As privately held companies choose to remain private longer and defer their initial public offerings (IPOs), these companies are increasingly reliant on raising capital in successive private placements. New categories of investors, including cross-over funds, sovereign wealth funds, and family offices, have become significant participants in late-stage (or mezzanine) private placements. Depending on the sector, a late-stage private placement may be an important step for a company. For example, a late-stage private placement may provide needed capital to allow the company to defer its IPO until the IPO market becomes more hospitable. The transaction may serve to provide liquidity to friends and family, angel and other early investors in the company. For companies in other sectors, such as life sciences, a late-stage private placement made to known and wellregarded life science investors may serve to validate the company’s product, drug or technology. Often, the investors will express an interest in participating in a subsequent IPO and this may be important to the IPO’s ultimate success. In this survey, we have examined the late-stage private placements that preceded life sciences IPOs undertaken in 2015 and in 2016 (through June 30). In 2015, there were 61 life sciences IPOs completed. Overall, in 2015, there were 185 IPOs completed. Life science IPOs represented approximately 33% of the IPOs for 2015. In 2016, through June 30, there were 19 life sciences IPOs completed. Overall, through June 30, 2016, there were 44 IPOs completed. Life sciences IPOs represented approximately 43% of the IPOs for the first half of 2016. Late-Stage Private Placements A Life Sciences Sector Survey 2 LATE-STAGE PRIVATE PLACEMENTS Explanatory Note: Unless otherwise specified, our findings set forth below regarding late-stage private placements also include those private placements that were undertaken concurrently with the IPO. How many months prior to the IPO was the last private placement completed? Approximately 91% (75/82) of the companies surveyed undertook a private placement shortly prior to the IPO. For those companies that undertook a private placement shortly prior to the IPO, the average amount of time between the final private placement and the IPO was approximately 6.91 months and the range was 1 to 16 months (excluding those private placements that were undertaken concurrently with the IPO). What were the gross proceeds from the last private placement shortly prior to the IPO? • Average gross proceeds: approximately $39.9 million • Range: $0.01 million to $120 million • Below $5 million: 16% (12/75) • $5 million to $20 million: 20% (15/75) • $20 million to $50 million: approximately 33% (25/75) • Over $50 million: approximately 31% (23/75) 91% 9% Time Frame Shortly prior to IPO Longer period of time prior to IPO 3 What type of security was offered in the last private placement shortly prior to the IPO? • Common stock or common stock with warrants: approximately 23% (17/75) • Preferred stock or preferred stock with warrants: 28% (21/75) • Convertible preferred stock or convertible preferred stock with warrants: 39% (29/75) • Convertible promissory notes: approximately 11% (8/75) There were no issuances of non-convertible promissory notes. One company that issued convertible promissory notes also issued warrants exercisable for common stock. Did investors receive dividend rights? If so, were dividends cumulative? Yes, investors in offerings of common stock, preferred stock and convertible preferred stock were entitled to receive dividends. Approximately 64% (25/39) specified cumulative dividends and 36% (14/39) specified non-cumulative dividends. 16% 20% 33% 31% Offering Size Below $5 million $5 million to $20 million $20 million to $50 million Over $50 million 23% 28% 38% 11% Securities Issued in Last Private Placement Common stock or common stock with warrants Preferred stock or preferred stock with warrants Convertible preferred stock or convertible preferred stock with warrants Convertible promissory notes 4 What was the specified dividend rate (for those companies that issued dividend-paying securities)? Approximately 92% (34/37) of the companies specified a dividend of 8% per annum, one company specified a dividend of 12% per annum and two companies specified a dividend of 6% per annum. Did investors receive anti-dilution protection? Approximately 96% (49/51) of the companies provided investors with anti-dilution protection and approximately 4% (2/51) did not. 64% 36% Cumulative Versus Non-Cumulative Dividends Cumulative Non-cumulative 92% 5%3% Dividend Rate 8% per annum 6% per annum 12% per annum 5 Of those companies that provided investors with anti-dilution protection, approximately 18% (9/49) provided “full-ratchet” anti-dilution protection and approximately 82% (40/49) provided “weighted-average” anti-dilution protection. Did investors receive registration rights? • Demand registration: Approximately 85% (56/66) of the companies provided investors with demand registration rights and approximately 15% (10/66) did not. 96% 4% Anti-Dilution Protection Provided Not provided 18% 82% Type of Anti-Dilution Protection "Full-ratchet" "Weighted-average" 85% 15% Demand Registration Provided Not provided 6 • Piggyback registration: Approximately 85% (56/66) of the companies provided investors with piggyback registration rights and approximately 15% (10/66) did not. Did investors receive co-sale rights? Drag-along rights? • Co-sale rights: Approximately 46% (31/68) of the companies provided investors with co-sale rights and approximately 54% (37/68) did not. • Drag-along rights: 25% (17/68) of the companies provided investors with dragalong rights and 75% (51/68) did not. 85% 15% Piggyback Registration Provided Not provided 46% 54% Co-Sale Rights Provided Not provided 25% 75% Drag-Along Rights Provided Not provided 7 Did investors receive a right of first offer? A right of first refusal? Preemptive rights? • Right of first offer: Approximately 46% (31/68) of the companies provided investors with a right of first offer and approximately 54% (37/68) did not. • Right of first refusal: Approximately 57% (39/68) of the companies provided investors with a right of first refusal and approximately 43% (29/68) did not. • Pre-emptive rights: Approximately 84% (57/68) of the companies provided investors with pre-emptive rights and approximately 16% (11/68) did not. 46% 54% Right of First Offer Provided Not provided 57% 43% Right of First Refusal Provided Not provided 84% 16% Pre-emptive Rights Provided Not provided 8 Did investors receive voting rights? All of the companies issuing equity securities provided for voting as a separate class on certain matters (for example, board members) and voting with other common stockholders or other classes of preferred stock on general matters presented to stockholders. Did investors receive board rights? Approximately 43% (29/68) of the companies provided investors with board rights and approximately 57% (39/68) did not. Did investors receive observer rights? Of those companies that did not provide investors with board rights, approximately 44% (17/39) provided investors with observer rights, typically non-voting, and approximately 56% (22/39) did not. 43% 57% Board Rights Provided Not provided 44% 56% Observer Rights Provided Not provided 9 Did investors receive information rights? • Right to financial reports: Approximately 84% (57/68) of the companies provided investors with a right to receive financial reports and approximately 16% (11/68) did not. • Inspection rights: Approximately 84% (57/68) of the companies provided investors with inspection rights and approximately 16% (11/68) did not. Did investors receive IPO price protection? No. Unlike tech company late-stage private placements in which IPO price protection has become more common, none of the companies provided investors with IPO price protection. 84% 16% Inspection Rights Provided Not provided 84% 16% Right to Financial Reports Provided Not provided 10 Did insiders participate in the last private placement shortly prior to the IPO? If so, what was the amount of their investment as a percentage of the gross proceeds of the last private placement shortly prior to the IPO? • Approximately 85% (64/75) of the companies had insider participation in their last private placement shortly prior to the IPO. Approximately 11% (8/75) of the companies did not disclose whether they had insider participation in their last private placement shortly prior to the IPO. Three companies did not have insider participation in their last private placement shortly prior to the IPO. “Insiders” refer to directors, executive officers, officers or employees with policy-making functions, and 10% beneficial holders. • Of those companies that had insider participation in their last private placement: o The amount invested by insiders relative to the gross proceeds of the last private placement was on average approximately 62%. o The amount invested by insiders relative to the gross proceeds of the last private placement ranged from 1% to 100%. 85% 4% 11% Insider Participation in Last Private Placement With Without Not specified 11 IPOs FOLLOWING THE LAST PRIVATE PLACEMENTS We also reviewed the IPOs following the last private placements in order to identify trends related to insider participation. Our findings are set forth below. How many IPOs had insider participation? Approximately 70% (57/82) of the IPOs had insider participation and approximately 30% (25/82) did not. What types of insiders participated? Insiders participating in the IPOs generally were 10% beneficial holders, including through an affiliation with a director or officer. Did the IPO prospectuses include disclosure regarding the type of insider participation? • Approximately 51% (29/57) of the IPO prospectuses did not disclose the names of those insiders participating in the IPO and approximately 49% (28/57) identified those insiders participating in the IPO. • Approximately 61% (35/57) of the IPO prospectuses disclosed a binding agreement of insiders to participate in the IPO and approximately 39% (22/57) disclosed a non-binding agreement to participate in the IPO. 70% 30% Insider Participation in IPO With Without 49% 51% Insiders Identified Versus Non-Identified Identified Not identified 12 For those IPOs with identified insider participation, what was the amount of insider investment as a percentage of the gross proceeds of the IPO? • Range: approximately 1% to 80% • Average: approximately 34% Was there a jump in valuation from the last private placement to the IPO? Yes, typically there is a jump in valuation for life sciences companies from the last private placement to the IPO. This jump was slightly higher in 2015 (an average of approximately over 150%) compared to 2016 (an average approximately under 110%). How many of the IPOs had a concurrent private placement? Approximately 11% (9/82) of the IPOs had a concurrent private placement. Of those companies with a concurrent private placement, eight also had insiders indicating an interest in participating in the IPO. 61% 39% Binding Versus Non-Binding Participation Binding Non-binding 11% 89% Private Placement Concurrent with IPO Occurring Not occurring 13 For those IPOs that had a concurrent private placement, what were the gross proceeds of the concurrent private placement relative to the gross proceeds of the IPO? • Range: approximately 8% to 36% • Average: approximately 22% For more information regarding late-stage private placements, see our infographic: http://www.mofo.com/~/media/Files/PDFs/160411LateStageFinancings_infographic.pdf The Jumpstart Our Business Startups (JOBS) Act is intended to jumpstart capitalraising for emerging companies, as well as facilitate capital formation for existing public companies of all sizes. Given our longstanding commitment to serve emerging companies and the breadth of our capital markets and corporate practices, we are fascinated by the possibilities that the JOBS Act may turn into reality. So fascinated that we decided to supplement our dedicated JOBS Act webpage with this blog. Our Jumpstart blog is intended to provide entrepreneurs, domestic and foreign companies of all shapes and sizes, and financial intermediaries, with up to the minute news and commentary on the JOBS Act. Visit www.mofojumpstarter.com. CONTRIBUTORS Julianne Nguyen Associate JulianneNguyen@mofo.com +1 (212) 336-4260 Kevin Erspamer Paralegal KErspamer@mofo.com +1 (212) 336-4135 CONTACTS Ze’-ev Eiger Partner ZEiger@mofo.com +1 (212) 468-8222 Anna Pinedo Partner APinedo@mofo.com +1 (212) 468-8179 14 ABOUT MORRISON & FOERSTER We are Morrison & Foerster—a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life sciences companies. We’ve been included on The American Lawyer’s A-List for 12 straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are committed to achieving innovative and business-minded results for our clients while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com. © 2016 Morrison & Foerster LLP. All rights reserved. For more updates, follow Thinkingcapmarkets, our Twitter feed: www.twitter.com/Thinkingcapmkts. The information contained in this report is the result of analysis that includes certain assumptions and compilations. There can be no assurance that this report is error-free. Neither Morrison & Foerster LLP nor any of its partners, associates, staff, or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion.