Author Archives: Dennis McCarthy

Corporations are Active Investors

Corporations continue to be active investors in younger companies. Stats indicate that the number of corporate investments doubled between 2009 and 2014 to 888 completed deals as reported by Pitchbook, the online deal database.

This growth in corporate investment is critical to provide capital for younger companies because traditional venture capital continues to be difficult to obtain and the public financing market has become less receptive (click here).

My colleagues and I have experienced this growing corporate interest in younger companies with several successful transactions.

The historical impediment to corporate investment, what was known as the “not invented here syndrome” at large corporations, seems less common today. Instead, large corporations appear to recognize that younger companies may be cost-effective and more agile in initial development. Large corporations have come to accept that investing in or acquiring a younger company can serve as a valuable product pipeline filler.

We’ve seen large corporate investors join financial investors in an investment round with the corporate investor receiving no special status or rights, such as a right of first refusal upon the company’s sale.

A couple transactions have taken the form of acquisitions with a purchase structure that included an attractive initial payment and an “earn-out” payment tied to the technology’s eventual commercial success.

Today, when my colleagues and I represent companies to raise capital, we regularly include strategic corporate investors and acquirers on our list of potential candidates. We structure our engagement compensation arrangements to encourage the pursuit of a broad range of outcomes. Our goal is to give our clients options from which to choose and the comfort that all options have been pursued.

To read the stats about corporate investing prepared by Pitchbook, please click here.

Please contact me to discuss your company’s capital market goals.

Alternative to a Conventional IPO

With the Dow Index at record highs, the valuation differential between public and private companies may be wider now than ever. It’s no wonder that private companies consider “going public” to get a valuation boost.

This surge in initial public offerings (IPOs) has been reported by a number of sources including a recent article, “The Hot IPO Market Continues” by Morrison Foerster in its “Jumpstarter” online magazine.

Excerpt

“The first half of 2014 has seen the hottest IPO market in 14 years – 133 IPOs priced, raising more than $30 billion in proceeds. This is already greater than the total number of IPOs priced during 2011 and 2012. The second quarter even included five IPOs that raised more than $1 billion each.”

Many private companies, however, are too small to go public through a conventional IPO.

Today, a company considering a conventional IPO typically plans to issue at least $100 million of new common stock. Given that the new public stock sold is typically no more than 25% to 30% of the company’s total stock, this requires the company to be at least $250 to $300 million in value before the IPO.

There are many private companies that would like to be publicly traded but haven’t gotten to that size yet for a conventional IPO. These companies might be successful as public companies and gain the benefit of a public company valuation.

For these companies, the alternative of merging with another small public company to “go public” may be a solution.

Many company executives upon hearing of merging to become public immediately think of merging with a shell company. While this is a possible method, I recommend merging with a smaller public “operating” company instead.

There are many smaller public operating companies whose stock price would benefit from a merger in order to add value and upside potential.

Careful selection and evaluation by both sides, the public and the private company, is very important.

The stock market reaction to a well-done merger is positive for both sides in the deal.

My colleagues and I at Monarch Bay have experience with these IPO mergers and can assist your company to navigate the process successfully.

Click here to go to a website page on this topic.

 

Deal Velocity Crowdfunding Site Operational

LogoMonarch Bay is a sponsoring broker-dealer of the crowdfunding site DealVelocity.com.

Click here to go to the dealvelocity.com site.

DealVelocity is a cloud based SaaS funding platform for equity and debt offerings conducted pursuant to Titles II of the JOBS Act of 2012 for Rule 506B and 506C private placements. The platform has been designed for use by other FINRA registered broker-dealers who are looking for a private-labeled, FINRA compliant, online transaction platform.

DealVelocity is comprised of investment bankers, entrepreneurs, and tech junkies that care about:

   – Eliminating frictions, so companies can change the world.
   – Connect companies and entrepreneurs with their optimal financing partners, on the most ideal terms, fast.
   – Create and enable tools for investors to help companies and the entrepreneurs who start them.
   – Provide a secure platform with regulatory compliant tools and features.
   – Process and syndicate transactions for FINRA registered Broker Dealers.

As entrepreneurs, the DealVelocity team knows the challenges and the frustrations management goes through when growing a company. That is why DealVelocity is determined to eliminate the growth capital challenges that all business owners face in growing a business. DealVelocity has done this by creating a platform, network and tools to allow your company to seamlessly execute on its growth plans.

IPOs Using JOBS Act Benefits

L&WHdgUS IPOs are taking advantage of provisions of the JOBS Act, introduced two years ago,

  • to submit a confidential filing, initially, and
  • to “test the waters”.

Latham & Watkins, the law firm, has prepared the attached report to review the use of the JOBS Act provisions during its second year.

Seven IP Mistakes of Startups

JD Supra, the online legal resource, offers these following tips gathered from several of their legal contributors.

You have a great idea, a solid team, the beginnings of a viable product that appears to be gaining early traction in the marketplace, interest from investors, and … what else? Well, for one thing: not enough time in the day to get it all done. And for another: you have intellectual property and it needs to be protected.

What’s the biggest  mistake startup entrepreneurs make with respect to their intellectual property, and what can they do to fix it?

That’s the question we recently put to IP attorneys writing on JD Supra, knowing that the diversity of responses would make for interesting reading. We weren’t disappointed. Here’s what we heard back:

Click here to read the article at JD Supra.

Current Reg A Offering Rules

The post, Smaller Company Reg A Offering Rules Get Update, triggered questions about the current rules.

Fortunately, the SEC provided a readable summary (click here) which is a segment of the full SEC page (click here) on financing small businesses.

Deregulation of Small Private Company M&A

A Bill that would largely deregulate the M&A business for smaller private companies (defined as those with EBITDA of $25 million or less) has passed the House and is now before the Senate.

The proposed rule change would enable unregistered advisors to assist the owner of a smaller private company to sell the owner’s business.  

In a coincident development, the SEC has issued a “no action letter” permitting unregistered advisors to assist private companies in M&A transactions.  As is pointed out in the linked post from Faegre Baker Daniels, however, state laws may conflict with this new SEC position (and the pending legislation).

The M&A business for smaller private companies has, in my opinion, always been a bit “the wild west” where unregulated advisers could operate openly for years without penalty.  This proposed rule change, therefore, may not trigger a fundamental change in behavior.  Rather, it may formally permit what is effectively the “status quo”.

What this proposed change would not permit, however, is for an unregistered advisor to assist in an increasingly common engagement structure in which the adviser pursues both capital and M&A options.  Often business owners will pursue parallel deal paths to determine the relative values to them of each alternative before making a decision.  The rules surrounding registration of advisors who are raising capital for smaller private businesses is unchanged under this proposed legislation.

Click here to read a Forbes article for more background.

Click here to read a post on this topic by the law firm, Faegre Baker Daniels.

Smaller Company Reg A Offering Rules Get Update

LanceImageLance Kimmel, a well-regarded attorney and head of SEC Law Firm, provides us with this helpful summary of key developments that should make Reg A offerings more useful again.

Following the mandate of the Jumpstart Our Business Start-Up (JOBS) Act, on December 18, 2013 the Securities and Exchange Commission proposed rules to amend largely forgotten and little-used Regulation A.

Having received far less attention than either of the other two major equity raising initiatives under the JOBS Act, general solicitation of accredited investors and equity crowdfunding, the revisions to Regulation A may well be the most far-reaching of the JOBS Act reforms. Informally known as “Regulation A+”.

Click here to read more on Capital Market Alerts.