2022 proved to be a difficult year for issuers seeking to raise capital. This is true for both private raises and public offerings. To give some color to just how much deal flow have fallen off a cliff, consider that, according to StockAnalyst.com, there had been 173 IPOs in the US in 2022 through November 30, 2022, a 82.1% decrease from the same period in 2021, which saw 969 IPOs. In addition to fewer IPOs, the average proceeds has significantly decreased. PwC’s Q3 2022 IPO overview showed that the US saw the lowest Q3 IPO proceeds in over 5 years in 2022, with 37 IPOs raising a total of $3.2 billion. Excluding the IPO of a large insurance company ($1.7 billion), the average IPO proceeds in Q3 2022 was only $41 million compared to average IPO proceeds of approximately $225 million in 2021.
For micro-cap issuers looking to complete an IPO or uplist to the Nasdaq Stock Exchange, the bad news doesn’t end with a bad capital market. After a series of wildly volatile micro-cap IPOs in the first half of the year, Nasdaq implemented an across the board moratorium on all micro-cap IPOs and uplistings (defined as offerings raising less than $25 million) this fall as it struggled to revamp its internal review process. The temporary moratorium was lifted a few weeks later but, in its wake, the Nasdaq initial listings team has implemented an approval process that turns the traditional IPO listing process on its head.
For context, historically, an exchange would accept and review an initial listing application from a company and, provided the company satisfies the initial listing requirements, the exchange would approve the company for listing, subject to completion of the IPO or uplisting transaction. With approval in hand, the issuer and its underwriter then go “on the road” and market the deal, culminating in the underwriter filling its order book and the registration statement being declared effective by the SEC, followed by the pricing and closing of the offering.
In response to concerns that micro-cap IPOs were being targeted for market manipulation, which results in wildly volatile stock prices post-IPO, Nasdaq implemented a policy whereby underwriters of these micro-cap IPOs are required to provide Nasdaq with a definitive list of IPO participants prior to approving the company for listing. The problem is that, under federal securities law, an underwriter cannot have a definitive list of IPO participants until after the registration statement is declared effective. Further, once a registration statement is declared effective, you cannot amend it without subjecting yourself to a de novo review by the SEC, which is why historically issuers time the effectiveness of their registration statement to occur immediately prior to the pricing of the offering, essentially once it is a done deal. Similarly, the SEC has traditionally held off on declaring a registration statement effective for offerings in which an issuer will be listing on an exchange until the exchange has certified that the issuer is approved for listing, which the Nasdaq initial listings team was now refusing to do until after the registration statement was declared effective. The SEC has since relented and there is now a path forward, albeit in a backwards manner. Alternatively, Nasdaq has allowed underwriters to provide a near-final list along with representations that the list would not materially change at the time of pricing, but since that shifts liability to the underwriters few are willing to make such representations and assume such risk.
By changing what approval comes first, Nasdaq has created a major problem for micro-cap issuers. Reversing the order of Nasdaq approval and registration statement effectiveness forces issuers and underwriters to structure, market, and price a deal without knowing when, or if, Nasdaq will approve the listing. This is a tremendously onerous burden for companies, who often are relying on these transactions to grow and sustain their businesses. If there is a delay between effectiveness and pricing of even one day, the company and underwriters may find that prospective investors have changed or abandoned their orders, the market many have shifted, or there may be some other change that puts the months of work and effort that culminate in an IPO or uplisting in jeopardy.
Nasdaq’s concerns over market manipulation are clearly valid. Hopefully, this awkward solution will prove to be a temporary fix, and Nasdaq will be able to develop other strategies to address their market manipulation concerns. Indeed, NYSE does not seem to be experiencing these kinds of issues, so there are likely systemic solutions, such as tightening listing standards, that will obviate this awkward arrangement. However, these solutions will require rulemaking which takes time. For the time being, micro-cap issuers should be aware of this issue when considering an IPO or uplisting transaction.
For more information, contact a member of the Securities & Capital Markets team.