

Private Markets Provide Alternative to Going Public

900 5,000
804 4,422 4,386 4,421
4,266 4,500
800
700 3,590 3,550 4,000

3,463
3,167 599 594 3,500
600 548
2,855 2,781 2,806 519
3,000
500 456 439
2,500
1,920 368 2,021
400 339
327 2,000
292
300 241 1,500
200 142 1,000
100 500
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD
Deals ($B) # Deals (RHS)
Private Markets Appealing to Smaller Companies (# Deals)

5,000 <$25M $25M-$100M $100M-$500M $500M-$1B $1B-$2.5B $2.5B+
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000 2,089 1,972 1,911

1,836
1,370 1,457 1,543 1,591
1,094 1,270 1,089 1,297
500 805
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD
Source: PitchBook (as of 2Q18), SIFMA estimates

The IPO Process
The IPO Process

Underwriting is the process during which investment banks (the underwriters) act as intermediaries connecting the
issuing company (issuer) and investors to assist the issuer in selling its initial set of public shares. Typically
companies issue 20-30% of its shares to the public (free float), albeit this varies by the company’s stage in the
business lifecycle, industry, etc. Investors may consider the deal riskier the lower the issued float, unless it is a “hot”
IPO (for example, Facebook issued only ~11%), which could lower the demand for the IPO.
There are several types of common underwriting agreements, including:
• Best Efforts Agreement – Underwriters do not guarantee the amount of money to be raised for the issuer.
Rather, underwriters agree to make a best effort to sell the shares on behalf of the issuer. The underwriters
do not hold the liability of reselling the shares.
• Firm Commitment – Underwriters purchase the whole offering from the issuer and resell the shares to
investors. This is the most common type of underwriting agreement, as it guarantees the issuer a fixed
amount of money will be raised. The underwriters hold the liability of reselling the shares.
• Syndicate – While not a type of agreement per se, we note IPOs can be managed by a single underwriter,
i.e. sole managed, or by a group of managers, a syndicate. In a syndicate, one investment bank is chosen
as the lead manager or book runner. This bank chooses the other members of the syndicate, forming
strategic alliances to ensure each investment bank sells a fixed amount of the IPO. This diversifies the risk
(or liability) across a group of firms.
The underwriters will work with the issuer to determine what the IPO should look like and the best time to bring the
deal to the market. Underwriters guide the issuer through the process, not only handling all of the required
paperwork and performing a detailed analysis of the company, but also assisting management in addressing
investor concerns to get investors interested in the deal. For an investment banking team, timing of the IPO process
itself will vary by deal, taking from 6 months to much longer. The pre-IPO process and winning the mandate will also
take many months (really years to build relationships with issuers). The length of time will vary by deal, size of issuer
and complexity of the deal. For example, a typical financial audit for a startup can take 30 days. This can grow to 60
to 120 days for a large operating company. The SEC review of the registration statement can take 60 to 120 days,
assuming no complications. The stock exchange review – looking at the number of shareholders, amount of capital
invested, shareholders’ control of public float, etc. – can range from two weeks to three months. While this indicates
the amount of time spent by an investment banking team up to the IPO date, post IPO support from the sales and
trading staff and research analysts will be ongoing.
It is also important to note, the IPO can be withdrawn at any time prior to pricing. Frequently, companies will run a
dual track process, including: (1) underwriters begin the IPO process, due diligence, etc.; and (2) a private equity
firm shops the company for an outright sale, i.e. the company will not go public. Market participants estimate ~70%
of IPOs are sponsor backed and these private equity or venture capital sponsors will therefore have a voice into the
issuer’s decision to go public or not. Market participants indicate one out of every five deals brought to an

The IPO Process
investment bank are withdrawn prior to the IPO pricing date. Yet, the underwriters still have to perform all of the
work and outlay the money for its own due diligence labor, outside accounting services and third party legal fees
(estimated at $1-2 million per annum, whether the deals go live or not).
The underwriters take on the risk and opportunity cost (time that could have been spent on another deal or project)
without a guarantee of deal completion.
Detailing Steps in the IPO Process

Sample IPO Deal
Note: This is a general description, and timing can vary by deal. Firms may use different procedures or terminology. The research analysts’ due
diligence and launch of coverage is performed separately from the work by the investment banking team.
• Pre-IPO Process – Investment bankers meet with the company to discuss what they believe the firm is
worth and how much stock they can reasonably sell. They are also updating the issuer on what value-add
their firm brings to the table, such as: industry expertise, reputation or IPO track record, quality of research
department and/or distribution capabilities (sales and trading capabilities, institutional client relationships,
retail investor distribution). Relationship building between the investment bank and the issuer prior to the
IPO will vary significantly based on prior association and other factors such as those described above.
Timing of this stage will vary as well.
• Mandate / Initial Stage – The issuing company selects the investment banks to underwrite its offering,
based on the factors listed above. A bank’s past relationship with an issuer will also be a factor in choosing
both the lead and additional underwriters. The issuer plays a role in determining the number of underwriters

The IPO Process
in the syndicate. Most IPOs have at least a few book runners and a few more investment banks in the
syndicate as co-managers (either due to past relationships or different distribution capabilities). Investment
bankers will also select the auditor and meet with the listings exchanges (NYSE, Nasdaq) in this phase.
• Due Diligence – The due diligence process begins with the kick-off meeting, attended by all parties:
company management, accountants and auditors, lawyers and the investment bankers of the underwriters.
This meeting sets the scene for who is responsible for what and the timing for the filing. Then the ongoing
due diligence will begin.
o Investment Banking Team – Investment bankers will analyze company financials, strategy and
operations. They will study industry trends to determine the future state of the industry. They will
make customer calls – asking about their relationship with the company, if they have plans to
increase/decrease business, etc. – to determine the company’s reputation in the marketplace.
o Legal Team – Lawyers will review contracts, registration forms, etc., as they begin preparing the
registration statement.
o Accounting Team – Accounts and auditors will need to vet the company’s historical financial
statements, tax returns, etc. A formal financial audit must be performed.
• Drafting & Filing – During this stage, the investment bankers will develop all necessary legal
documentation and file the required SEC documents. This includes:
o Engagement Letter – This is a standard letter determining the relationship between the issuer and
underwriters and setting deal terms. It notes the gross spread (underwriting discount), equal to the
sale price of the issue sold minus the purchase price of the issue bought by the underwriters. This
fee paid to the underwriting syndicate covers costs to take the company public plus service
commissions for the underwriters. Typically, 20% of the gross spread is used to cover IPO costs
(legal counsel, road show expenses, etc.), with another 20% paid to the lead underwriter and the
remaining 60% (the selling concession) split among the rest of the syndicate in proportion to the
number of shares sold.
o Letter of Intent – This legal document states the investment banks’ commitment to the issuer to
underwrite the IPO. It also states the issuer’s commitment to provide all relevant information and
cooperate in the due diligence process. It often includes an agreement to provide the underwriter a
15% overallotment option (ability to sell more shares than the number originally agreed upon, up to a
set percentage; often called a greenshoe option). It does not include the final offering price.
o Underwriting Agreement – Once the securities are priced, the underwriting agreement is executed.
The underwriters are now contractually bound to purchase the shares from the issuer at the

The IPO Process
specified price (depending upon whether it is a best efforts or firm commitment deal agreement).
o Registration Statement (S-1) – After a complete review of the issuing company, referred to as due
diligence, the registration document is prepared. This document ensures investors have adequate
information to perform their own due diligence prior to investing. It contains the historical financial
statements of the company, management backgrounds, insider holdings, ongoing legal issues and
pertinent IPO information, including the ticker to be used once listed. It is split into the prospectus,
the public document distributed to all investors, and private filings, or information for the SEC to
review but not distributed to the public. (During this stage, investment bankers will also respond to
any comments or questions from the SEC.) After the prospectus is filed with the SEC and before the
IPO, the issuer's communications with investors about the deal are restricted while the SEC reviews
the documentation. This cooling off period typically lasts 20 days.
• Final Preparations – During this stage, the investment bankers will respond to any additional comments
from the SEC. They will also be preparing for the roadshow. Once the investment bankers finalize the
valuation of the company, they will receive Board of Directors approval from the issuer.
• Execution – After receiving the “go/no-go” decision from the issuer, the initial prospectus10 document is filed
and used by underwriters and the issuer to market – or explain the company’s story to investors – the IPO
during a road show to investors interested in buying shares in the offering. This marketing period typically
lasts around two weeks and enables underwriters to gauge the demand for the shares. As investors state
how many shares they would be willing to buy and at what price, this information is used in pricing the
shares.
• Pricing – Once approved by the SEC, an effective date is set for the IPO. One day prior to this date,
underwriters and the issuer will determine the offering price, or the price the shares will be sold to the public,
and the number of shares to be sold. The stock is priced at the market clearing level, based on demand
gauged during the road show and other market factors. The price is set to attempt to ensure the issue is fully
subscribed by investors. After the deal is priced, underwriters (along with issuer input) will allocate shares to
investors. The objective is to maximize allocation to investors who will remain on as long-term holders of the
stock and promote a liquid after-market.
• Research Team Role – Research analysts will begin their due diligence separately from the investment
banking team. Management and the investor relations team of the issuer will meet with all of the research
analysts in the sector to run through the company’s strategic plans and financial statements. Analysts will
develop their financial models and write their initiation of coverage research reports. In this stage, the
analyst develops his or her investment thesis for the company and how it will rank against peers in the
10
This is often referred to as the red herring document, which is an initial prospectus for investors containing company details but not inclusive of the
effective date or the offering price.

The IPO Process
sector, i.e. stock recommendations. At the same time (but separately) the investment banking team is
running the road show, research analysts will also be speaking with clients interested in taking part in the
IPO about company fundamentals, growth potential and how the company stacks up against the rest of
his/her coverage universe. The stock recommendation is not issued at this time.
• Stabilization – Once the IPO is priced and the stock begins trading on exchange, the underwriters’ job is
not finished. They must provide market stabilization for the stock price for a short period of time after the
IPO. For example, if order imbalances exist, i.e. the buy and sell orders do not match, underwriters will
purchase shares at a certain level below the offering price to rectify the imbalance. Underwriters are
responsible for providing liquidity, or market making, to maintain orderly markets immediately after the IPO.
• Trading – Underwriters will continue to make a market in the stock after the stabilization period. Market
makers are firms which stand ready to buy and sell stocks on a regular and continuous basis at a publicly
quoted price, i.e. facilitate trading (buying and selling) of the stock in the secondary markets and maintain
liquidity in the stock. Market making will be an ongoing function of the trading desks.
• Analyst Research – Once an IPO opens, it trades as an uncovered stock, i.e. no analyst coverage. The
SEC mandates a quiet period on research recommendations, lasting 10 days (formerly 25 days). Analysts
will launch research coverage on the stock after this quiet period ends, making for a noisy trading day when
all of the coverage reports come out.

Alternatives to IPOs
Direct Public Offerings
As an alternative to a traditional IPO, a direct public offering (DPO, also known as a direct placement or direct
listing) is where the company offers its securities directly to the public, without the use of underwriters as with an
IPO. Since the company is selling existing shares, there is no dilution to existing shareholders and no capital is
raised. The terms of the deal are up to the issuer, including: offering price, effective date, length of offering period,
minimum investment per investor, limit on the number of securities an investor can buy, etc. A DPO can be
attractive to companies with an established and loyal customer base and commonly raises less than $1 million
(albeit sometimes up to $25 million).
The process is typically less expensive and less time consuming than an IPO. Yet, a DPO is not without costs. Bank
of America estimates DPO costs can range from $50,000 to $125,000 to cover expenses11, including: marketing
(traditional or social media ads, the roadshow with investors, etc.), attorney and accountant fees. Additionally, if
there are a large number of shares to sell or timing is crucial, the issuer may recruit a broker to sell a portion of the
shares to its clients on a best effort basis.
Preparing a DPO can last days to a few months. Similar to an IPO, the issuer develops an offering memorandum,
goes on a roadshow, and files documents to securities regulators under the Blue Sky Laws of each state it will
conduct the DPO (regulatory approval can take weeks to months, depending on the state). Most DPOs do not
require the issuers to register with the SEC, as they qualify for an exemption (for example: Rule 504 under SEC
Regulation D notes companies may not have to register with the SEC if raising less than $1 million or if all investors
are in the same state). The issuer will then run a tombstone ad to announce the offering to the public, and the
offering closes once all securities are sold or the closing date of the offering period. A DPO will still have to meet
regulatory requirements of exchanges if it wants to trade on an exchange.
While potentially a shorter time period and less expensive, the company’s stock could end up being less liquid than
with an IPO. Lower liquidity means it will be harder for investors to sell or trade their positions and could also make
the stock more volatile, at least in the early stages (worsened by the fact that the underwriting syndicate is not there
to stabilize the stock price after the IPO). The company will also most likely not have the same research coverage
as with IPO stocks, whose syndicate investment banks begin covering the stock after the quiet period ends. This all
makes it more difficult to attract investors in the DPO unless you are a “hot” name.
While DPOs have been around for decades, they are not very common. One well known example was the ice cream
company Ben & Jerry’s, raising $750,000 from 1,800 investors in 1984 by selling shares directly to Vermont
residents. Ben & Jerry’s utilized Reg A to allow them to advertise the offering, with the slogan “get a scoop of the
action”. With this money, the company built a new plant and expanded distribution, allowing them to IPO the
following year, raising $5.8 million. Traditionally, it is small companies in industries such as food, tech and biotech
11
Source: Bank of America website

which go public via DPO. In April of this year, Spotify became the first large company to list via a DPO, closing
around a $26 billion market cap on the day of its DPO.
Dutch Auction IPO

A Dutch auction, also is known as a descending price auction or a uniform price auction, is a price discovery
process which can be used in an IPO to figure out the optimum price for a stock offering (the U.S. government also
uses this process for the public offering of Treasuries). The price is not set by the underwriters. Instead, the
company determines the number of shares they would like to sell and the price is determined by the bidders. Buyers
submit a bid with the number of shares they would like to purchase at a specified bid price. A list is created, with the
highest bid at the top. Once all the bids are submitted, the allotted placement is assigned to the bidders from the
highest bids down, until all of the allotted shares are assigned. However, the price that each bidder pays is based on
the lowest price of all the allotted bidders, or essentially the last successful bid. A Dutch auction encourages
aggressive bidding because the nature of the auction process means the bidder is protected from bidding a price
that is too high.
In 2004, Google (now Alphabet Inc.) decided to go with a Dutch auction IPO. In its regulatory filings, Google stated,
“Many companies going public have suffered from small initial share float and stock price volatility that hurt them
and their investors in the long run…we believe our auction-based IPO will minimize these problems.” Another
reason for the choice of the Dutch auction is Google's business model was based on algorithmically auctioning
advertising space alongside search results. Given its unique (at the time) business model, the company decided it
also made sense to choose a different kind of auction to create its shareholder base. Its offering closed with a
market capitalization of over $27 billion.
However, the success of Google did not set a new trend for untraditional IPOs, as the Google deal remains an
anomaly.

Market Structure for Listings Exchanges

When a company decides to go public, it will become listed on a national securities exchange. The listings
exchanges have their own criteria – in addition to the requirements by the SEC for a company to go public – for
firms to qualify to list on their exchange. These quantitative requirements typically analyze the financial status of a
company (revenue, income, cash flows, operating history, etc.), as well as the number and types of shareholders,
the amount and value of publicly held shares after the IPO and the percentage of public float. As discussed earlier in
this report, under UTP stocks listed on one exchange may then be traded on other exchanges in the U.S.
The corporate listings business is highly competitive, with significant barriers to entry. As such, there are only two
main listings exchanges in the U.S., the New York Stock Exchange12 (NYSE) and Nasdaq. As of June 2018,
Nasdaq lists 3,004 companies and NYSE 2,292.13 These incumbents have long track records and therefore strong
brand power to attract new issuers. On an ongoing service basis, these exchanges can tout not only their trading
capabilities, but also the additional offerings attached to a listing: investor relations services, use of conference and
meeting space, data analytics tools, etc.
While the ability to experience the ringing of the bell on the day of your IPO provides incentives for corporates to list
– and has the potential cachet to outweigh offerings of lower listing fees by newer exchanges – the same is not true
for exchange-traded products (ETPs). There is not the feeling of ownership as with a corporate listing, which brings
down barriers to entry. This is why Bats Global Markets (BATS; now owned by Cboe Global Markets/CBOE) – which
listed its own stock when it IPOd in 201614 – has kept its strategic focus on listing ETPs rather than single stocks.
In light of these barriers to entry, market participants 1990s 2000s 2010s % Change
do not expect significant changes to the listings Nasdaq
environment. (That said, the Investors Exchange # deals 3,215 950 641 -80.1%
(IEX) received listing approval and plans to test its $ billion 139 111 99 -28.3%
corporate listings process in 2018.) As shown in the NYSE
# deals 779 431 525 -32.6%
table, Nasdaq listed 641 deals in the 2010 decade,
$ billion 155 219 222 43.8%
with deal value totaling $99 billion. For the same time Total
period, NYSE listed 525 deals, with deal value totaling # deals 3,994 1,381 1,166 -70.8%
$222 billion. This represents an 80% and 33% decline $ billion 293 329 322 9.7%
in the number of deals for Nasdaq and NYSE
respectively since the 1990s, or -71% in total.
Source: Dealogic
Note: As of June 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers. Excludes IPOs
trading on OTC bulletin (pink sheets). Includes dual listed IPOs, where one of the exchanges in U.S. based.
12
Intercontinental Exchange (ICE) owns the NYSE exchanges, as well as other exchanges and clearing houses across the globe.
13
Source: World Federation of Exchanges; U.S. domiciled companies only
14
CBOE transferred its primary stock exchange listing from Nasdaq to its own exchange in September 2018.

Sector Breakout for Total IPOs

The following charts show each sector as a percent of total IPOs for that time period:
• For both 2017 and YTD (as of June), Healthcare leads the way at 25% and 37% respectively, followed by
Computers & Electronics (24% and 25%) and Finance (10% and 9%)
• In the 2010s, it was 27% Healthcare, 23% Computers & Electronics and 10% Finance
• In the 2000s, Computers & Electronics lead at 26%, followed by Healthcare at 17% and Finance at 10.5%
• In the 1990s, it was 26% Computers & Electronics, 14% Healthcare and 8% Telecommunications
Current Environment YTD 2017 2010s
Utility & Energy Defense 0.1%

0.6%
0.8% Aerospace 0.1%
Food & Beverage 0.6%
Forestry & Paper 0.1%
Dining & Lodging 0.8%
0.6% Publishing 0.2%
Consumer Products 4.5%
0.6% Textile 0.3%
Telecommunications 0.8% Agribusiness 0.3%

1.2%
Mining 0.7%
Metal & Steel 1.2%
Machinery 0.9%
Leisure & Recreation 0.8%
1.2% Auto/Truck 1.1%
Insurance 1.5%
Metal & Steel 1.1%
Mining Food & Beverage 1.1%

1.8%
0.8% Consumer Products 1.1%
Machinery 1.8%
Leisure & Recreation 1.3%
Chemicals 0.8%
1.8% Insurance 1.5%
Auto/Truck 1.8% Telecommunications 1.5%
Transportation 2.3% Dining & Lodging 1.8%
2.4%
1.5% Construction/Building 1.9%
Retail 2.4%
Chemicals 2.1%
Real Estate/Property 3.0%
Transportation 2.2%
Construction/Building 0.8%
3.0% Retail 2.4%
Professional Services 5.3% Utility & Energy 2.5%
5.9%
Real Estate/Property Professional Services 3.2%

7.1%
Real Estate/Property 5.7%
Oil & Gas 5.3%
7.1%
Oil & Gas 7.2%
Finance 9.1%
10.1% Finance 10.1%
Computers & Electronics 25.0% Computers & Electronics 22.9%
23.7%
37.1%
Healthcare Healthcare 26.7%
25.4%
Source: Dealogic (as of June 2018). U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers)

2000s 1990s
Holding Companies 0.1% Defense 0.1%
Forestry & Paper 0.2% Agribusiness 0.1%
Textile 0.2% Holding Companies 0.2%
Defense 0.2% Mining 0.3%
Agribusiness 0.2% Forestry & Paper 0.4%
Aerospace 0.2% Aerospace 0.5%
Auto/Truck 0.5% Publishing 0.6%
Publishing 0.6% Textile 1.3%
Mining 0.6% Metal & Steel 1.4%
Machinery 0.8% Utility & Energy 1.4%
Leisure & Recreation 0.8% Chemicals 1.4%
Metal & Steel 0.9% Insurance 1.6%
Food & Beverage 1.0% Auto/Truck 1.6%
Construction/Building 1.4% Machinery 1.7%
Chemicals 1.4% Food & Beverage 1.9%
Consumer Products 1.5% Construction/Building 2.3%
Dining & Lodging 1.6% Dining & Lodging 2.4%
Utility & Energy 2.7% Transportation 2.5%
Retail 2.8% Oil & Gas 2.9%
Insurance 3.4% Leisure & Recreation 3.0%
Transportation 3.5% Consumer Products 3.3%
Real Estate/Property 4.8% Real Estate/Property 3.4%
Oil & Gas 4.9% Retail 5.3%
Professional Services 5.2% Professional Services 5.8%
Telecommunications 7.3% Finance 6.9%
Finance 10.5% Telecommunications 7.9%
Healthcare 17.1% Healthcare 13.7%
Computers & Electronics 25.6% Computers & Electronics 26.2%
Source: Dealogic
Note: As of June 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, and rights offers

Sector Breakout Across Exchanges

The following charts show the sector breakout for IPOs by each exchange:
• Nasdaq (NDAQ) has decreased its proportion of tech IPOs, from 31%/32% in the 1990s/2000s to 20% in the
2010s; Healthcare IPOs now represent 46% of the total in the 2010s
• NYSE now has Tech (20%), Oil & Gas (17%) and Real Estate (14%) at the top in the 2010s; Tech listings
have more than doubled since the 1990s, from 8% to 20%
NDAQ 1990s NDAQ 2000s NDAQ 2010s
Retail, Other,
Other,
20.7% 2.3% 17.2%
Other, Tech, Tech,
31.7% 31.4% 31.8%
Dining &
Prof. Serv., Lodging,
5.3% 2.3% Healthcare,
Finance, 45.8%
12.4%
Telecom,
Healthcare, 6.3%
Finance, Healthcare,
Prof. Serv., 15.9%
11.4% 24.5% Tech,
6.6%
19.9%
Finance,
7.1%
Telecom, 7.2%
NYSE 1990s NYSE 2000s NYSE 2010s
Real Real
Estate, Estate, Tech,
15.0% 15.1% 19.9%
Other,
Healthcare, 35.1%
Other, Finance,
9.1%
46.6%
12.4%
Other, Tech, Oil &
52.6% 8.3% Gas,
Oil & Gas,
16.9%
11.3%
Real
Tech, Estate,
Finance, Healthcare,
8.8% 14.0%
7.7% 4.9%
Oil & Gas, Finance,
7.3% Healthcare, 5.9% 9.1%
Source: Dealogic
Note: As of June 2018. U.S. domiciled companies listed on U.S. exchanges. Excludes BDCs, SPACs, ETFs, CEFs, rights offers & IPOs trading on OTC
bulletin (pink sheets). Includes dual listed IPOs, if one exchange is U.S. based. Tech = Computers & Electronics; Prof. Serv. = Professional Services.

Comparison to Other Regions

Comparing the environment in the U.S. from 2003 to 2017, we note the following similarities and differences to other
regions in terms of number of listed companies. While the number of U.S. companies was down 12%:
• Americas – Canada was also down 12% and Brazil was down 15%
• AsiaPac – Other countries were up: 189% in China, 113% in Hong Kong, 71% in Japan, 50% in Singapore,
48% in Australia and 8% in New Zealand
• Europe – The U.K. was down 27% and Switzerland was down 9%; conversely, the EU was up 5% and Oslo
Bors was up 4%
US versus Other Countries in the Americas

6,000 US Canada Brazil (RHS) 400
5,500 390
380
5,000
370
4,500
360
4,000
350
3,500 340
3,000 330
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jun 18
Source: World Federation of Exchanges, SIFMA estimates

Note: As of June 2018. Domestic companies listed on domestic exchanges. U.S. = NYSE, Nasdaq; Canada = TSX, TSXV; Brazil = B3.

US versus Countries in Europe

US EU UK Switzerland (RHS) Oslo Bors (RHS)
6,500 310
6,000 290
5,500
270
5,000
4,500 250
4,000 230
3,500 210
3,000
190
2,500
2,000 170
1,500 150
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jun 18
US versus Countries in AsiaPac
US Australia Japan Hong Kong
China New Zealand (RHS) Singapore (RHS)
6,000 600
5,500 550
5,000 500
4,500
450
4,000
400
3,500
350
3,000
300
2,500
250
2,000
1,500 200
1,000 150
500 100
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 14
Jan 15
Jan 16
Jan 17
Jun 18
Sep 04
Source: World Federation of Exchanges, London Stock Exchange Group, SIFMA estimates
Note: As of June 2018. Domestic companies listed on domestic exchanges, except Italy includes foreign listings. U.K. = London Stock Exchange Main
Market, AIM; Oslo Bors = Norway and other Nordic countries; EU27 = Austria, Euronext (Belgium, Netherlands, France, Portugal), Cyprus, NASDAQ
OMX Nordic Exchange (Denmark, Finland, Sweden; not in EU are the remaining Nordic and Baltic countries), Germany, Greece, Hungary, Ireland,
Luxembourg, Malta, Slovenia, Spain and Italy (Borsa Italia Main Market and AIM). China = Shanghai, Shenzhen.

Legislation and Regulation to Attempt to Boost Capital Formation

Legislators and regulators are constantly looking to spur capital formation, with the objectives to: get individual
investors more access to invest in public companies; and bring companies public earlier in their lifecycle before
valuations get too high in the private markets.
Jumpstart Our Business Startups Act (JOBS, 2012)

https://www.sec.gov/spotlight/jobs-act.shtml
https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
Catalyst: Decline in small company IPOs
Objective: Encourage business startups and improve access to public capital markets for emerging growth
companies (newly established term)
Details:
In April 2012, the JOBS Act was signed into law. With the objective of boosting small company IPOs to create more
jobs and stimulate the economy, it was an effort to ease regulatory burdens for smaller companies and facilitate
capital formation. This act made amendments to Securities Act of 1933 and the Securities Exchange Act of 1934,
including:
• Title I – Reopening American Capital Markets to Emerging Growth Companies: Title I established a
new definition for an emerging growth company (EGC), defined as an issuer: (a) with total annual gross
revenues of less than $1 billion during its most recently completed fiscal year, (b) that does not have greater
than $700 million in public float following the IPO and (c) has not sold common equity securities as of
December 8, 2011 (the first sale of equity securities is not limited to a company’s initial primary offering; for
example, offering common equity in an employee benefit plan would constitute a sale of equity securities). A
company may continue to be an EGC for the first five fiscal years following the IPO, unless: total annual
gross revenues reach $1.07 billion or more, it issued greater than $1 billion in non-convertible debt in the
past three years or it becomes a large accelerated filer. EGCs are authorized to include less narrative
disclosures, particularly around executive compensation, and provide audited financial statements for two
years versus the standard three. EGCs do not need auditor attestation to SOX and can defer complying with
certain changes in accounting standards. Further, EGCs may use test-the-waters communications with
qualified institutional and accredited investors during its IPO. Title I also eased restrictions on
communications between a research analyst and a potential investor during an EGC IPO, as well rules
prohibiting research analysts from participating in communications with the EGC management team when
other associated persons of a broker-dealer are in attendance.
• Title II – Access to Capital for Job Creators: Title II revised prohibitions under the Securities Act against
general solicitation and advertising. These rules cease to apply to Rule 506 offerings, if all purchasers are
accredited investors, or to Rule 144A offerings, if the securities are only sold to qualified institutional buyers.

Title II also provided exemptions from broker-dealer registration for securities offered under Rule 506 if the
entity only maintains a platform offering, selling, purchasing or negotiating securities or permits general
solicitation/advertising.
• Title III – Crowdfunding: Crowdfunding is the raising of capital from a large number of investors whose
individual investments are limited. Title III permits crowdfunding by U.S. domiciled issuers if the aggregate
amount sold, including amounts sold pursuant to crowdfunding in the prior 12 months, is not greater than $1
million. Additionally, the total amount sold to an individual investor, including amounts sold pursuant to
crowdfunding in the prior 12 months, cannot exceed: the greater of $2,000 or 5% of the investor’s annual
income or net worth, if the investor’s annual income or net worth is less than $100,000; or 10% of the
investor’s annual income or net worth not to exceed $100,000, if the investor’s annual income or net worth is
greater than $100,000. The transaction must be conducted through an intermediary, and the issuer is
required to comply with SEC disclosure and filing obligations, limitations on advertising, limitations on
compensating promoters and disclose results of operations and financial statements not less than annually.
• Title IV – Small Company Capital Formation: Title IV expanded exemptions from registration under
Section 3(b) of the Securities Act, building on Regulation A (exemptions from certain registration
requirements for public offerings of securities not exceeding $5 million in any one-year period). There are
two tiers of offerings under Regulation A+: Tier 1, for securities offerings up to $20 million in a 12-month
period; and Tier 2, for securities offerings up to $50 million in a 12-month period. Rules for offerings under
Tier 1 and Tier 2 speak to issuer eligibility, offering circular contents, testing the waters and bad actor
disqualification. The filing process for all offerings aligns practices for registered offerings and creates
additional flexibility for issuers, while establishing an ongoing reporting regime for certain issuers. Tier 2
issuers are required to include audited financial statements in their offering documents and to file annual,
semiannual and current reports with the SEC on an ongoing basis. With the exception of securities that will
be listed on a national securities exchange, purchasers in Tier 2 offerings must either be accredited
investors or be subject to certain limitations on their investment. Tier 2 offerings are not required to register
with state securities regulators and are therefore exempt from state Blue Sky reviews. Tier 2 offerings may
be sold to non-accredited investors, if no more than: (a) 10% of the greater of annual income or net worth; or
(b) 10% of the greater of annual revenue or net assets at fiscal year end (non-natural persons). This limit
does not apply to securities that will be listed on a national securities exchanges.
• Title V – Private Company Flexibility and Growth and Title VI – Capital Expansion: Under the JOBS
Act, issuers are not required to register under Section 12(g) of the Securities Act until it has over $10 million
in assets and a class of equity securities (other than exempted securities) held of record (excluding
securities received in an employee compensation plan) by either 2,000 persons or 500 persons who are not
accredited investors. An issuer that is a bank, bank holding company or savings and loan holding company
is required to register a class of equity securities if it has greater than $10 million in total assets and the
securities are held of record by 2,000 or more persons, and they may terminate or suspend registration if the
securities held of record are by fewer than 1,200 persons.

JOBS Act 2.0 (2015)

https://www.congress.gov/114/bills/hr22/BILLS-114hr22enr.pdf
https://www.sec.gov/news/pressrelease/2016-6.html
Catalyst: Decline in small company IPOs
Objective: Ease regulatory burdens for small companies to facilitate capital formation
Details:
In December 2015, the Fixing America’s Surface Transportation Act (FAST Act) was signed into law. This act
represents JOBS Act 2.0, as it included several provisions to enhance the JOBS Act. The focus was on improving
access to the capital markets for small businesses by easing regulatory burdens, without removing investor
protections. It included the following changes to reporting and disclosures, among others:
• TITLE LXXI – Improving Access to Capital for Emerging Growth Companies: This section reduced the
number of days an EGC must publicly file its IPO registration statement before its roadshow to 15 from 21
and established a grace period for EGCs that lose their EGC status while in registration for their IPO
(actively in the SEC review process), allowing EGC rules to apply throughout the process. If the EGC loses
its EGC status during the confidential review of its draft IPO registration statement, it would need to publicly
file a registration statement to continue the review process and comply with current non-EGC regulations.
This section also permitted smaller reporting companies to use forward incorporation by reference to update
information in a Form S-1 or Form F-1 after the registration statement is declared effective. This enables the
IPO prospectus to stay current through the automatic inclusion of the issuer’s current and future filings,
avoiding costs and delays associated with updates via prospectus supplements or post-effectiveness
amendments. This section further enabled EGCs to omit from their IPO registration statements certain
historical financial information otherwise required by Regulation S-X, provided: the omitted financial
information relates to a historical period that the EGC reasonably believes will not be required to be included
in the Form S-1 or Form F-1; and the registration statement is amended to include all financial information
required by Regulation S-X prior to the distribution of a preliminary prospectus to investors.
• TITLE LXXII – Disclosure Modernization and Simplification: This section permitted companies to submit
a summary page on Form 10-K, as long as each item on the summary page includes a cross-reference to
the related material in Form 10-K. It simplified Regulation S-K (reporting requirements for SEC filings for
public companies), scaling or eliminating certain requirements to reduce the burden on all public companies,
except large accelerated filers, while still providing all material information to investors. This section also
called for the elimination of provisions under Regulation S-K, for all issuers, that are duplicative, overlapping,
outdated or unnecessary. The act simplified the disclosure provisions under Regulation S-K to modernize
and simplify it in a manner that reduces costs and burdens on issuers, including: a company-by-company
approach to eliminate boilerplate language and static requirements; and methods of information delivery and
presentation that discourage repetition and the disclosure of immaterial information.

Additional Related Regulations and Laws

Markets in Financial Instruments repealing Directive (MiFID II, 2011)
https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir
Catalyst: Updates to MiFID (applicable since November 2007)
Objective: Strengthen investor protection and make financial markets more efficient, resilient and transparent
Details:
Financial markets in the European Union had been operating under the Markets in Financial Instruments Directive
(MiFID) since November 2007. MiFID was meant to increase the competitiveness of Europe’s financial markets by
creating a single market for investment services and activities and to ensure a high degree of harmonized protection
for investors in financial instruments. In June 2014, the Markets in Financial Instruments repealing Directive and the
Markets in Financial Instruments Regulation (MiFID II and MiFIR) were published in the EU Official Journal. The
objective was to ensure fairer, safer and more efficient markets and facilitate greater transparency for all market
participants, including: new reporting requirements to increase the amount of information available and reduce the
use of dark pools and OTC trading; rules governing high-frequency-trading to impose a strict set of organizational
requirements on investment firms and trading venues; and provisions regulating non-discriminatory access to
central counterparties, trading venues and benchmarks to increase competition.
Rules for investment research payments under MiFID II, which went live on January 3, 2018, seek to increase
transparency and prove best execution (trading) by unbundling payments for execution and research. The regulation
is expected to drive many changes in the industry, including:
• Behavioral – Institutional investors must pay directly for investment research (traditionally offered for “free”
from a P&L perspective as it was bundled with other sales and trading commissions)
• Logistical – Firms must substitute commission-sharing for direct payment accounts
• Strategic – Firms must establish pricing schemes for research offerings without disrupting traditional
services provided to and relationships with institutional clients
While MiFID II is technically a European regulation, financial services is a global business. Many non-European
financial institutions are having to run MiFID II rules across all regions, rather than establish separate compliance
and operational regimes across regions.

Sarbanes-Oxley Act (SOX, 2002)

https://www.congress.gov/bill/107th-congress/house-bill/3763
https://www.sec.gov/info/smallbus/404guide/intro.shtml
Catalyst: Accounting malpractice in the early 2000s (Enron Corporation, Tyco International, WorldCom)
Objective: To improve financial disclosures by corporations and prevent accounting fraud
Details:
In July 2002, the Sarbanes-Oxley Act was passed to weed out corporate accounting fraud by holding management
of and auditors to public companies accountable to assess and attest to internal controls for financial reporting, as
well as other changes, including.
• Section 404 holds CEOs personally responsible for errors in accounting audits, requiring corporate
executives to certify the accuracy of financial statements personally. If the SEC finds violations, CEOs could
face 20 years in jail. It also made managers maintain adequate internal controls and procedures for financial
reporting. Companies' auditors had to attest to these controls and disclose material weaknesses. There was
an exemption for non accelerated filers with market cap of $75 million or less.
• SOX created the Public Company Accounting Oversight Board to oversee the accounting industry and set
standards for audit reports, requiring all auditors of public companies to register with them. This entity
investigates and enforces compliance of these auditing firms and prohibits accounting firms from doing
consulting business with the companies they are auditing (excluding tax consulting).
• It banned company loans to executives and directors, with certain exemptions (standard credit card or other
type of loans made to the general public on similar market terms).
• SOX gave protections to employees (and contractors) reporting fraud against their employers. Companies
cannot change the terms and conditions of employment, reprimand, fire or blacklist whistleblowers.
• SOX established rules around research analysts' potential conflicts of interest, including: restricting the
approval of research reports by persons either engaged in investment banking activities or not directly
responsible for investment research; limiting the supervision and compensatory evaluation of research
analysts to personnel not engaged in investment banking activities; prohibit retaliation against a research
analyst as a result of unfavorable research adversely affecting the investment banking relationship; and
separating research analysts from the review, pressure or oversight of personnel involved in investment
banking activities. SOX also directed research analysts and broker-dealers to disclose specified conflicts of
interest.

Appendix
Industry Classifications
General Industry Group Specific Industry Group General Industry Group Specific Industry Group
Aerospace Aircraft Finance Accounts Receivables/Factoring
Agribusiness Agriculture Acquisitions/Restructurings
Auto/Truck Manufacturers Automobile
Mobile Homes Capital Pool Companies
Parts & Equipment Commercial & Savings Banks
Repair Credit Cards
Sales Development Banks/Multilateral Agencies
Chemicals Diversified Home Equity Loan
Fertilizers Investment Banks
Plastic Investment Management
Specialty Leasing Companies
Computers & Electronics Components Manufactured Homes
Measuring Devices Miscellaneous
Memory Devices Mortgages/Building Societies
Miscellaneous Provincial Banks
Networks Savings & Loan
PCs Special Purpose Vehicles
Peripherals Student Loan
Semiconductors Food & Beverage Alcoholic Beverages
Services Beer
Software Canned Foods
Construction/Building Air Conditioning/Heat Confectionary
Cement/Concrete Dairy Products
Commercial Building Flour & Grain
Engineering/R&D Meat Products
Infrastructure Miscellaneous
Maintenance Non-Alcoholic Beverages
Miscellaneous Wholesale Items
Residential Building Forestry & Paper Packaging
Retail/Wholesale Pulp & Paper
Wood Products Raw Materials
Consumer Products Cleaning Products Healthcare Biomed/Genetics
Cosmetics & Toiletries Drugs/Pharmaceuticals
Footwear Health Management Organizations
Furniture Hospitals/Clinics
Glass Instruments
Household Appliances Medical/Analytical Systems
Miscellaneous Miscellaneous Services
Office Supplies Nursing Homes
Precious Metals/Jewelry Outpatient Care/Home Care
Rubber Practice Management
Tobacco Products
Tools Holding Companies Conglomerates
Defense Contractors/Products & Services Insurance Accident & Health
Dining & Lodging Hotels & Motels Brokers
Restaurants Life
Multi-line
Property & Casualty
Source: Dealogic

General Industry Group Specific Industry Group General Industry Group Specific Industry Group
Leisure & Recreation Film Retail Apparel/Shoes
Gaming Automobile Parts & Related
Products Computers & Related
Services Convenience Stores
Machinery Electrical Department Stores
Farm Equipment Home Furnishings
General Industrial Jewelry Stores
Machine Tools Mail Order & Direct
Material Handling Miscellaneous
Printing Trade Pharmacies
Metal & Steel Distributors Supermarkets
Processing Telecommunications Cable Television
Products Equipment
Mining General Radio/TV Broadcasting
Oil & Gas Diversified Satellite
Exploration & Development Services
Field Equipment & Services Telephone
Pipeline Wireless/Cellular
Refinery/Marketing Textile Apparel Manufacturing
Royalty Trust Home Furnishings
Professional Services Accounting Mill Products
Advertising/Marketing Miscellaneous
Funeral & Related Transportation Air Freight/Postal Services
Legal Airlines
Management Consulting Airports
Miscellaneous Equipment & Leasing
Personnel General Logistics/Warehousing
Printing Rail
Schools/Universities Road
Security/Protection Services
Travel Agencies Ship
Publishing Books Utility & Energy Diversified
Diversified Electric Power
Newspapers Gas
Periodicals Hydroelectric Power
Real Estate/Property Development Nuclear Power
Diversified Waste Management
Operations Water Supply
REIT
Source: Dealogic

Terms to Know
FINRA Financial Industry Regulatory Authority
SEC Securities and Exchange Commission
IPO Private company raises capital buy offering its common stock to the public for the first time in the primary markets
Bought Deal underwriter purchases a company's entire IPO issue and resells it to the investing public; underwriter bears the entire risk of selling the stock issue
Best Effort Deal Underwriter does not necessarily purchase IPO shares and only guarantees the issuer it will make a best effort attempt to sell the shares to investors at
the best price possible; issuer can be stuck with unsold shares
Follow-On Offering (Follow-on public offering) Issuance of shares to investors by a public company already listed on an exchange
Direct Listing (Direct placement, direct public offering) Existing private company shareholders sell their shares directly to the public without underwriters. Often used
by startups or smaller companies as a lower cost alternative to a traditional IPO. Risks include, among others, no support/guarantee for the share sale
and no stock price stabilization after the share listing.
Underwriting Guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee in a financial transaction or
deal
Underwriter Investment bank administering the public issuance of securities; determines the initial offering price of the security, buys them from the issuer and sells
them to investors.
Bookrunner The main underwriter or lead manager in the deal, responsible for tracking interest in purchasing the IPO in order to help determine demand and price
(can have a joint bookrunner)
Lead Left Bookrunner Investment bank chosen by the issuer to lead the deal (identified on the offering document cover as the upper left hand bank listed)
Syndicate Investment banks underwriting and selling all or part of an IPO
Arranger The lead bank in the syndicate for a debt issuance deal
Pitch Sales presentation by an investment bank to the issuer, marketing the firm’s services and products to win the mandate
Mandate The issuing company selects the investment banks to underwrite its offering
Engagement Letter Agreement between the issuer and underwriters clarifying: terms, fees, responsibilities, expense reimbursement, confidentiality, indemnity, etc.
Letter of Intent Investment banks’ commitment to the issuer to underwrite the IPO
Underwriting Agreement Issued after the securities are priced, underwriters become contractually bound to purchase the issue from the issuer at a specific price
Registration Statement Split into the prospectus and private filings, or information for the SEC to review but not distributed to the public, it provides investors adequate
information to perform their own due diligence prior to investing
The Prospectus Public document issued to all investors listing: financial statements, management backgrounds, insider holdings, ongoing legal issues, IPO information
and the ticker to be used once listed
Red Herring Document An initial prospectus with company details, but not inclusive of the effective date of offering price
Roadshow Investment bankers take issuing companies to meet institutional investors to interest them in buying the security they are bringing to market.
Non-Deal Roadshow Research analysts and sales personnel take public companies to meet institutional investors to interest them in buying a stock or update existing
investors on the status of the business and current trends.
Pricing Underwriters and the issuer will determine the offer price, the price the shares will be sold to the public and the number of shares to be sold, based on
demand gauged during the road show and market factors
Stabilization Occurs for a short period of time after the IPO if order imbalances exist, i.e. the buy and sell orders do not match; underwriters will purchase shares at
the offering price or below to move the stock price and rectify the imbalance
Quiet Period (Cooling off period) The SEC mandates a quiet period on research recommendations, lasting 10 days (formerly 25 days) after the IPO
Reg S-K Regulation which prescribes reporting requirements for SEC filings for public companies
Reg S-X Regulation which lays out the specific form and content of financial reports, specifically the financial statements of public companies
Form S-1 Registration statement for U.S. companies (described above)
Form F-1 Registration statement for foreign issuers of certain securities, for which no other specialized form exists or is authorized
Form 10-Q Quarterly report on the financial condition and state of the business (discussion of risks, legal proceedings, etc.), mandated by the SEC
Form 10-K More detailed annual version of the 10Q, mandated by the SEC
Form 8-K Current report to announce major events shareholders should know about (changes to business & operations, financial statements, etc.)
Greenshoe Allows underwriters to sell more shares than originally planned by the company and then buy them back at the original IPO price if the demand for the
deal is higher than expected, i.e. an over-allotment option
Tombstone A plaque awarded to celebrate the completion of a transaction or deal
ETF Exchange-Traded Fund; pooled investment vehicles holding an underlying basket of securities (equities, bonds, etc.), publicly traded
CEF Closed-End Fund; pooled investment fund, launched through an IPO with a fixed number of shares publicly traded
BDC Business Development Company; unregistered closed-end investment company, invests in small and mid-sized businesses
SPAC Special Purpose Acquisition Company; publicly traded buyout company, raises funds in a blind pool through an IPO to acquire a private company
Rights Offer Rights offered to existing shareholders to purchase additional stock (subscription warrants) in proportion to existing holdings
Investors
Institutional Asset managers, endowments, pension plans, foundations, mutual funds, hedge funds, family offices, insurance companies, banks, etc.; fewer
protective regulations as assumed to be more knowledgeable and better able to protect themselves
Individual Self-directed or advised investing; some considered accredited investors: income > $200K ($300K with spouse) in each of the prior 2 years or net worth
>$1M, excluding primary residence

Authors
Authors
Author
Katie Kolchin, CFA
Senior Industry Analyst
SIFMA Insights
Contributor
T.R. Lazo
Managing Director, Associate General Counsel
Equities

SIFMA Insights:: US Equity Capital Formation Primer

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Executive Summary

SIFMA Insights Page | 1

SIFMA Insights Page | 2

SIFMA Insights Primers

Guides for retail investors can be found at http://www.projectinvested.com//markets-explained

SIFMA Insights Page | 3

SIFMA Insights Page | 4

The Importance of Capital Formation

Why do companies How do companies

SIFMA Insights Page | 5

I: Survey of Post IPO Companies

Strengthen Balance Sheet 89%

Access to Capital 83%

Improve Brand 63%

Acquisition Currency 60%

II: Survey of Pre IPO CEOs

Competitive Advantage 84%

Cash for Growth 63%

Premium Valuation 61%

Source: SEC IPO Task Force August 2011 CEO Survey

SIFMA Insights Page | 6

Post IPO Employment Growth

SIFMA Insights Page | 7

SIFMA Insights Page | 8

Declining Number of US Listed Companies and IPOs

Looking at World Bank data from 1980 to 2017:

• The number of listed companies is down 11%, with an average of 5,253

• The number of IPOs peaked in 1996 at 860

SIFMA Insights Page | 9

Number of Listed Companies in the US

Source: (top) World Bank, (bottom) World Federation of Exchanges

SIFMA Insights Page | 10

Decline in IPO Value ($B) and # of Deals

US Equity Markets Issuance

Secondary Offerings ($B) Preferred Stock ($B) IPOs ($B)

SIFMA Insights Page | 11

Decreasing Number of Small Cap IPOs

• Peaked in 2000 at 382, troughing in 2008 at 37

SIFMA Insights Page | 12

Small Cap IPOs as a Percent of Total

IPOs Are Down… Particularly Smaller IPOs

Deal Size < $50M Deal Size >= $50M

SIFMA Insights Page | 13

IPOs Not Keeping Pace with the Stock Market Run

SIFMA Insights Page | 14

35 Domestic Market Capitalization ($T) 34.2

Source: (top) World Federation of Exchanges, (bottom) Dealogic

SIFMA Insights Page | 15

Factors Driving Companies to Remain Private or Delist

• 100% agreed a strong and accessible IPO

• 86% agreed it is not as attractive an option

• 83% agreed going public has been a

• 23% agreed the U.S. IPO market is

• 17% agreed going public was a relatively

SIFMA Insights Page | 16

IPO Challenges and Concerns with Going Public

SURVEY I: Public Company CEO Survey

SURVEY II: Post-IPO CEO Survey