Evolving Capital Markets & Crowdfunding Symposium

New Legislation, New Markets, New Opportunities

David Weild 212-542-9979

Atlanta
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David Weild

Leader, Grant Thornton's Capital Markets group Chairman & CEO, Capital Markets Advisory Partners Chairman of the Small Business Crisis Task Force for the International Stock Exchange Executives Emeriti (non-profit) Former vice-chairman and executive vice-president of NASDAQ Numerous senior management roles at Prudential Securities, including: President of PrudentialFinancial.com Co-Head of strategy (banking, research, institutional sales and trading) Head of corporate finance Head of equity capital markets and equity syndicate globally Head of technology investment banking Commitment Committee member

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Equity capital markets

Thought leadership citations and public policy activity

documented by [Weild & Kim's] studies led to the JOBS Act (HR 3606)."
"Broken Markets" Sal Arnuk and Joseph Saluzzi page 198 FT Press May 2012

The problems

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"The financial system has been wounded by a flood of so-called innovations that merely promote hyper-rapid tradingIndividual investors are being shortchanged."
John C. Bogle, founder of VANGUARD "A Mutual Fund Master, Too Worried to Rest" By Jeff Sommer The New York Times August 11, 2012

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"Markets are still adjusting to regulatory changes like the Order Handling Rules and Regulation ATS that were made over a decade ago."
Professor Robert Schwartz Baruch College Marvin M. Speiser Professor of Finance and University Distinguished Professor of Finance at the Zicklin School of Business

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"The irony of all this is that the change in Order Handling Rules [in 1997] that were instituted under my watch at the [SEC] has resulted in the proliferation of markets, technologies and automation that brought about the flash crash and yesterday's [Knight Securities] events. I think public confidence is severely shaken by things of this kind."
Arthur Levitt, former chairman of the SEC Bloomberg Surveillance with Ken Pruitt and Tom Keen August 2, 2012

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"I think many of our problems with market liquidity in small- and mid-caps can be traced right back to decimalization [tick sizes]," said Dennis Dick, prop trader at Bright Trading in Detroit. "Where decimalization has helped to reduce spreads in the large-cap space, it has actually harmed liquidity in the small- and mid-cap space."
For blocks, "it's nearly impossible to execute any sizable order without significant price impact," Dick said.
"SEC to Examine Tick Size for Small Caps" By John DAntona Jr. Traders Magazine Online News April 17, 2012

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"Larry Tabb, chief executive of the Tabb Group, said dime spreads shouldn't be off the table and considered as well. This, he added, would incentivize brokers to trade and provide research for smaller and new companies. "[Professor James] Angel believes issuers, not the regulators, should decide what the spread should be in stocks. But if a company trades better with sub-penny pricing, 'then sub-penny should be permitted.'"
"Wider Spreads and Fees Could Help Restore Investor Confidence" By John DAntona Jr. Traders Magazine Online News June 1, 2012

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Some past publications

Foundational arguments behind The JOBS Act (but much left to be done!)

- Cited in Congress - Cited by the Senate

November 2008

- Cited by the U.S. Treasury - Cited by the SEC - Cited by The President's Jobs Council
November 2009 June 2010 October 2011

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The JOBS Act

Seminal events
Why are IPOs in the ICU? (11/2008)

2008

NYSE/NVCA Blue Ribbon Task Force

Senator Kaufman speech on the floor of the U.S. Senate "How can we create a market structure that works for a $25
million IPOboth in the offering and the secondary aftermarket. If we can answer that question, this country will be back in business."

2009

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

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

2010
Title IV - House subcommittee on capital markets (testimony 3/16) President Obama cites IPO market problems cut away the red (9/8 speech) "Were also planning to rapidly growing tape that prevents too many
startup companies from raising capital and going public."

CFTC-SEC Joint Panel on Emerging Regulatory Issues

2011

SEC Small Business Forum (testimony 11/17)

2012

Signing of The JOBS Act

SEC Advisory Committee testimony (Decimalization)

Congressional testimony (Decimalization)

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U.S. has lost 43.5% of all listed companies since 1997.

First published in A Wake-Up Call for America (November 2009)

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

250 China 200

150 Hong Kong 100 Australia 50 Tokyo 0 Toronto Deutsche Brse London

(50)

United States

(100) '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Sources: Capital Markets Advisory Partners LLC and World Federation of Exchanges Based on the number of listed companies at year-end, excluding funds. Data as of Dec. 31, 2011.

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The U.S. IPO market collapsed

The U.S. IPO market is broken
In the last decade, the number of IPOs has fallen dramatically, specifically deals less than $50 million in proceeds
Price/share < $5.00 800 Deal size < $50 million Deal size $50 million

700

520 average IPOs/year pre-bubble

539 average IPOs/year bubble

128 average IPOs/year post-bubble

600

Number of U.S. IPOs

A B C D E

500
F G H I
J

400

Christie-Schultz study* First online brokerage New Order Handling Rules Regulation ATS Online brokerage surges and stock bubble inflates; Gramm-Leach-Bliley Act Regulation FD Decimalization Sarbanes-Oxley Act Global Research Analyst Settlement Regulation NMS

300

200

100

0 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

A Pre-bubble

D E Bubble

J Post-bubble

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic Data includes corporate IPOs as of December 31, 2011, excluding funds, REITs, SPACs and LPs *Christie, William G., and Schultz, Paul H., Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes? Journal of Finance, Vol. 49, No. 5, 1994.

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Small IPO collapsed with SEC changes to the economic model that paid for small-cap support.
Chapter 2 of the JOBS ActTitle 1, Section 106(b): Tick Sizes
Smaller tick sizes undermined U.S. small-company IPOs
100%

Transactions raising at least $50 million

90%

Order Handling Rules

80%

Transactions raising less than $50 million

Percentage of total U.S. IPOs

70%

Regulation ATS Tick size Decimalization 12-1/2 to 25 cents Sarbanes-Oxley

60%

50%

40%

Regulation NMS 3-1/8 cents

30%

20%

1 cent
10%

1/100th of 1 cent
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

0%

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

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

Large-cap public (symmetrical order book) Small-cap public (asymmetrical order book) IPO (canary in the coal mine)

Venture B, C, D round, etc.

Angel | venture A

Startup: Friends, family, angel

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The JOBS Act focused on limiting cost for issuers and improving communications with investors. It has yet to address aftermarket support.

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The "one-two punch The "one-two punch" of small tick sizes and the shift to electronic order book markets precipitated a secular decline in the U.S. stock markets Reg. ATS (1998)] [Order Handling Rules (1997) and
100% $0.30 90%

Quote-driven market (pre-Reg. ATS) Effective tick size > minimum tick size

Electronic order book market (post-Reg. ATS) Effective tick size collapsed to minimum tick size
$0.25

Transactions raising at least $50 million Transactions raising less than $50 million

80%

Percentage of total U.S. IPOs

70% A B C D E Order Handling Rules Regulation ATS Decimalization Sarbanes-Oxley Act Regulation NMS $0.20

50%

$0.15

40% $0.10 30%

Tick sizes
"Bankable" spread or effective tick size Tick size for higher priced stocks1 Tick size for lower priced stocks2

60%

20% $0.05

10%

0% '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

$0.00

Sources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and Dealogic Data includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs. 11992: $0.125 for NASDAQ stocks $10, AMEX stocks $5 ( $10 in 1995) and NYSE stocks > $1; 1997: $0.0625 for NASDAQ stocks $10, AMEX stocks $0.25 and NYSE stocks $0.50. 21992: $0.03125 for NASDAQ stocks < $10, AMEX stocks < $0.25 and NYSE stocks < $0.50.

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JOBS Act
SEC resources

SEC JOBS Act portal: http://www.sec.gov/spotlight/jobs-act.shtml

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

Crowdfunding (Title III)

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

Exchange Act Registration and Deregistration (Titles VVI)

Changes to Registration and Deregistration Requirements: http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm
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The JOBS Act

Implementation timeline

Emerging Growth Companies (EGCs): Category defined IPO process reforms Reduced public company reporting requirements Research restrictions loosened Shareholder registration threshold raised for companies to 2000 "Held of record" definition revisedno deadline for SEC rulemaking Shareholder registration threshold raised for banksSEC rule due April 5, 2013

SEC authorized to increase trading in EGC stocks from one penny to nine cents Review of Reg. S-K to decrease EGC registration and reporting burden

New registration exemption on offerings up to $50 million

April 5, 2012 (signing)

October 2, 2012 (180 days)

No deadline

July 5, 2012 (90 days)

General solicitation and advertising permitted for accredited investors and QIBs (Reg. D and Rule 144A) SEC study on decimalization's impact on small companies due to Congress (public companies) GAO report on impact of Blue Sky laws on Reg. A offerings
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December 31, 2012 (270 days)

SEC to issue rules exempting crowdfunding offerings of up to $1 million annually (aggregate) Crowdfunded shareholders excluded from shareholder count

The JOBS Act

Implementation timeline

"News You Can Use"

Please consult your attorney. Emerging Growth Companies (EGCs): Category defined IPO process reforms Reduced public company reporting requirements Research restrictions loosened Shareholder registration threshold raised for companies to 2000 "Held of record" definition revisedno deadline for SEC rulemaking Shareholder registration threshold raised for banksSEC rule due April 5, 2013

"Confidential filings" for IPOs becoming the norm. "Testing the waters" to become the norm for technologically complex businesses. Likely more parallel pathing of private placements and IPOs. Check with attorneys on "integration." Companies able to stay private longer and make more aggressive use of Rule 144A, Rule 506 of Reg. D and other private placement exemptions (shareholder cap increased from 500 to 2000).

April 5, 2012 (signing)

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The JOBS Act

Implementation timeline

"News You Can Use"

Please consult your attorney.

July 5, 2012 (90 days)

General solicitation and advertising permitted for accredited investors and QIBs (Reg. D and Rule 144A) SEC study on decimalization's impact on small companies due to Congress (public companies) GAO report on impact of Blue Sky laws on Reg. A offerings

Deadlines missed. Reg. D expected shortly. Definition of accredited investor Rules governing advertising Debate over what restrictions may be placed on advertising content to accredited investors and QIBs under Reg. D. Likely to see firms advertise (esp. funds) and solicit via email. Point of control shifted from solicitation to verifying that the investor is duly qualified. Reg. ABlue Sky may be an impediment. Lots of back channel discussion to ensue with stock exchanges and SEC (TBD).

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The JOBS Act

Implementation timeline

"News You Can Use"

Please consult your attorney. SEC authorized to increase trading in EGC stocks from one penny to nine cents Review of Reg. S-K to decrease EGC registration and reporting burden

Deadlines aggressivelikely to be missed by SEC. Please monitor. Increased tick sizes will increase support for small cap public companies, but needs to be extended well beyond simply EGCs. We recently spoke to the SEC Advisory Committee on Small and Emerging Companies. They are taking this seriously.

October 2, 2012 (180 days)

SEC report to Congress on the impact of Decimalization on capital formation concluded that they needed to study the issue further.
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The JOBS Act

Implementation timeline

"News You Can Use"

Please consult your attorney.

December 31, 2012 (270 days)

SEC to issue rules exempting crowdfunding offerings of up to $1 million annually (aggregate) Crowdfunded shareholders excluded from shareholder count

Deadlines aggressivelikely to be missed by SEC. Please monitor. Limited to $1 million. Regulation not yet settledlikely to go to FINRA. Broker/dealers and crowdfunding portals prohibited from acting until SEC gives approval. Likely to be used to satisfy 400 shareholder requirements on IPOs (TBD)!

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The JOBS Act

Implementation timeline

"News You Can Use"

Please consult your attorney. New registration exemption on offerings up to $50 million

No deadline

"Reg. A+" Needs to be fleshed out. Currently in discussions with one stock exchange and a known tech securities law firm on providing some advice to SEC. Hoping for a construct (no guarantees) that: Limits Blue Sky Provides streamlined disclosure Provides and exchange listing Advantage: investors receive tradable securities.

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IPOs that are trading at or above issue price 30 days after pricing
(Trailing 30 IPOs)
Success rate of IPOs maintaining issue price one month after going public
100%

FaceBook
Not an anomaly Unintentional Underlying causes
Deteriorating coverage of investors Unreliable feedback Poor placement

90%
80% 70% 60% 50% 40% 30% 20% 10% 0% '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

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

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

Lowered cost for issuers Improve economic incentives to support especially small-cap stocks (increases in tick sizes)

Improved issuer communication with investors

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Collapse (Before and after structural changes)

Small-capitalization companies and capital formation Before 1997 Tick sizes Investment banks (acting as a bookrunner) Small company IPOs $0.25 per share 167 (1994) 2,990 (1991-1997) After 2001 $0.01 per share 39 (2006) 233 (2001-2007) % change -96% -77% -92%

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A major contributor to employment

A major contributor to employment
1,200

+18.8 million jobs (direct plus private market effect) +9.4 million jobs (direct)
20

Domestic companies going public in the U.S.

1,000

+6.2 million jobs (direct plus private market effect) +3.1 million jobs (direct)
800 15

Maximum additional jobs (direct plus private market effect)* Maximum additional jobs (direct) Maximum additional IPOs Minimum additional jobs (direct plus private market effect)* Minimum additional jobs (direct)

600 10

400 5 200

Additional jobs

Millions

Minimum additional IPOs

Actual number of domestic IPOs

0
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 *Best estimate of the multiplier effect in the private market of more companies going public

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

David Weild
david.weild@us.gt.com david.weild@cmapartners.com 212-542-9979

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

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While 81% of all public companies are sub-$2 billion in market value
Percentage of total number of listed companies 100%

80%

60%

52.0%

81.1% of listed companies

40%

20%

15.6%

13.5%

12.5% 6.4%

0%

Nano-cap (sub $100 million)

Micro-cap ($100 to $500 million)

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

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

Large-cap ($10+ billion)

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

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sub-$2 billion companies represent less than 7% of total public company market value
Percentage of total public company market value 100%

80%

74.3%

60%

6.6% of total market value

40%

19.1%
20%

5.0% 0.3%
0%

1.3% Micro-cap ($100 to $500 million) Small-cap ($500+ to $2 billion) Mid-cap ($2+ billion to $10 billion) Large-cap ($10+ billion)

Nano-cap (sub $100 million)

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

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