CohnReznick Middle Market Equity Capital Report

Middle Market Equity Capital Report

2014 Analysis: Progress for Middle Market IPOs

February 2015 A CohnReznick LLP Report

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Middle Market Equity Capital Report ― February 2015

pro• gress verb: To move forward. To develop to a more advanced stage.

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Middle Market Equity Capital Report ― February 2015

Table of Contents

IPO Activity: Q4 and 2014.....................................................................1 2014—A Year in Review ........................................................................3 Crowdfunding’s Potential Disruptive Impact on Capital Markets...7 Middle Market IPO Activity: Industries in Focus.............................. 10 Middle Market Snapshot.................................................................. 16 Top 25 Middle Market Investment Banks........................................ 18 2015 Regulatory View....................................................................... 19 Summary............................................................................................ 21

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Middle Market Equity Capital Report ― February 2015

Preface February 17, 2015 Equity capital formation in 2014 proliferated to levels not seen in several years—an encouraging sign that middle market growth is thriving and on a positive trajectory as we move into 2015. Private placements, the stock market, IPOs, and the JOBS Act all proved instrumental in improving the middle market capital formation engine in 2014.

Dom Esposito

In this CohnReznick capital markets report, we examine the metrics for IPO activity and how these factors are converging to influence the overall middle market business sector, and the impact of the regulations intended to raise capital.

Also included is a special feature in this full-year report: the proliferation and potential disruptive impact of crowdfunding on the capital markets ecosystem.

CohnReznick highlights IPO activity as 2014 was the strongest year since the year 2000, undergoing a 25% increase compared to 2013 in the number of IPOs completed by middle market companies (which we define as companies with market capitalizations between $10 million and $2 billion). In particular, the technology, healthcare, and life sciences sectors saw a continued surge in IPOs, largely due to the impact of regulations for Emerging Growth Companies (EGCs) under the JOBS Act. Accordingly, these sectors accounted for 62% of all middle market IPOs in 2014, versus 46% in 2013.

Middle market companies raised over $28 billion in 2014 compared to nearly $31 billion in 2013. Despite the slight decrease in proceeds, we remain encouraged by the larger number of deals in 2014, which indicates that companies are more willing to move forward with IPO plans at possibly younger stages of development.

However, even with indicators pointing to a healthier middle market capital formation temperature, issues such as the continued dampening level of activity in smaller IPOs and persistent underpricing of middle market IPOs are points of concern heading into 2015. We anticipate that maintaining a steady course of growth for the middle market business sector will largely hinge upon proactive legislative efforts that provide additional access to capital and address a variety of measures within the JOBS Act that have the propensity to further support capital formation.

Dom Esposito Partner, National Practice and Growth Director

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Alex Castelli Partner, Middle Market Equity Capital Sponsor

Middle Market Equity Capital Report ― February 2015

Alex Castelli

“... maintaining a steady course of growth for the middle market business sector will largely hinge upon proactive legislative efforts that provide additional access to capital and address a variety of measures within the JOBS Act that have the propensity to further support capital formation.”

IPO Activity: Q4 and 2014

Q4 of 2014 capped the strongest year for IPOs since 2000. Seventy-eight IPOs were completed in the fourth quarter of 2014 compared to 69 in the Q3 2014 and 76 in Q4 2013. Seventy-two of these IPOs were operating company IPOs, versus 63 in Q3 2014 and 71 in Q4 2013.

There were 60 middle market IPOs in Q4 2014 in comparison to 57 in Q3 2014 and the same 60 in Q4 2013.

CohnReznick examines the middle market in greater depth below.

Figure 1. IPO Activity by Quarter 90 80 70

MIDDLE MARKET IPOS

60

IPOs by companies with post-IPO market capitalization between $10 million and $2 billion.

50 40 30 20 10 0

Q4 - 2013

Q1 - 2014 All IPOs

Q2 - 2014

Q3 - 2014

Q4 - 2014

Middle Market IPOs Source: IssuWorks

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IPO Activity: Q4 and 2014 There were 307 total IPOs completed in 2014, compared to 255 in 2013. Of these, 284 IPOs in 2014 were operating company IPOs versus 221 IPOs in 2013—an increase of 29%. Of total IPOs, 239 were completed by middle market companies in 2014 compared to 192 in 2013—an increase of 25%.

2014 marks the highest number of IPOs in 14 years —this strong performance is owed to the increasing impact of the JOBS Act and the continued strength in the stock market.

Figure 2. Middle Market IPO Increases (Strongest Year for IPOs Since 2000) 350 300

Up 20%

250 200

Up 25%

150 100 50 0 All IPOs

Middle Market IPOs 2013

2014 Source: IssuWorks

While overall IPO numbers are stronger for 2014 than the prior year, one sobering note remains: the continued dampening level of activity in smaller middle market IPOs—those raising less than $50 million in proceeds.

Although 2014 saw 48 small IPOs, a welcome increase over 22 IPOs in 2013, this figure is still just 17% of all operating company IPOs. Just two decades ago, small IPOs accounted for 80% of all operating company IPOs. CohnReznick believes that more proactive legislation would propel increased viability of the smaller middle market IPO market going forward.

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Middle Market Equity Capital Report ― February 2015

2014 —A Year in Review

There is no denying that the U.S. economy is showing signs of life. According to the U.S. Department of Labor, unemployment declined to 5.6%1 this past December—marking the lowest unemployment rate of any other month in 2014. Job creation improved to 260,000 jobs in December 2014 which is a step—albeit not a stride—in the right direction. But is this level of fiscal vitality enough to support the U.S. economy? It is not likely. For three decades prior to the 2000s, the U.S. created an average of 20 million net new jobs each decade—or an average of two million jobs a year. However, beginning in the 2000s our job-creation engine began to sputter and each month that the U.S. economy did not keep job creation in pace with economic needs, the sputter leaned more toward being a watershed. With this in mind, the U.S. necessitates the creation of 400,000+ jobs every month for many months to absorb the inevitable recessions and the pent-up slack in the labor force. This accelerated level of job creation would propel U.S. workers that stopped looking for work to come off the bench in light of increased job opportunities and would provide more open employment doors to new college graduates and immigrants.

While we have made good progress, additional work is needed to accelerate job growth. Based on data gathered by the Kauffman Foundation, each new IPO creates an average of 822 new jobs. Therefore, to grow jobs and fuel the economy, the U.S. must continue to increase access to capital in the form of pro-capital formation legislation.

What does CohnReznick think?

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http://www.bls.gov/news.release/pdf/empsit

In terms of IPO activity, the progress made by the U.S. economy over the past two years has been impressive suggesting that the middle market IPO has re-emerged and that an increasing number of private companies are more seriously considering an IPO as part of their strategic plan to raise capital. Encouraged by a strengthening U.S. economy, the investment community is receptive to those companies with interesting stories, strong financials, and experienced management teams.

Absent any catastrophic changes in the marketplace, 2015 IPO activity may eclipse 2014’s record-breaking performance.

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2014 —A Year in Review Four Steps Forward Although additional work is needed, the JOBS Act— the single most important pro-capital-formation legislation in over a generation—is showing results: 1. Crowdfunding: “Generally solicited” private placements2 exploded with activity. Two recent studies3 indicate that it appears that more companies are taking advantage of the new regulations to raise private capital, that deals are closing, and that the higher level of visibility and activity on crowdfunding websites is facilitating the participation rates by accredited investors.

2. IPO Activity: The IPO market hit a new post2000 high with 307 IPOs completed in 2014 compared to 255 in 2013. In addition, 284 IPOs were executed for operating companies (excluding funds and SPACs) versus 221 in 2013.

This contrasts to an average of approximately 150 operating company IPOs since 2000. Of the operating company IPOs, 239 (over 84%) were by middle market companies, which we define as companies with market capitalizations between $10 million and $2 billion, versus 192 in 2013. Forty-eight smaller middle market IPOs (sub $50 million in proceeds) were completed which represented 16.9% of operating company IPOs, up from only 10% in 2013.

3. Focus on Technology and Healthcare: Technology, healthcare, and life sciences IPOs continued to surge, in large part due to the JOBS Act’s “Confidential Filings” and “Testing the Waters” provisions for Emerging Growth Companies (EGCs).4 These provisions attract and support a group of more technologically complex middle market growth companies.

Combined, technology, healthcare, and life sciences middle market IPOs grew to nearly 62% (147 IPOs) of middle market IPOs versus only 46% (89 IPOs) in 2013.

Venture Capital Flexes Its Muscle • The fourth quarter of 2014 was the seventh consecutive quarter to see more than 20 venturebacked IPOs, which has not happened since 2000.

• Compared to the third quarter of the year, that’s an 18% increase by number of offerings and a surprising 68% increase in dollars. In addition, the National Venture Capital Association (NVCA) and Thomson Reuters say that 20 of the 27 companies that went public this quarter are trading above their offering prices—a sign that the market should continue to be healthy for new entrants.

• Most of the venture capitalists’ share of these gains goes back to their limited partners. In turn, healthy payouts to limited partners convince those same institutions to reinvest in new venture capital.

Once those limited partners turn over their money to the VCs, the VCs invest it, making more money available to entrepreneurs in need of capital, continuing the virtuous financing circle.

• For the full year, there were 115 venture-backed IPOs. While tech companies continue to get the lion’s share of attention, for a while now it’s been biotech companies that have really been the stars. For the second year in a row, they’ve accounted for more than half of all venturebacked IPOs. 2014 saw 59 biotech companies go public, the most since the NVCA started keeping records in 1994.

• The most highly-valued biotech IPO of the year came from Juno Therapeutics, which is focusing on immunotherapy treatments for cancer patients.

It raised $265 million at a $2.2 billion valuation.

• Interestingly, the largest venture-backed IPO of the quarter was neither tech nor biotech: It was Lending Club, a company that has a large technology component but which is essentially a facilitator of loans. The company raised $1 billion on December 10 and is trading at about 58% above its offering price. It went through 12 funding rounds before its IPO, including a debt round.

Rule 506(c) offerings Crowdnetic PIPRs (private issuers publicly raising) report at https://www.crowdwatch.com http://www.offerboard.com/whitepaper.asp 4 An Emerging Growth Company or “EGC” is defined, for IPO purposes, as a company with less than $1 billion in revenues in its most recently completed fiscal year. This category was created by Title I of the JOBS Act which was signed into law by President Obama on April 5, 2012. While the category of EGC was immediately effective under the Act, Wall Street and securities attorneys took some time to get comfortable with the provisions, and there continues to be a learning curve in applying such features as “Testing the Waters” (pre-marketing of IPOs).

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Middle Market Equity Capital Report ― February 2015

2014 —A Year in Review 4. Tick Size Pilot: The SEC tasked the Self-Regulatory Organizations (stock exchanges and FINRA) to establish a pilot program to test 5 cent per share tick sizes to create the economic incentives necessary to support higher small cap liquidity.

Opportunity for Growth While the JOBS Act is performing as it was intended, it is important to shine a light on areas of potential improvement that are on stand-by for solutions. As an example, equity new issues performance, while much improved, is still a shadow of what is needed to support an economy the size of the country: • Title III Crowdfunding: The SEC still has not implemented Title III of the JOBS Act—crowdfunding to non-accredited public investors. This Title was intended by Congress to help companies obtain start-up capital. The number of startups (companies that are less than one year old), while showing a modest increase in 2014, are running at not much more than half the levels they did back in the 1970s and 1980s.5 • Regulation A+: Regulation A+ (Title IV of the JOBS Act) was supposed to establish an “IPO lite” (scaled disclosure) for sub $50 million public equity offerings. Reg. A+ still has not been implemented by the SEC. As proposed Reg. A+ calls for an exemption from state law review, state securities administrators through NASAA, the North American Securities Administrators Association, have been trying to assert jurisdiction. As small companies can ill afford a second layer of regulatory cost and uncertainty, we expect that Congress and the President may need to step in and preempt state jurisdiction in order to finally facilitate implementation of Regulation A+.

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Foreign Affairs, Start-Up Slowdown: How the United States Can Regain Its Entrepreneurial Edge by Robert Litan, January|February 2015

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2014 —A Year in Review • Small IPOs: The small IPO segment,6 which represented 80% of all IPOs before 1997 and prior to the dawn of low commission decimalization, is sputtering at less than 17% of operating company IPOs. CohnReznick believes this is in large part due to the lack of profitability in small cap market-making which has caused a steady decline in Wall Street’s capacity to support small capitalization companies—i.e., equity research, sales, and trading. This, in academic circles, is called “the ecosystem theory of small IPO decline.”7 To return profitability to small cap market-making, the U.S. House of Representatives passed a bill to test both 5 cent and 10 cent tick sizes. However, the U.S. Senate and the President of the United States still need to act. Either way, we will be monitoring these developments in 2015 as they have the potential, if designed properly, to dramatically increase the interest and liquidity in small cap stocks.

• GDP Adjusted IPOs: The absolute number of IPOs is a fraction of where it should be: A 2013 study for the OECD, Making Stock Markets Work to Support Economic Growth, estimates that the U.S., given the size of its economy, should be executing an average of 950 IPOs per year versus the 284 operating company IPOs that were completed in 2014.

• Net Neutral: The 284 operating company IPOs achieved in 2014, a bull market year, is hardly enough to replace the 300 - 360 listings that are lost from Nasdaq and the NYSE on average every year.

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Consisting of companies with offerings that are sub $50 million in size.

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IssuWorks.

What does CohnReznick think?

Evidence suggests that private equity and venture capital investors see the value and return resulting from utilizing IPOs as an exit strategy—in 2014, 64% of middle market IPOs were PE-backed. In 2015, expect to see private equity and venture capital continue to take advantage of a healthy market for IPOs.

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Middle Market Equity Capital Report ― February 2015

Crowdfunding’s Potential Disruptive Impact on Capital Markets A COHNREZNICK SPECIAL FEATURE Equity Crowdfunding’s Disruptive Impact on Capital Markets Equity crowdfunding is transforming how privately held companies raise capital and interact with investors. The rise of equity crowdfunding has been nothing short of meteoric. At the end of 2014, there were 3,507 active financings seeking to raise over $20 billion in capital, according to data analytics company Dealflow.com.

Of course, not all of these companies will successfully attract funding.

According to Crowdnetic, a provider of technology and market data solutions to the global crowdfinance marketplace, about 1,200 companies have raised approximately $500 million since equity crowdfunding first became legal in September 2013. That is considerably short of the approximately $45 billion raised in venture capital investments in 2014, or the $562 billion of global private equity activity last year, as reported by Thomson Reuters.

Nevertheless, it is still a very impressive start for equity crowdfunding.

“It is rare for something to come along and fundamentally disrupt a core Wall Street function, but equity crowdfunding is undoubtedly one of those things,” said Steven Dresner, CEO of Dealflow. “Investment banking, venture capital and private equity will never be the same. At the same time, companies will have easier access to the capital they need to grow than ever before.”

Dresner noted that the internet has disrupted many industries over the past 20 years, including books, music, retail, and travel. Now, the disruptive nature of the internet is having the same effect on the financing of private companies as the proliferation of online equity crowdfunding platforms make it easier and more cost effective to invest in deals. There are currently more

In the past, it was illegal for private companies to advertise their capital raising efforts and promote their offerings to the public. Now, thanks to Rule 506 of the JOBS Act eliminating the ban on general solicitation and advertising, it is possible for private companies to publicly market their fundraising efforts to accredited investors, largely via online platforms, in exchange for an equity interest in the business.

than 150 different equity crowdfunding sites, though only about a dozen or so have gained real traction.

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“It is fascinating to watch what is going on,” Dresner said. “The market is moving online as companies realize they can get broader distribution, better efficiency, and ultimately cheaper capital by advertising and marketing their deals. It is all about transparency, efficiency, and making markets easier and cheaper for issuers.”

What are the Differentiators for Deals?

But not all equity crowdfunding deals are created equal. Like anything else, some companies will succeed in their fundraising efforts, while others will not. However, there is a commonality among the success stories. Deals receiving funding typically have outside sponsors who advocate on behalf of the deal. These are typically prominent investors who are willing to put their names on the deal and endorse them personally, thus signaling to other investors that it is a quality opportunity.

“This is not so different from the way investments have always been done,” said Dresner. “In the past, one prominent venture capitalist would put a million dollars in a deal, and then the startup could use that as leverage to attract more VC money. Now it is just taking place in a whole new forum.”

And because that forum is so public, it is extremely important for companies seeking to raise capital to make a strong first impression. “If you have an unprofessional website, people won’t take you seriously,” said Luan Cox, CEO of Crowdnetic. “If you don’t have a nice investor deck, it becomes obvious very fast. So, as a private company, you need to get even more dressed up for the dance if you want to raise money from the crowd.”

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“If you have an unprofessional website, people won’t take you seriously. If you don’t have a nice investor deck, it becomes obvious very fast. So, as a private company, you need to get even more dressed up for the dance if you want to raise money from the crowd.”

Another key to the success of crowdfunding is the ability to match

― Luan Cox CEO, Crowdnetic

calls and online forums before making a commitment.

the right investors with the right deals. This can be done by leveraging massive amounts of data and digital marketing tools to drum up interest and attract investors to a particular transaction.

Some sites encourage companies to upload as much information as possible, including executive summaries, management bios, and financials. It then organizes and indexes all that data, so that when investors peruse the site, they can perform search queries for the kinds of deals they are looking for and quickly find the best matches.

By contrast, other equity crowdfunding portals closely vet all companies before inviting them on their site. These portals only accept a small percentage of companies that apply. Its team of private equity professionals evaluates each opportunity and only lists those that have substantial revenue or other indicators of potential success, thus pre-qualifying the deal for its network of investors. These investors are then able to communicate directly with company CEOs via conference

Middle Market Equity Capital Report ― February 2015

The Crowd Will be Coming To date, equity crowdfunding may be best characterized as a “growing” source of capital formation available to private companies. However, crowdfunding could rapidly accelerate if non-accredited investors are allowed to participate in these deals.

No doubt, crowdfunding has made it much easier for private companies to reach the estimated 3.4 million accredited investors in the U.S., who generally have annual incomes of at least $200,000 and a net worth of at least $1 million. But the JOBS Act could eventually make it possible for non-accredited investors to participate as well. This could lead to a deluge of capital as millions of new investors enter the market.

Once Title III of the JOBS Act is approved, which could be as soon as 2016, privately held companies will be allowed to raise up to $1 million per year from the general public through equity crowdfunding portals. “If every American family gave just 1% of their investable assets to crowdfunding, it would be a $300 billion market,” says Cox. Still, even if Title III is approved next year, it will take a long time to educate the American public about the opportunity that is available to them, admits Cox. But, if and when that happens, the funding of private companies via equity crowdfunding sites could eventually be as common as investing in the stock market.

“Imagine a time when you can go online and see what the top venture capitalists or private equity professionals are investing in, and what you’re allowed to invest right alongside them,” said Cox. “That makes for a powerful shift in the market.”

What does CohnReznick think?

Although not fully understood by many middle market business executives, equity crowdfunding could change the way middle market companies think about raising capital. The internet has the capacity to become a powerful, transparent, and more affordable tool for accessing capital.

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Middle Market IPO Activity: Industries in Focus

2014 saw increased activity across multiple industries in the middle market sector, with technology and healthcare issuances reflecting dominant gains. Technology and healthcare, including life sciences, comprised 62% of all middle market IPOs in 2014 in comparison to only 46% in 2013.

These sectors are typically the focus of the venture capital community, and perhaps the greatest beneficiaries of the JOBS Act provisions of “Testing the Waters” and “Confidential Filing.”

The science and complexity of many of these companies demand greater time for management to explain their business and strategy to investors’ satisfaction. Accordingly, they benefited greatly from the ability to submit their registration statements confidentially with the SEC for comment rather than having to file publicly and broadcast their financing intentions and intellectual property to their competitors while they continue to negotiate their transactions with their bankers.

“Technology companies with complex stories to tell investors have benefitted from the ‘Testing the Waters’ and ‘Confidential Filings’ provisions of the JOBS Act. We think that in 2015, investors will renew their interest in specific sub-segments of the technology space. Venture capital and private equity investors will fuel the IPO marketplace as they continue to exit investments via IPO.” ― Alex Castelli Partner, Technology Industry Practice Leader, CohnReznick

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Middle Market Equity Capital Report ― February 2015

Middle Market IPO Activity: Industries in Focus Figure 3. Middle Market IPO INDUSTRY BREAKDOWN

2013

Other 18%

2014

Technology 16%

Reta

il–3% Hospita lity–2%

Energy & Utilities 10% Real Estate Financial 7% Services 14%

Technology 18%

Other Re Ho tail– 12% sp 2% ita lity –3 Ener g % Utilitie y & s–6%

Life Sciences 8%

Life Sciences 6%

Real Estate–2%

Financial Services 14%

Healthcare (ex Life Sciences) 22%

Technology Life Sciences Healthcare (ex Life Sciences)

Healthcare (ex Life Sciences) 37%

Real Estate Energy & Utilities Hospitality Retail Other

Financial Services

Source: IssuWorks

Middle Market Proceeds Middle market companies raised over $28 billion in 2014 versus nearly $31 billion in 2013. However, the 2013 data is modestly inflated due to two transactions that raised over $1 billion (Empire State Realty Trust and Caesars Acquisition), while the largest deal in 2014 was by Travelport at $480 million. Even discounting the billion dollar deals, we are actually encouraged despite this slight decrease in proceeds. The larger total number of deals (239 in 2014 as opposed to 192 in 2013) indicates that companies were more willing to move forward with their IPO plans at possibly younger stages of development. Once again, we would point to the JOBS Act and the strong overall stock market as the foundation of this development.

Figure 4. Middle Market Proceeds

Middle Market Sub-Segments

2013 Number of Deals

2014 Proceeds

Number of Deals

Proceeds

Nano Cap ($10-$99 million)

17

$

511,290,169

29

Micro Cap ($100-$499 million)

94

$ 8,988,990,040

128

$ 10,061,527,814

Small Cap ($500 mil - $2 billion)

81

$ 22,218,374,320

82

$ 17,312,971,956

192

$ 31,718,654,529

239

$ 28,070,470,530

TOTAL

$

695,970,760

Source: IssuWorks

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Perspectives From CohnReznick’s Industry Thought Leaders

“

Even though healthcare, life sciences, and technology seem to attract most of the attention in the capital markets arena, industries such as commercial real estate, hospitality, renewable energy, and retail and consumer products are all impacted when IPO and overall capital market transactions escalate. Featured below are industry specific thoughts, insights, and observations from some of CohnReznick’s thought leaders.

T

he stage is set for private restaurant companies to consider an IPO as part of their strategic plan. Mature restaurant companies with interesting concepts and value propositions that have been diligent building outstanding management teams will be attractive to investors. In 2015, we wouldn’t be surprised if a number of private equity-backed restaurant companies went public.

Cindy McLoughlin Partner, Hospitality Industry Practice

M

ost IPO activity in the real estate industry has come to market in the form of REITs. Even though 2014 was relatively quiet for new public REITs, there was an increase in activity in the fourth quarter and the performance level of established REITs is likely to attract additional IPO activity in 2015.

Adam Kleeman Partner, Commercial Real Estate Industry Practice

O

ver the past couple of years, public offerings have come to market in the form of ‘Yieldcos’. This trend should continue in 2015 and 2016 as there continues to be consolidation in the industry as companies look for exit strategies.

Anton Cohen Partner, Renewable Energy Industry Practice Co-National Director

S

portsman’s Warehouse, Boot Barn, and Smart & Final Stores are retailers that took advantage of the vibrant IPO market in 2014 raising in excess of $409 million. All three of these middle market deals were private equity-backed. The transition from a private to a public company will certainly come with its fair share of challenges and opportunities.

Stephen Wyss Partner, Retail and Consumer Products Industry Practice

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Middle Market Equity Capital Report ― February 2015

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n 2014, we saw an unprecedented surge in biotechnology IPOs. As we transition into 2015, there is no indication that new biotech issues won’t continue to take center stage.

Alex Castelli Partner, Technology Industry Practice Leader

”

Middle Market IPO Activity: Industries in Focus Middle Market Pricing While the increased activity in the middle market is encouraging, we remain concerned about the performance of pricing execution as 41% of middle market IPOs in 2014 were priced below their filing range. However, Q4 2014 was a notable improvement over atrocious Q3 results (which saw over half of middle market IPOs priced below the range).

Figure 5. Under-Pricing Concerns Continue

100% 90%

19%

8%

16%

45%

32%

17%

15%

45%

44%

38%

41%

80% 70% 60% 50%

52%

40% 30% 20% 10%

52%

47% 29%

0% Q1 2014

Q2 2014

Below Filing Range

Q3 2014 Within Filing Range

Q4 2014

FY 2014

Above Filing Range Source: IssuWorks

We believe that a major contributor to this underpricing phenomenon is that there simply is not enough time in the few weeks between establishing a pricing range and executing the deal to explain and market the investment thesis properly. Companies must consider that they are asking portfolio managers to make multimillion dollar decisions on the basis of one roadshow meeting. An uncertainty discount is almost inevitable.

CohnReznick urges companies to test the waters on their IPO prospects as early as possible, given the new freedom that the JOBS Act has bestowed for investor discussions. The earlier that companies can get in front of investors, the more successful they are able to be.

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Middle Market IPO Activity: Industries in Focus Middle Market Post IPO Performance Middle market IPOs had healthy trading once again in the Q4 2014, posting solid 10-15% gains on average during the first month of trading. Investors in these transactions will have been pleased with the trading outcomes in the middle market, though we must reiterate that issuers do have legitimate objections about how these transactions were priced. The phenomenon of issuers “leaving money on the table” remains a concern as we noted above, and investors are getting the benefit of the bargain at the expense of many issuers.

Given the broader market’s strength in 2014, the capital markets community should not be surprised that middle market IPOs traded well in the immediate aftermarket. We would recommend that potential investors and issuers take a slightly longer view, however, when assessing trading outcomes. Six months and 12 months post-IPO may be fairer measures of the true health of corporate issuance.

Figure 6. After-Market IPO Performance Slips in Q4

30%

1 Day

2 Weeks

1 Week

1 Month

25%

20%

15%

10% Q1 2014

Q2 2014

Q3 2014

Q4 2014 Source: IssuWorks

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Middle Market Equity Capital Report ― February 2015

Middle Market IPO Activity: Industries in Focus Middle Market Follow-On Activity Follow-on activity in the middle market was robust with 564 transactions in 2014. Technology, healthcare, and life sciences issuances accounted for 45% of these deals (unchanged from 2013). While 2014 activity declined somewhat from 2013 levels (631 transactions), we anticipate another active year for follow-on issuance in 2015, which is highly correlated to the strength of the stock market.

Figure 7. Middle Market FOLLOW-ONS BY INDUSTRY

2013 Other 21%

Retail

–3% Hospitality–2%

2014

Technology 13% Life Sciences 8%

Other 24%

Technology 13% Life Sciences 10%

Retail–2% Hospitality–1% Healthcare (ex Life Sciences) Energy & 22% Utilities 9% Real Estate 12% Financial Services 7%

Healthcare (ex Life Sciences) 24%

Energy & Utilities 9% Real Estate 11% Financial Services 9%

Technology Life Sciences Healthcare (ex Life Sciences)

Real Estate Energy & Utilities Hospitality Retail Other

Financial Services

Source: IssuWorks

Figure 8. Follow-Ons, by Middle Market Subsegment

2013

Number of Deals

Proceeds

2014

Number of Deals

Proceeds

Nano Cap

142

$ 1,454,372,696

Nano Cap

128

$ 1,297,226,874

Micro Cap

225

$ 11,278,915,752

Micro Cap

190

$ 9,442,433,992

Small Cap

264

$ 44,716,400,844

Small Cap

246

$ 36,541,494,799

TOTAL

631

$ 57,449,689,292

TOTAL

564

$ 47,281,155,665 Source: IssuWorks

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Middle Market Snapshot Analyzing Middle Market IPOs CohnReznick’s Middle Market Snapshot analyzes IPOs conducted by middle market companies―regardless of proceeds generated. CohnReznick defines the middle market as companies with $10 million to $2 billion in market capitalization post initial public offering.

Middle Market IPO Activity

Middle market IPOs were up 25% for 2014. CohnReznick expects strong middle market IPO activity in 2015.

Number of IPOs

Proceeds ($B) 32

239 192

Average Deal Size ($M) 165 2 117

UP 25.5% DOWN 11.4%

2013

2014

2013

DOWN 29.1%

2014

2013

2014

Source: IssuWorks

Number of Middle Market IPOs by Sub-Segment

Nano cap IPOs increased by 70% and micro cap IPOs increased by 36% in 2014.

150

2013

2014

125

128

100

94

75

81

82

50 25

29

17

0

Nano Cap

Micro Cap

Small Cap

($10 - 99 million) ($100 - 499 million) ($500 mil - 2 billion)

Nano Cap

Micro Cap

Small Cap

($10 - 99 million) ($100 - 499 million) ($500 mil - 2 billion)

Source: IssuWorks

Proceeds of Middle Market IPOs by Sub-Segment

Even with the increased number of middle market IPOs in 2014, overall proceeds decreased. Small cap proceeds decreased by $5 billion.

25

2013

$ Billions

20

2014 22

15

17

10

0

10

9

5

.70

.50 Nano Cap

Micro Cap

Small Cap

($10 - 99 million) ($100 - 499 million) ($500 mil - 2 billion)

Nano Cap

Micro Cap

Small Cap

($10 - 99 million) ($100 - 499 million) ($500 mil - 2 billion)

Source: IssuWorks

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Middle Market Equity Capital Report ― February 2015

Active Industry Segments

Healthcare IPOs represented 37% of middle market IPOs in 2014. Technology and financial services have been steady performers over the past two years.

100

2013

90

2014 Healthcare 37%

Number of IPOs

80 70

Technology 18%

Healthcare 21%

60

Financial Services 14%

50 40 30

Real Estate 7%

Hospitality 2%

20

Financial Services 14%

Technology 16% Energy & Life Sciences Utilities 9% 8% Retail 3%

Retail 2%

Real Estate 2%

Hospitality 3%

Life Energy & Utilities Sciences 7% 6%

10 0 Source: IssuWorks

Private Equity-Backed IPOs

In 2014, 64% of middle market IPOs were backed by private equity.

Source: IssuWorks

250

Private Equity-Backed IPOs

225 200

Number of IPOs

175 150 125 100

152/239

50 25 0

64%

120/192

75

63%

51/60

46/60

85%

77%

2013

4Q

2014

2013

YE

2014 Source: IssuWorks

Companies Filing as EGCs

The JOBS Act is working. Filing as an EGC for purposes of Title I of the JOBS Act builds a bridge to the “Testing the Waters” and “Confidential Filing” provisions.

Companies Filing as EGCs

13.29 141/192

73%

2013

201/239

84%

2014 Source: IssuWorks

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Top 25 Middle Market Investment Banks Fifty-nine different investment banks acted as a bookrunner on at least one middle market IPO in 2014 (239 IPOs).* We are encouraged by the increased participation of different banks and view it as a welcome trend supporting the middle market.

Number of Bookrun IPOs

Number of Bookrun IPOs

JP Morgan Securities

54

Wells Fargo Securities

22

Credit Suisse Securities

51

Leerink Partners

18

Morgan Stanley

45

Cowen and Company

15

Barclays Capital

38

Robert W Baird

14

Citigroup Global Markets

37

BMO Capital Markets

13

Goldman Sachs

37

Raymond James

11

Jefferies Group

36

Sandler O’Neill & Partners

10

Bank of America Merrill Lynch

35

Aegis Capital

9

Deutsche Bank Securities

34

William Blair & Company

8

Stifel Nicolaus & Company

33

JMP Securities

6

RBC Capital Markets

26

Roth Capital Partners

5

UBS Securities

26

Oppenhemier 4

Piper Jaffray

24

Thirty-four additional investment banks participated in at least one middle market IPO in 2014.

*The total number of middle market IPOs reflected in the table above greatly exceeds the 239 IPOs as most deals involve more than one bookrunner.

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Middle Market Equity Capital Report ― February 2015

2015 Regulatory View

The Financial Services Committee of the U.S. House of Representatives has developed a base of knowledge and bipartisan passion for improving equity capital formation. There is a wide variety of pro-capital formation bills that were passed in the House but unfortunately went nowhere in the U.S. Senate. This has been a point of frustration for both House Republicans and Democrats as they recognize that equity capital is needed to fuel entrepreneurship and innovation in the economy. It supports job and wage growth and provides the tax base to pay for national security and services.

Now, with the change in leadership of Mitch McConnell for Harry Reid, we believe that the Senate will end the legislative backlog and send a wide variety of pro-capital formation legislation to the President for his signature.

What are the major game changers to watch for in the year ahead?

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2015 Regulatory View • A New Type of Stock Exchange For Small Cap Companies – A consensus is emerging that “one-size-fits-all” stock markets cannot work for companies of markedly different market caps. Apple Computer’s valuation, for example, is roughly the equivalent value of 6,500 companies with $100 million market valuations. The trouble is, there are no longer 6,500 listed companies in the U.S. (there are about 5,000, down from nearly 9,000 in 1997, when there probably should be 13,000). This decline is the legacy of one-size-fits-all stock markets that Congress and the SEC ushered in during the late 1990s—markets that are truly optimized for large cap trading while destroying the small cap ecosystem. We expect to see legislation introduced in 2015 to create a new form of stock exchange that is optimized for small-cap companies and access to growth capital. It is being referred to popularly as a “Venture Exchange” and it would be analogous to what has been successful in the UK with the London Stock Exchange’s AIM market and Toronto’s TMX Venture Exchange.

• Public Crowdfunding or Regulation A+ or Both – Congressman Patrick McHenry was the original champion of public crowdfunding and sponsored the bill that became Title III of the JOBS Act. It was essentially dead on arrival for a variety of reasons. The capital markets industry may initially see Congress first ensuring that Reg. A+ is successful by pre-empting state regulation and, second, by the SEC declaring the rules effective.

Companies may then see the cost of going public improving.

What does CohnReznick think?

Middle market companies need Washington to further develop creative solutions to increase access to capital. The change in congressional leadership and a greater level of awareness by members of congress related to challenges of accessing capital may help pave the way for additional capital formation legislation in 2015. Given its size, and with additional access to capital, the middle market has the power to further enhance job growth and the broader U.S. economy.

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Middle Market Equity Capital Report ― February 2015

Summary

A resurgence in equity capital formation transpired in 2014 due in large part to the favorable regulations under the JOBS Act, the performance of the stock market, and investors’ appetite for new issues. Technology, healthcare, and life sciences middle market companies fared especially well in the past year, as IPO activity within these sectors blossomed from 46% of middle market IPOs in 2013 to 62% in 2014. Likewise, follow-on activity in the middle market remained robust throughout the year, with technology and healthcare issuances accounting for 45% of all middle market follow-ons.

The regulatory provisions spawned by the JOBS Act positively impacted capital formation in 2014 and contributed to economic growth. While interest rates may start to edge higher, the increased growth in the U.S. economy will continue to be buoyed by the JOBS Act and its successive provisions. Though challenges remain, including a dearth of smaller middle market IPOs (those raising less than $50 million in proceeds), crowdfunding to public investors, and underpricing of middle market IPOs—to name a few—CohnReznick believes Washington will want to expand on this success and we remain optimistic that more proactive legislation will transpire to ensure the ongoing viability of the middle market. We expect progress in the next two years in furthering access to capital and consequently, the economic vitality of the U.S.

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Glossary of Common Terms Aftermarket – Also called a secondary market, the aftermarket is the financial market in which a previously issued financial instrument is bought and sold. The major stock exchanges are the most commonly referred to secondary markets, where investors purchase stocks from other investors.

Alternative Trading System (ATS) – A means for matching buy and sell orders for an instrument that is not regulated as an exchange.

Bookrunner – The main underwriter or lead manager, often an investment bank, in the issuance of new equity, debt, or hybrid securities instruments. The bookrunner often syndicates with other investment banks to mitigate risk, assigning parts of the new issue to the other underwriters. They are listed first among all underwriters participating in an issuance.

Capital Formation – The accumulation of capital (financial assets) by a business entity by obtaining additional debt or equity financing. For the purposes of this report, capital formation refers to the issuance of new securities on public stock exchanges.

Corporate IPOs – An initial public offering for a company with ongoing business operations (operating companies).

Corporate IPOs exclude IPOs involving financial vehicles such as closed-end funds, REITs, LPs, and SPACs. Decimalization – The pricing of securities using a decimal format rather than a fractional format. Decimalization was seen as providing a savings to investors who would save on commission prices paid to stock brokers as price increases could now be measured to the penny.

Emerging Growth Company – A new category of issuer created by the JOBS Act that refers to companies with total annual gross revenues of less than $1 billion.

Filing Range – The price range that a securities underwriter and an issuer have agreed upon as tentative minimum and maximum levels for which a security will be priced.

Financial Industry Regulatory Authority (FINRA) – FINRA is the largest independent securities regulator in the U.S., created after the merger of the National Association of Securities Dealers and the New York Stock Exchange’s regulation committee.

It is a not-for-profit organization that regulates member brokerage firms and exchange markets with the primary role of protecting investors by maintaining the fairness of the U.S. capital markets.

Micro Cap – Publicly traded companies with a market capitalization between $100 million and $499 million.

Middle Market – Companies with $100 million to $1 billion in market capitalization post IPO. Nano Cap – Publicly traded with a market capitalization between $10 million and $99 million.

Primary Market – A primary market is the financial market in which new securities are first issued by companies and governments to obtain financing through debt or equity backed securities. They are facilitated by underwriters (often investment banks) to price the securities and oversee a direct sale to investors.

Small Cap – Publicly traded companies with a market capitalization between $500 million and $2 billion.

Tick Size – The smallest increment by which the price of a financial instrument can move.

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Middle Market Equity Capital Report ― February 2015

Contributors to This Report CohnReznick has an agreement with IssuWorks, Inc. that enables CohnReznick to utilize its services and resources to assist clients with their capital needs. IssuWorks provides services and technologies that improve capital formation, distribution, and aftermarket results for companies, investors, and investment banks. The primary contributors from IssuWorks were: David Weild IV – IssuWorks Founder, Chairman, and Chief Executive Officer David has co-authored studies that document the long-term decline in equity capital formation and has testified in Congress and at the CFTC-SEC Joint Panel on Emerging Regulatory Issues. He is a former Vice-Chairman of NASDAQ and a frequent resource to the media on issues relevant to the capital markets.

Edward H. Kim – IssuWorks Chief Operating Officer Ed has more than 25 years of capital markets, finance, product development, and operations experience. He was formerly Managing Director of Financial Communications at Stern and Company, a Senior Vice President of NASDAQ, and the Chief Administrative Officer of a publicly held software company.

About CohnReznick’s Public Companies Group Utilizing comprehensive resources and deep industry expertise, the professionals of CohnReznick’s Public Companies Group understand the goals of both middle market companies and investors to deliver timely and appropriate solutions and opinions. We understand the challenges and opportunities of the capital markets and possess the forward thinking technical skills and experience necessary to address the needs of clients, investment bankers, investment advisors, attorneys, lenders, investors, managements, audit committees, and the U.S. Securities and Exchange Commission and other regulatory authorities.

• • • • • • • • • • • • • •

Mark Spelker, CPA, Partner, National Director of SEC Services Steven Schenkel, CPA, Partner, Chief Risk Officer Dom Esposito, CPA, Partner, National Practice and Growth Director George Gallinger, Principal, CohnReznick Advisory Group − Governance, Risk, and Compliance National Director Jeremy Swan, Principal, CohnReznick Advisory Group Alex Castelli, CPA, Partner, Technology and Life Sciences Industry Practice Leader David Kessler, CPA, Partner, Commercial Real Estate Industry Practice National Director Tim Kemper, CPA, Partner, Renewable Energy Industry Practice Co-National Director Anton Cohen, CPA, Partner, Renewable Energy Industry Practice Co-National Director Gary Levy, CPA, Partner, Hospitality Industry Practice Leader Richard Schurig, CPA, Partner, Retail and Consumer Products Industry Practice Leader Cindy McLoughlin, CPA, Partner, Hospitality Industry Practice Adam Kleeman, CPA, Partner, Commercial Real Estate Industry Practice Stephen Wyss, CPA, Partner, Retail and Consumer Products Industry Practice

A CohnReznick Report

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CohnReznick Advantage for Capital Markets Industry Insights, Optimized Solutions • Partners immersed in supporting public companies and capital markets transactions who understand your business drivers.

• Support from industry specialists to offer comprehensive industry-specific solutions and insights.

• Engagement teams utilize the Firm’s broad resources to provide innovative solutions and breakthrough ideas.

Transformative Advice • Timely, relevant views about critical economic, business, legislative, tax, and global news and emerging trends in the capital markets.

• Thought leadership reports, alerts, conferences, and events delivered in the context of what these issues mean to public companies, companies considering a public filing, the capital markets, and your business.

Responsive Culture • Our partners are empowered and entrepreneurial decision makers.

• They draw on our depth of knowledge and expertise to provide faster, smarter, more efficient service.

Capital Markets Dexterity • Preparation, valuation, structuring, and facilitation of capital markets transactions, and introductions to capital sources.

• Assistance with acquisitions, identification/dispositions, liquidity events, and other capital-raising needs.

Proactive, Resourceful Service • A true partner-led service model ensures direct access and active partner management.

• Accountability and expectations are developed to meet your needs and documented in the CohnReznick Client Service Plan.

National and Global Reach • With 28 offices, we seamlessly and cost-efficiently serve clients on a regional, national, and international basis.

• Companies with international interests in 100+ countries are served through our membership in Nexia International, a global network of independent accountancy, tax, and business advisors.

About CohnReznick LLP CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in New York, NY, and with offices nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for middle market and Fortune 1000 companies, private equity and financial services firms, government contractors, government agencies, and not-for-profit organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. For more information, visit www.cohnreznick.com.

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Middle Market Equity Capital Report ― February 2015

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CohnReznick is an independent member of Nexia International

CohnReznick LLP Š 2015 Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Middle Market Equity Capital Report ― February 2015