A Wake-up Call for America

8/14/2019 A Wake-up Call for America

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A wake-up call for America

A study of systemic failure in theU.S. stock markets and suggestedsolutions to drive economic growth

www.GrantThornton.com/WakeupCall


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Grant Thornton LLP. All rights reserved.

Todays presenters

David Weild,Capital Markets Advisor atGrant Thornton LLP and former vice chairman ofNASDAQ

overview

moderator

Edward Kim,Capital Markets Advisor atGrant Thornton LLP and former head of productdevelopment at NASDAQ

job implications


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Todays presenters (cont)

Pascal Levensohn,founder and managing partnerof Levensohn Venture Partners, board member of theNVCA and member of the Council on Foreign Relations

VC industry and entrepreneurial implications

U.S. security interests

Barry Silbert,founder and CEO of SecondMarket the private market

implications for business

changes needed to accelerate growth


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A Blockbuster Study

provides powerful new informationthat will

reframe the debateand

debunkcommon mythsand

call for a restructuring of marketsto better

support investors and economic growth (jobs)


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Myths exploded

Sarbanes-Oxley causedthe IPO Crisis

200 IPOs is a great IPOmarket

the IPO market is back

cheaper transaction costs

are always betterfor theconsumer

the Dot-Com Bubble wasa listings bubble

there are no goodcompanies to take public

banks are causing theeconomic problem by notlending to small business

U.S. equities markets are

the best in the world


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Catastrophic failureA Great Depression in publicly listed companies

undermining: private companies

jobs innovation

U.S. competitiveness

national security

trouble began before the Dot-Com Bubble reached its peak


7/36 Grant Thornton LLP. All rights reserved.

Great Depression in Listingsbegan with the advent ofonline brokerage and the Order Handling Rules

SOX and peak of Dot-Com Bubble came later

S&P 500

-43.3%

NYSE Composite

NASDAQ Composite

Values are indexed to zero on January 31, 1991.

Source: Capital Markets Advisory Partners, WorldFederation of Exchanges, NYSE Euronext,NASDAQ Stock Market. Domestic companieslisted, excluding funds.

Companies listed on U.S. stock exchanges

First online brokerage and beginning of Dot-Com Bubble (1996)

New Order Handling Rules (1997)

Peak of Dot-Com Bubble (2000)

Decimalization (2001)

Sarbanes-Oxley Act (2002)



Number of sub-$50M IPOs declined from 80% to 20%of market by 2000

100

90

80

70

60

50

40

30

20

10

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009thru 6/30

Transactions raising at least $50 million

Transactions raising less than $50 million



Relative to key segments of the stock market, theideology is false that cheaper trade execution by itself

is better for consumers



The United States is losing ground to all otherdeveloped nations steep decline since

implementation of Order Handling Rules in 1997


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and destroying the ecosystem that supported smallbusiness formation


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The United States should have twice (2x) as manypublicly listed companies as it currently has

self-inflicted end to the America Era?


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The U.S. lags far behind other global markets Asiais adding companies even fasterthan GDP growth

rates


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It takes many more IPOs to sustain listed markets (andthe economy) than anyone realized until we

conducted this study

Replacement Level to match GDP growth = 520

Average Replacement Level = 360

Average IPOs 2004-2008 = 209

Listings lost

IPOs gained

U.S. stock markets need 360 new listings per year just to tread water, and 520 per year to

keep pace with 3% annual GDP growth levels we have not realized in nearly a decade.

Number of new listings required to maintain replacement levels on all U.S. stock markets

Source: Capital Markets Advisory Partners, World Federation of Exchanges, Dealogic, NYSE Euronext, The NASDAQ Stock Market. Exc ludes funds.

2000 2001 2002 2003 2004 2005 2006 2007 2008

1,000

800

600

400

200

0


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Market failure may be costing the U.S. 10 million to 20millionjobs

The lack of a functional IPO market may have cost the United States 22 million jobs over the last decade.

Calculations based on actual 1996 IPO levels of 803 and number of employees at IPO of 1,372.

Source: Capital Markets AdvisoryPartners, Global Insight (studycited by N VCA in its 4-Pillar Planto Restore Liquidity in the USVenture Capital Industry)

22.7 million potential jobs lost

(17.8% annual employee growth rate)

15.0 million potential jobs lost(10.0% annual employee growth rate)

11.6 million potential jobs lost

(5.0% annual employee growth rate)

Job costs

from 2008 lost IPOs

from 2007 lost IPOs

from 2006 lost IPOs

from 2005 lost IPOs

from 2004 lost IPOs

from 2003 lost IPOs

from 2002 lost IPOs

from 2001 lost IPOsfrom 2000 lost IPOs

from 1999 lost IPOs

from 1998 lost IPOs

from 1997 lost IPOs

Each color band represents the

progressive effects of lost IPOson job growth potential. For

example, the loss of 10 IPOs in 1997

translates into the potential loss of

83,167 jobs in 2008.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

20,000,000

15,000,000

10,000,000

5,000,000

0


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When primary capital formation (IPOs) fails, quality jobformation fails in both public and private enterprise

Millions of jobs would have been created if we had maintained even modest IPO levels.

Source: Capital Markets Advisory Partners, Dealogic, Global Insight. IPOs exclude funds, REITs, SPACs and LPs.

Historical IPO levels

Annual

employee

growth rate

Number of

employees at IPO

361 IPOs

(1998 actual)

568 IPOs

(1991-1996 average)

803 IPOs

(1996 actual)

5.0%

500 1,092,104 2,378,822 4,248,229

750 1,638,156 3,568,232 6,372,343

1,000 2,184,208 4,757,643 8,496,458

1,372 2,996,733 6,527,487 11,657,140

10.0%

500 1,322,139 2,964,342 5,475,569

750 1,983,209 4,446,514 8,213,354

1,000 2,644,278 5,928,685 10,951,138

1,372 3,627,950 8,134,155 15,024,962

17.8%

500 1,790,494 4,231,626 8,282,176

750 2,685,741 6,347,439 12,423,265

1,000 3,580,989 8,463,252 16,564,353

1,372 4,913,116 11,611,582 22,726,292


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Five hundred $100-million companies equals one $50billion Madoff, but the companies contributejobs,

innovation and tax revenues

WorldCom had a value of$181 billion

AIG had a value of$240 billion at its peak

Fannie Mae was at $90 billion Global Crossing was more than $80 billion

Enron was at $66 billion


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Recommendation Alternative public market segment

a public market solution that provides an economic modelthat supports the value components (research, sales

and capital commitment) in the marketplace. It wouldestablish a new, parallel market segment that benefitsfrom a fixed spread and commission structure.


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Recommendation Enhancements to the private market

a private market solution that enables the creationof a qualified investor marketplace consisting of both

institutional investors and large accredited investors thatallows issuers to defer many of the costs of accessingprivate capital as a precursor to becoming a public company.This market would serve as an important bridge to an IPO,notably in improving the market for 144A PIPO (pre-IPO)

transactions that require an issuer to list publicly in thefuture.


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Venture capital industry and entrepreneurialimplications; U.S. security interests

Pascal Levensohn founder and managing partner of Levensohn

Venture Partners, board member of the NationalVenture Capital Association (NVCA), and memberof the Council on Foreign Relations


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21ton LLP. All rights reserved.

Today Innovation is Mobile and Global

Thrives In an Environment Which:

INNOVATION

Encourages Collaboration and Diversity

Is Defined by Resource Constraints and a Sense of Urgency

Promises Ample Rewards for Success

Today, innovation is mobile and global



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Innovative Solutionsfor Next Generation

Infrastructure

America is Late to Recognize These KeyInterrelationships

Government

Academic andResearch

Institutions

Corporations

VentureCapitalists

Entrepreneurs

Funding BreakthroughInnovation

Funding Breakthrough Innovation Licensing IP

IncrementalR&D

Developmentof IP

ProcessKnowledge &Best Practices

Core BuildingBlocks

America is late to recognize these key interrelationships



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Global Financial Crisis Exposes Structural Flaws in U.S. CapitalMarkets from Unintended Regulatory Consequences

Why is American Innovation in Crisis and at Risk ofLong-Term Decline?

Traditional Risk Capital Sources Drained from Public and Private

Equity Market Venture Capital Community Experiencing Systemic Liquidity Crisis

U.S. must rely on a new cycle of job creation to drive sustainablegrowth in our economy. While entrepreneurs can be successfulwithout VCs, venture capital is the most efficient job growth

creation engine in this country Serious Negative Implications for Americas Economic Growth for

the Security of Critical Infrastructure and for National Security

Why is American innovation in crisis and at risk of long-term decline?



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92% of Job GrowthOccurs Post-IPO

VC-Backed Company Employment Growth

1970s 1980s 1990s 2000s Overall

97% 94% 88% 76% 92%

Pre-IPO Post-IPO

0.48%

1.54%

All Companies VC-BackedCompanies

12.1M Jobs Created

VC-Backed CompaniesCreate Jobs Faster

Employment CAGR (2006 - 2008)

Venture Capital Fuels Job CreationVenture capital fuels job creation

Sources: Left: Global Insight, 2009Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 19702005



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Longer Time to IPO and M&A

Median Age at IPO

Median Age at M&A

1998

4.5Years

2008

9.6Years

1998

3Years

2008

6.5Years

The Recent Realities of Venture-BackedM&As and IPOsThe recent realities of venture-backed

M&As and IPOs

Source: Thomson Reuters, Dow Jones VentureSource Grant Thornton LLP. All rights reserved.


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2000s1990s

(92 00)

Number of Venture-Backed IPOs vs. M&A Exits

Lack of IPOs is harmful to job creation and the economy

M&A87%

(01 08)

IPOs56%

M&A44%

1,776IPOs

392IPOs

IPOs13%

Dramatic Decline in IPOs in the 2000sDramatic decline in IPOs in the 2000s

Source: Thomson Reuters/NVCA Grant Thornton LLP. All rights reserved.

k d d $


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19721972$3.0MM Raised$3.0MM Raised14,824 Employees Today14,824 Employees Today















17 Venture-Backed Companies Raised $367M;Provide 470K U.S. Jobs Today17 venture-backed companies raised $367M and

provide 470K U.S. jobs today the vast majority ofthese companies could not go public today!

Source: Jefferies & Co.



http://www.fiservcbs.com/


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New 501(c)(6) established October 2009Coalition for Restoration of U.S. Listings and Markets

What are Private Sector Leaders Doing About This?

Active leadership from David Weild, former EVP NASDAQ, PatrickVon Bargen, former Deputy Chief of Staff, SEC, Steve Bochner,CEO, Wilson Sonsini, Pascal Levensohn, and others

Targeted reform of technical securities regulations to restorepositive economics for risk taking on behalf of small company IPOs

Reaching out to Congressional leadership for support

Reaching out to our nations largest pension plans for support

Raising awareness with the media

What are private sector leaders doing about this?



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The private market, implications for business, andchanges needed to accelerate growth

Barry Silbert founder and CEO of SecondMarket, the industry

leader in private company stock transactions


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SecondMarket the largest centralized marketplacefor illiquid assets

hybrid marketplace

offices in NYC and

Silicon Valley 5,000 participants

managing over $1trillion

~$25 billion for sale ~$2 billion in

transactions in 2009


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Significant interest in private company shares fromleading privateandpublic investors


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A robustIPO market

drives capital

(equity plus credit) into

the private market


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Regulatory considerations to be addressed toaccelerate growth and participation

key considerations: amend general solicitation rules: vetting should occurbefore

purchase, rather than before marketing

amend 144A rules to include both QIBs and accredited investors

review investment intent rules to allow for more active marketmaking

add exemption to 500 shareholder limit for accredited investors


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A Wake-up Call for America

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