dealflow report THE NEWS, INFORMATION, AND ANALYSIS OF SMALL CAP EQUITY FINANCE report.dealflowmedia.comreport.dealflow.com SMALL CAP FINANCING MARKET DECLINES IN FIRST QUARTER AS INVESTORS ESCHEW ILLIQUID INVESTMENTS by Dan Lonkevich The small cap and microcap equity the small cap equity financing market: (CEMI), a $5.5 million registered direct financing market contracted more than the decimalization of stock prices, the offering of common stock for Novelos expected in the first quarter as concern absence of small cap investment banks, Therapeutics (NVLT), and a $1.77 about the illiquidity of the smallest the lack of profitability in underwriting. million convertible debt placement for companies kept investors focused on The Jumpstart Our Business Start- CopyTele Inc. (COPY). large cap names that drove the broader ups Act was meant to solve some of “It’s a tale of two markets,” said market to record levels. these problems by making it easier for David Weild, chairman and chief The number of PIPE transactions companies to go public by relaxing dis- executive officer of Weild & Co., an declined by 3.1%, while initial public closure requirements, ending the ban investment banking and advisory firm. offerings slid 10%. Venture capital deals on general solicitation and advertising “You’ve got large cap companies set- declined 31%. Reverse mergers fell 44% of private placements and even allow- ting records and performing well and and alternative public offerings declined ing crowdfunding. The Securities and the bottom of the market grounding to by 81%. The IPO market for special Exchange Commission, however, has a halt.” purpose acquisition companies also fell been slow to finish the rule making that During the first quarter, Weild & 66.7%. Follow-on offerings, which were many observers are hoping will resus- Co. acquired some of the investment dominated by larger companies, were the citate the market. banking assets of ThinkEquity out of only outlier, rising 14.7%. bankruptcy. At one time, San Fran- The declines contrasted sharply to Wishful Thinking? cisco-based ThinkEquity had been a larger than expected 10% rise in the “It’s a cycle and there’s plenty of an active PIPE placement agent and Standard & Poor’s 500 Index, which set liquidity,” said John Borer, the head of underwriter of IPOs. a record close of 1569.19 on March 28, investment banking at The Benchmark “It is precisely because there are no above its previous high of 1565.15 in Co. in New York. “It’s just that insti- more incentives being committed to the October 2007. tutional investors think there’s more small cap and microcap market,” Weild “We’re moving toward a market money to be made right now in larger said. “This is a marketing and distri- that’s completely dominated by the cap companies.” bution problem and it’s a progressive large cap space,” said Mark Wood, Small to medium sized companies disease. It doesn’t mean you won’t get a partner with the law firm Katten aren’t getting many deals done, Borer said. cyclical upturns, but the new cyclical Muchin Rosenman in Chicago, who “I don’t remember a time when we upturns may start to look lower than the advises small cap and microcap com- had this few deals getting done,” he said. old cyclical downturns.” panies on capital raising. “The liquid- “I’ve been in this business for more than Weild noted that many provisions of ity’s there. The values are going up 15 years and usually when it feels this bad the JOBS Act -- ending the ban on gen- there more consistently. That’s where it means things are about to get better.” eral solicitation and advertising, easing the institutional investors are playing Borer previously worked at Rod- restrictions on offerings under Regula- and they drive the market.” man & Renshaw, the small cap invest- tion A of the Securities Act, allowing The small cap equity financing ment bank that declared bankruptcy companies to experiment with tick sizes space is pretty tough right now and I last September after a failed attempt to larger than a penny and crowdfunding don’t see that changing,” Wood said. transform into a financial technology -- have not been implemented yet. “Things like the JOBS Act aren’t help- company with an electronic platform for “We need to get on with it and set ing. I hope not, but the glory days of executing private placements. about repairing capital formation for small the small cap equity financing market In the first quarter, Benchmark cap and microcap companies,” he said. may be gone for good.” helped arrange a $6 million confiden- “It’s not going to be an overnight fix.” Wood cited a host of reasons that con- tially marketed public offering of com- To be sure, not everyone believes that tributed to the absence of liquidity in mon stock for Chembio Diagnostics the pullback in the small cap and microcap For use by original recipient only. It is illegal to forward or otherwise distribute without permission. Market UpdatePIPES equity finance market is unwarranted. million deal for Ventas Inc. (VTR), New York-based Cantor Fitzgerald “The market is smarter than it’s been and $500 million ATMs for Westar arranged 10 ATMs and one PIPE to raise in the past,” said Bryant Riley, chairman Energy (WR), American Campus as much as $673 million. In contrast, of boutique investment banking, advi- Communities (ACC) and El Paso Dawson James, in Boca Raton, Fla., sory and research firm B. Riley & Co. Pipeline Partners (EPB). arranged 11 PIPEs worth $70.9 million. in Los Angeles. “PIPEs, reverse mergers The largest non-ATM PIPEs were by Excluding the large ATM deals to and SPACs are all highly speculative. Cheniere Energy Partners (CQP) with large energy partnerships and real estate Investors are being more careful. I think a $365 million common stock place- investment trusts, “the deals getting it’s good. I hope we don’t go through ment, and ARIAD Pharmaceuticals done were minute,” Benchmark’s Borer another fad like reverse mergers in (ARIA) with a $323.2 million common said. And even on the smallest deals China, clean tech or the dot-com bubble. stock placement. there were often two or three banks Wall Street makes a lot of money when Of the 249 first-quarter PIPEs, 133 helping to arrange them, he said. Even that happens, but it’s better for investors involved the issuance of common stock, on ATMs, deals often have three or four when there’s more caution.” 25 the issuance of convertible preferred banks on them. stock, and only 23 the issuance of convert- Investment banks that used to special- PIPEs ible debt. In comparison, the first quar- ize in PIPEs have had to change their PIPE activity declined in the first ter of 2012 included 142 common stock focus, Borer said. quarter to 249 deals from 257 deals in deals, 21 convertible preferred deals, and “We’re focusing on M&A advisory the year-ago period. The 249 deals were 25 convertible debt deals. and private company financings,” he the fewest in a first quarter since the As usual, health care issuers dominat- said. “There’s a need to fill and it’s same period in 2009. Then, during the ed the PIPE market with 85 deals worth much less competitive.” height of the financial crisis, only 166 $1.83 billion, followed by technology, Competition for an ever shrinking PIPEs were issued. telecom and media issuers with 39 deals piece of the small cap equity financing Fewer companies raised more money worth $1.17 billion. market accelerated the demise of Rod- in the latest quarter, $9.63 billion com- Hedge funds accounted for almost man, ThinkEquity and other investment pared with $8.37 billion a year earlier. The half of the total PIPE investments in the banks in recent years. larger dollar volumes reflected an increase first quarter with 123 investments worth in the average dollar amount raised: $39.8 $461.7 million, followed by private equity IPOs million compared with $32.6 million. and venture capital with 32 investments IPO activity also cooled off in the first It also reflected an increase in the size worth $605.2 million. Corporate insiders quarter with only 35 deals raising $8.8 bil- of the companies issuing PIPEs. Forty and affiliates accounted for 30 invest- lion, compared with 39 deals worth $5.8 PIPE issuers had market values greater ments worth $50.1 million. billion a year ago, according to Dealogic. than $500 million and accounted for $6.94 The top 10 PIPE investors were led The number of companies that elect- billion of the total dollars raised. by Sabby Management, Hudson Bay ed to go public as emerging growth The number of unregistered PIPEs fell Capital Management and Downsview companies under the JOBS Act rose to to 143 worth $2.17 billion from 168 worth Capital, which each had six investments 28 that raised $3.6 billion. That was up $4.88 billion, a year ago. Registered deals worth $8.85 million, $5.62 million and from the 24 EGCs that raised $4.1 bil- increased to 102 worth $7.46 billion from $3.88 million respectively. lion in the fourth quarter. The JOBS Act, 89 worth $3.5 billion. The placement agent rankings were which created the new EGC category, The dollar volume figures also were led by RBC Capital Markets, which was signed into law April 5, 2012. exaggerated by the relatively large num- arranged 12 deals including six ATMs The top 10 first quarter IPOs were ber of at-the-market offerings, which and six PIPEs worth $2.02 billion.