Abstract
ROBERT SCHWARTZ: When I think about an exchange and, more broadly, about a securities marketplace, I am reminded of the secondary market for trading shares. Of course, you need liquidity in the secondary market so people will be willing to buy newly-issued shares. Now let’s put that in the context of a broader macro economy. Why do we want a liquid, secondary market? Answer: It is terribly important for capital rising. The exchanges are part of a broader mechanism for capital raising. Who better than David Weild to moderate this superb panel on this topic. Dave, what is happening on the IPO front?
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- 1.
A wake-up call for America. David Weild and Edward Kim, Grant Thonton, November 2009.
- 2.
Why are IPOs in the ICU? David Weild and Edward Kim, Grant Thornton.
- 3.
Market Structure is Causing the IPO Crisis - and More. David Weild and Edward Kim, Grant Thornton, June 2010.
- 4.
Hüseyin Erkan, CEO of the World Federation of Exchanges at the time of writing, was the Chairman and CEO of the Istanbul Stock Exchange from 2007 until 2012. He graduated from New York University Stern Business School with a B.S. degree in Economics (1981) and an MBA in the fields of International Business and Finance (1984). His thesis project was on currency risk management at the United Nations Development Program.
- 5.
The Conference took place in late 2011. The JOBS Act was signed into law by President Obama on April 5, 2012 in the Rose Garden, bringing these bills together. David Weild was among the attendees. The four bills, Titles, I, II, III and IV of the Act, are credited with giving birth to such changes as the new IPO classification of an Emerging Growth Company. That permits Confidential Filings with the SEC and Testing the Waters (pre-IPO). It also required the SEC to study the impact of decimalization on capital formation. Title II repealed the “Prohibition against general solicitation” of private placements and subsequently led to crowdfunding for accredited investors. Title III, as of the end of 2013, still had not seen rules issued by the SEC. It was intended to allow crowdfunding of securities to public investors. Title IV, popularly called Reg. A+, will allow a lower cost “IPO lite,” offering of up to $50 million in securities to the public.
- 6.
The Sarbanes-Oxley Act of 2002, named after U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley, the main architects, introduced major changes to the regulation of financial practice and corporate governance in the United States.
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Reg. ATS, introduced by the SEC in 1998, aims to protect investors and regulate this type of trading system. As of writing, the regulation had strict record keeping and reporting requirements on areas such as transparency once an ATS reaches more than five percent of the trading volume in any security. Examples of ATSs include Electronic Communication Networks (ECNs), crossing networks and call markets.
- 8.
The Order Handling Rules (OHR) significantly changed the economic structure of trading stocks for dealers and specialists in the U.S., narrowing spreads in stock trading. The limit order display rule and the quote rule, key features of the rules, were introduced in the wake of well-publicized charges of price collusion on the dealer markets, which led to a regulatory settlement with NASDAQ.
See background on OHR, http://www.stock-market-investors.com/stock-strategies-and-systems/sec-order-handling-rules.html
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Stock trading in the U.S. switched from fractional increments to decimal pricing.
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Reg. NMS became effective on August 29, 2005. Regulation National Market System (NMS) was approved by the Securities and Exchange Commission in 2005 and introduced two years later to further advance the ideas of a national market system. The regulation includes the order protection, or trade-through rule; access rule (fair access) to market data including quotations; rules on sub-penny trading and on market data specifically. See, http://www.sec.gov/rules/final/34-51808.pdf
- 11.
The Markets in Financial Instruments Directive, or MiFID, was officially enacted on November 1, 2007. The goal is to integrate the European Union's financial markets and to increase the amount of cross-border investment orders. See, http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf
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The AIM market is micro-cap division of the London Stock Exchange and consists of generally smaller capitalization companies. AIM is the acronym for Alternative Investment Market.
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Silicon Valley has a history of generating IPOs inspired by an entrepreneurial class of creative and business-savvy, technology professionals.
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A principles-based approach provides general guidelines of best practice. This contrasts with a rules-based approach which rigidly defines precise provisions that must be strictly adhered to.
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An equity syndicate manager is the professional whose job is to coordinate the marketing and allocation of IPO shares during an Initial Public Offering. The equity syndicate manager will also set the IPO price and oversee all aftermarket price stabilization activities.
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ThinkEquity filed for bankruptcy in November of 2012. This bankruptcy, its principals said, was due in large part to the loss of a profitable model to provide liquidity, research and marketing support to small- and micro-cap stocks in the public markets.
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Arizona Republican Congressman, David Schweikert, authored key portions of the pro-business Jumpstart Our Business Startups Act (JOBS Act) which passed with bipartisan support in 2012 and was signed into law by the President.
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The speaker defines success here as an IPO that is completed at or within the original IPO filing price range, and is trading at or above the IPO price 30 days after the IPO is completed.
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This period of time, a bull market that ran from 1996 to 2000, refers to 1997’s Order Handling Rules and 1998’s Regulation ATS (Alternative Trading Systems) through the Dot-com Bubble.
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The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, repealed part of the Depression-era Glass-Steagall Act of 1933. Significantly, it eliminated the barriers among banking, securities and insurance companies that prohibited any one institution from acting as any combination of an investment bank, commercial bank, and insurance company. With the passage, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate.
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Commitment committees are responsible for approving or rejecting investment banking transactions.
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Section 404 of the Sarbanes-Oxley Act (SOX) of 2002 is the most contentious and costly part of SOX. Section 404(b) requires a publicly-held company’s auditor to attest to, and report on, management's assessment of its internal controls. Under the JOBS Act of 2012, a new category of IPOs called Emerging Growth Companies, or EGCs, is allowed to delay implementation (defer cost) of 404(b).
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NYSE: UGP.
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JP Morgan Chase acquired Hambrecht & Quist for $1.46 billion on December 9, 1999.
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Al (Alfred) Berkeley was President of NASDAQ from 1996 to 2000 and vice chairman from 2000 to 2003. Prior to NASDAQ, Berkeley was a general partner and then a managing director of Alex. Brown & Sons.
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Alex. Brown & Sons, the first investment bank in the United States, was founded by Alexander Brown in 1800 and based in Baltimore, Maryland. In 1997, the firm was acquired by Bankers Trust and became part of BT Alex. Brown. In 1999, this was acquired by and absorbed into Deutsche Bank.
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Weild, in a follow-up for this chapter, noted that Al Berkeley, who was in the audience during his panel discussion, confirmed this view.
- 28.
The so-called Four Horsemen were four Wall Street firms that catered to the IPO and growth equity business during the 1970s, 1980s and 1990s. They included Alex. Brown, Hambrecht & Quist, Montgomery Securities and Robertson Stephens.
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Wunsch, a well-known market structure commentator, founded the now defunct electronic Arizona Stock Exchange (AZX) in 1990. Prior to AZX, Wunsch was an executive at Kidder Perabody.
- 30.
See, Quattrone gets 18 months in prison. Former star banker also gets 18 months for obstructing justice and witness tampering. Krysten Crawford, CNN/Money. September 8, 2004. http://money.cnn.com/2004/09/08/news/newsmakers/quattrone/
- 31.
See, Why Did Nasdaq Market Makers Stop Avoiding Odd Eight Quotes. The Journal of Finance, December 1994. William G. Christie; Jeffrey H Harris; Paul H. Shultz. http://www.acsu.buffalo.edu/~keechung/TEM/Journal%20Articles/Collusion%20B%201994.pdf
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The speculative trading bubble (that ultimately burst) spurred by advances in technology and the Internet, the frenzy was characterized by the creation of Internet-based companies that went public. At its peak on March 10, 2000, NASDAQ reached 5,408.60.
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Henry Blodget was head of the global Internet research team at Merrill Lynch during the Dot-com Bubble. In 2002, then New York State Attorney General Eliot Spitzer released Merrill Lynch e-mails on Blodget’s assessments about stocks which allegedly contradicted what was previously published by Blodget. In 2003, Blodget was charged with civil securities fraud by the Securities and Exchange Commission. He agreed to a permanent ban from the industry, paid a $2 million fine and a $2 million disgorgement.
Jack Grubman, a former managing director of Salomon Smith Barney, he was the lead research analyst for the firm’s telecommunications sector coverage. The commission charged that from 1999 to 2001, Grubman issued research reports that concealed material facts and which misled investors. In 1999, he famously upgraded his opinion of AT&T from “neutral” to “buy,” according to reports. In a later e-mail, Grubman supposedly explained the change as part of a strategy to have his twin daughters and son accepted into the prestigious 92nd Street YM-YWHA’s preschool program. In April, 2003, the SEC banned Grubman for life from the financial industry.
- 34.
The term “whack-a-mole” is used colloquially to describe the repetitive and ultimately futile task of “whacking” an adversary that, despite the successive attempts, simply pops up somewhere else each time.
- 35.
See, The Future of Securities Regulation, Brian G. Carwright, General Counsel, U.S. Securities and Exchange Commission, University of Pennsylvannia Law School for Law and Economics, Philadelphia, Pennsylvannia, October 24, 2007 http://www.sec.gov/news/speech/2007/spch102407bgc.htm
- 36.
Rule 144A relates to the private resale of restricted securities to qualified institutional buyers for minimum $500,000 units granted a safe harbor from registration requirements.
- 37.
See, SecondMarket website, http://www.secondmarket.com
- 38.
- 39.
The various bills described by Barry Silbert were ultimately folded into the JOBS Act in 2012.
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When the JOBS Act was later signed into law on April 5, 2012, it included as Title II this earlier bill that repealed the prohibition against general solicitation (marketing) of private placements. This gave birth by late 2013 to a new type of Crowdfunding Portal that would offer securities under 506(c) to accredited investors.
- 41.
Regulation on general solicitation of private security offerings. See, A Trillion Dollar Source Of New Funding? The SEC’s New 'Reg. D'. July 13, 2013, Cheryl Connor, Forbes, http://www.forbes.com/sites/cherylsnappconner/2013/07/13/a-trillion-dollar-source-of-new-funding-the-secs-new-reg-d/
- 42.
Harold Bradley is a well-regarded industry commentator, a former buy-side executive at American Century, who has been outspoken on various market structure practices through the years.
- 43.
ISEEE is a global non-profit organization of current and former senior executives from stock and derivatives exchanges, educational in nature, and providing a forum for sharing ideas and insights. See background, http://www.sec.gov/info/smallbus/acsec/iseeeorlandodeclaration2012.pdf
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Weild, D., Wright, G.L., Silbert, B.E., Erkan, H., Hall, J., Wunsch, S. (2015). IPO Capital Raising in the Global Economy. In: Schwartz, R., Byrne, J., Wheatley, L. (eds) The Economic Function of a Stock Exchange. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-319-10350-1_6
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