Considerations of a SPAC: Part III – Takeaways from a Dozen Healthcare SPAC Processes

Given the prevalence of recent SPAC-sponsored public listings, the process of executing a successful SPAC combination may seem clearer than ever. Advantages of combining with an SPAC (Special Purpose Acquisition Company, or blank-check company) are now relatively well understood, including (1) efficient access to capital and (2) the potential to leverage your SPAC partner for strategic advice, industry expertise, investor relationships, and greater commercial visibility. Further, a growing list of precedent transactions provides a potential “model SPAC” framework to assess and deploy as challenges and questions on the path to public listing arise.

Ready, Set, SPAC?
Not (necessarily) so fast! There are multiple, varied approaches to accessing public markets via SPAC merger, and what works for one company is not necessarily the right strategy for another. As with any major corporate decision, there are material risks and benefits to acknowledge as you consider pursuing an SPAC combination. The advantages may well outweigh the risks, but your company’s challenges and opportunities are unique, driving the need for a tailored strategy.

Gilmartin Group is working with nearly one dozen healthcare companies in SPAC combination processes.

If your company is considering, or in the early stages of, public listing via SPAC merger, we highlight several considerations to help you (1) assess your company’s public market readiness; (2) communicate your story and objectives to employees, investors, and external stakeholders; and (3) map out logistics as you prepare to be publicly listed within a matter of months.

Our recommendations center on making a thoughtful decision to go public, creating a sincere, consistent, and well-supported message outlining your value proposition and objectives, and organizing processes such as timeline management, internal education, and external outreach in advance. When unexpected challenges arise, having a plan in place to address them will go a long way.

1. Assessing Your Company’s Public Market Readiness
The timeframe from definitive agreement (announcing mutual intentions between an operating company and SPAC to combine) to listing day often spans no more than a few months. As you evaluate your readiness to pursue an SPAC business combination, consider:

  • The capacity, experience, and rigor of your internal FP&A team
    • Questions to ask: Is our team prepared to build a detailed, quarterly financial forecast? Do we have a consistent process behind internal financial forecasting? How has our business performed relative to our internal model in recent quarters? Is our team prepared to offer a formal financial forecast to investors and sell-side research analysts? Who is leading our FP&A team (do we have a suitable CFO)?
  • SPAC partner value-add
    • Questions to ask: How sophisticated is the SPAC management team and Sponsor with public equity investors? What is the relevant experience, relationships, and/or industry expertise that the SPAC partner brings to our company?
  • Advisory and leadership
    • Questions to ask: Is our executive team complete? Do we have relationships with experts or advisors who can support our transition to a publicly traded entity, and/or would be additive to our Board of Directors? What characteristics, background, and range of experience will we prioritize in selecting Board of Directors members?
  • SEC process readiness
    • Questions to ask: Do we have materials to draft the necessary components of an S4 filing? Have we done proxy work ahead of the definitive agreement announcement?
  • Number and caliber of banks involved in the transaction
    • Questions to ask: Which banks do we want to bring on as financial advisor(s), capital markets advisor(s), and private placement agent(s) if the transaction will be supported by a PIPE offering?
  • Preparation for equity research coverage
    • Questions to ask: Have any Equity Research teams expressed interest in covering our company? Have we reached out to introduce ourselves to banks and their research teams? Have we expressed direct interest in having analyst coverage?

2. Communicating Your Story and Objectives
First impressions matter, but strategic investor and stakeholder communications go well beyond your initial pitch. Prepare a compelling, concise, and consistent message that will help investors, sell-side analysts, and other internal/external stakeholders understand the company’s value-add. We suggest outlining:

  • Company mission
    • Questions to ask: How can we convey our purpose in one concise statement? What are our near-term and long-term objectives? Are we messaging our mission consistently across customers/commercial relationships, employees/internal relationships, and investors/sell-side constituents, and other external relationships?
  • TAM (total addressable market) characteristics
    • Questions to ask: Is our market readily understood? Is it clearly defined? Who are our peers and/or competitors? What is our current level of market penetration, and what level of penetration are we assuming in our financial forecasts?
  • Financial forecasts and supporting rationale
    • Questions to ask: What are the key assumptions underpinning our model? What metrics and KPIs will we provide regularly? Are we confident that we can execute on our financial forecasts? What could a Bear Case (downside scenario) and Bull Case (upside scenario) look like, if those assumptions prove too aggressive or conservative?
  • Diligence materials
    • Questions to ask: Do we have a list of experts and KOLs (key opinion leaders) familiar with our product, whom we can connect to investors and sell-side research analysts? Do we have a packet of clinical/commercial/other materials that we can provide to help educate these parties?

3. Mapping Out Logistics
Every well-executed transaction relies on an organized calendar and a consistent decision process. Consider preparing:

  • An integrated timeline or workstream tracking responsibilities and deadlines
    • Questions to ask: What are the key responsibilities of the executive team, banks, legal counsel, FP&A team, investor relations, and public relations? What are our priorities from the point of LOI (letter of intent) through merger-close and beyond? How often will we meet to track progress?
  • Internal communications
    • Questions to ask: Are we prepared to communicate the rationale for, and implications of, our business combination agreement to employees? Do we have a prepared list of employee and shareholder FAQs to distribute upon definitive agreement announcement? Are we ready to host a series of internal Town Hall Meetings to educate employees about implications of going public, and/or explore other ways to maintain our culture, drive excitement, and “make a splash” with our news? How will we celebrate our first day of trading as a public company?
  • Wall Street communications
    • Questions to ask: Do we have a curated list of investors and sell-side research analysts for outreach? When are we scheduling meetings, and who is facilitating? How will we provide business or financial updates in the period between merger-announcement and transaction close? Are we prepared to host an investors’ email inbox? Do we have, or are we building, an investor website?
  • Additional stakeholder communications
    • Questions to ask: How will we message our intent to go public with customers/clients, researchers, advisors, Medical Advisory Board members, or other stakeholders who have contributed to our business?

Conclusion
No two SPAC processes are the same, and there are multiple, varied approaches to successfully accessing public markets through an SPAC business combination. The considerations here are just a sample of questions that we have helped our clients address. If you are interested in working with us or simply learning more about our approach, contact our team today.

Marissa Bych, Vice President

 

A Beginner’s Guide to Non-Deal Roadshows

Non-deal roadshows (NDRs) offer investors a comprehensive look at a company’s story that press releases, conference presentations, and other public documents cannot. Public and private companies alike may benefit from scheduling NDRs to foster effective communication between the executive team and investors. The focus of NDRs is to update investors on company performance (i.e. financial results and developmental milestones), communicate future goals, and learn from industry experts and analysts.

Some of the benefits of NDRs are:

  • Develop and build long-term relationships between management, investors, and sponsoring research analysts
  • Hear from investors on areas of interest and receive feedback on company perception
  • Manage expectations and correct misconceptions
  • Access investors that do not attend conferences
  • Recruit new shareholders

Successful NDRs require proactive planning and preparation. Below are some considerations to include in your NDR strategic plan.

Set and Define Goals
Setting defined goals before scheduling NDRs will maximize their potential. What is the executive team looking to achieve with NDRs? Are they aiming to engage new shareholders or change the company’s current investor composition? There are many different types of investors out there. To name a few variables, investors differ in investor category, portfolio performance, geographic location, and typical length of holding. Similar to how a company analyzes investors based on certain criteria, institutional investors may have to adhere to specific parameters to make a deal. Understanding and incorporating investor metrics and parameters into the NDR strategic plan avoids unnecessary calls with investors that may be uninterested. Though adding new shareholders is an exciting and important goal for NDRs, it cannot be the only focus. Updating and reconnecting with current investors should not be overlooked. Maintaining an open dialogue with current and long-term investors is crucial in strengthening relationships, receiving feedback, and understanding why they continue to invest in your company. Investor targeting is a selective process.

Timing is Crucial
Navigating the busy calendars of company leadership, investors, and analyst sponsors may make the process of scheduling NDRs seem like a daunting task. Consider industry and company events before booking an NDR. First, NDRs should not conflict with earnings or any large industry and investor conferences. Though valuable, conferences create a lot of noise in the industry. Minimizing potential conflicts will optimize attendance and participant engagement. Secondly, NDRs should follow notable company events and milestones. Since the focus for many NDRs is to provide additional information for investors, this is easier to do when there is new information to talk about. Highlighting recent news may be a great way to kick off the conversation. Wall Street and the healthcare industry is constantly changing. Therefore, it is crucial to keep the company’s IR calendar updated and in hand when picking potential NDR dates.

Be Prepared
The dates are set and the invites are out, so what’s next? Prepare, prepare, prepare. Management should know who they’re meeting and have access to background information on the investors, analysts, and their institutions. First impressions matter. The investor relations team should practice with management to ensure their message is both clear and standardized across the board. Presenters should have an in-depth understanding of the NDR slide deck and be prepared for any questions that may arise. Such preparation will build trust between management and investors that will open the door to long-term relationships and conversations.

Conclusion
Non-deal roadshows are a unique way for management to connect with potential and current investors. The NDR planning process may be tenuous, but having clear goals and a strategic plan will help companies maximize their potential. With most NDRs transitioning to Zoom during COVID, it’s now time to turn on the camera and get the show on the road. Contact our team today if you’re looking for more advice on where to start.

Laine Morgan, Analyst

Leveraging KOLs and PIs for Investor and Analyst Diligence

Before investing in or launching coverage on a company, investors and analysts will want to perform rigorous due diligence. The ability to leverage primary research can go a long way. Key opinion leaders (KOLs) and primary investigators (PIs) are key assets in this area and can play an important role in educating the overall investment community given their backgrounds. KOLs and PIs are experts in a particular field or area and can independently validate a company’s clinical hypothesis and/or provide context on publicly available data and information. They can add further value by comparing a company and its data with other publicly available information. That being said, KOLs and PIs are subject to non-disclosure and embargo agreements, which prevent them from discussing material non-public information. However, their independent validation of public information can help investors understand the unique value proposition a company presents. Let’s touch on the basics of how to plan and execute for a productive and well-attended KOL/PI diligence event.

Select KOLs/PIs

KOLs and PIs are often practicing clinicians, and their time dedicated to a company for investor meetings can be limited. With this in mind, when hosting an event for investors/analysts, it is important to have a few subject matter experts present to maximize the efficiency of the experience for everyone involved. Having advocates that have worked on different data sets or business units is also ideal, so they can speak to specific areas of interest about the company.

The Investment Community Interaction

There are various forums where KOLs and PIs may interact with investors and analysts. This includes presentations, fireside chats, or 1×1 meetings at industry conferences, company analyst and investor days, formal due diligence calls, and ad hoc requests. It’s important to be mindful that KOLs and PIs may not have extensive experience interacting with the investment community. Sufficient prep calls to provide an overview of what to expect and answer any questions will help ensure a stress-free event.

Prep Calls to Prepare for Expectations

Once you have selected KOLs/PIs to participate, scheduling a brief overview is ideal to help them prepare for the event. It is helpful to communicate to the KOLs/PIs how familiar the investors are with the company and the purpose for the call. Generally, the diligence call should provide a chance for investors to ask about first-hand experience with the technology, data, or industry in which the company operates. Often, investors will be knowledgeable about the company, its markets, and any specific data that the interaction is featuring. Therefore, the event is less of an introductory and background experience and more a discussion about application that includes opinions and direct experience of the KOLs/PIs. It can be useful to send the KOLs/PIs the information that the investors have seen beforehand, so they have an understanding of the investors’ level of knowledge; typically, this would be an investor presentation or summary of publicly available data. Remind the KOLs/PIs that the answers they provide will not make or break an investment decision but can help investors become more informed about the company. This can make them more comfortable with participating in the event. Also, providing the KOLs/PIs with logistics, such as how many investors are expected to participate and the allotted time for the event, is helpful to communicate ahead of time.

Drive Attendance and Promote a Dynamic Conversation

Selecting a date for the entire target audience to attend can often be unattainable. However, you want to avoid having nobody attend after accommodating your KOL’s/PI’s schedule. Try to ensure you have generated sufficient interest for the event before coordinating with your KOL/PI. A 1×1 or 2×1 call can be helpful in certain cases, but it is best to aim for a group meeting to make the best use of time and resources. Encourage the investors to be prepared with questions for a productive conversation. Providing the biography and background of the speaker ahead of time helps investors to develop questions relevant to the speaker’s experience and relationship to the company.

How Gilmartin Can Help Facilitate KOL/PI Meetings for Clients

Like the first day at camp or a first date, the first few questions of a conversation can be the toughest. At Gilmartin, we work with clients to establish a framework for the expected KOL/PI interaction. Furthermore, while hosting, we will help facilitate dialogue with questions previously discussed with management. They can be general questions around the technology, data, and personal experience of the KOL/PI. A few sample questions are below.

  • Can you talk about your overall experience with the technology?
  • How do you see this technology being used among the scientific and medical community?
  • Why do you think this technology could change the current standard of care?
  • How enthusiastic are you about the potential for this technology?

After discussing a few introductory questions, the investors and KOLs/PIs will oftentimes fall into the traditional question and answer dialogue.

Conclusion

In conclusion, investors will seek to perform thorough due diligence before making investment decisions. With proper guidance and planning, KOL and PI diligence events can be valuable resources for potential investors and analysts. Gilmartin has guided many clients through the investor/analyst diligence process. For additional information, contact our team today.

Emma Poalillo, Vice President

Material Non-Public Information (MNPI) & Insider Trading – The Basics

Disseminating information to employees on the IPO is an important step in becoming a public company. As we have discussed before, there are certain topics that are critical to discuss with employees, including Regulation FD (Reg FD), insider trading, material non-public information (MNPI), and employee stock plans. Today, let’s go through the basics of insider trading and material non-public information.

When it comes to MNPI, the two definitions that matter are in the name: material and non-public. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, hold, or sell a security. More simply, any information that could reasonably be expected to affect the stock price is material, including  positive and negative information. Information is non-public if it is not generally known or available to the public. To be considered available to the public, information must be broadly released to the marketplace (such as by a press release or an SEC filing), and the investing public has had time to absorb the information fully. Both criteria must be met before information can be considered public knowledge.

Examples of potential MNPI are varying and can include things that may be surprising. To name a few:

  • Number of customers, customer contracts, customer wins and/or launches
  • Quarterly financial performance (prior to quarterly reporting)
  • Sales quotas/expectations for future sales performance
  • Key clinical and regulatory pathway progress
  • Sales force headcount/hiring plans
  • R&D pipeline initiatives
  • Upcoming corporate actions (financing rounds, M&A, etc.)
  • Legal disputes

It’s also important to consider whether the MNPI disclosures are intentional vs. unintentional. An intentional disclosure of MNPI occurs when the person making the disclosure either knows, or is reckless in not knowing, that the information he/she is communicating is both material and non-public. Unintentional disclosure occurs if a covered person makes an inadvertent disclosure. When this happens, public disclosure of the information is required promptly after a senior official learns of the disclosure.

A good rule of thumb is this: when in doubt, just keep company information to yourself. This includes sharing information among other company employees; this type of information should be shared only on an as-needed basis to do your job.

Now let’s discuss insider trading. This refers to transactions in a security when the person buying or selling is in possession of material non-public information about that security. It is important to remember that insider trading can be done by anyone, including company executives and employees, their friends and relatives, or just a regular person on the street, as long as the information is not publicly known. Insider trading violations also include “tipping” of such MNPI to other individuals. In fact, roughly half of the insider trading cases brought to the government involve tipping, rather than direct trading from the insider. Insider trading is highly scrutinized by the SEC, and penalties for violation can include fines and imprisonment for the individual and significant civil and/or criminal fines for the company. It’s important to remember the responsibility for avoiding improper trading and violating insider trading laws rests with you. Here are a few key considerations for insider trading:

  • The law applies to anyone who knows MNPI at the time of the trade or tip
  • Even if the “tipper” doesn’t trade, it is still illegal to pass along information or tips
  • Most cases are based on circumstantial evidence

To wrap it up, here are some  Dos and Don’ts  regarding external communication that employees should consider:

  • Do pass requests for information off to a designated individual (a CFO, general counsel, etc.) in the company
  • Do contact this designated individual if you think you may have accidentally made a company-related statement
  • Don’t speak on behalf of the company
  • Don’t respond to rumors
  • Don’t give anyone (including clinicians or customers) information that is not publicly available (e.g., disclosed via press release or earnings call)
  • Don’t use personal or corporate social media accounts to post or interact with anything related to the company, unless you are interacting on a site used for professional development (e.g., LinkedIn) and/or in the normal course of business
  • Don’t like, retweet, or favorite any use of the company’s product that is an unauthorized use of the product or in a market where the product is not approved

Gilmartin has partnered with many clients to achieve public company readiness. For additional information, contact our team today.

Sam Bentzinger, Analys

Gene Editing – The 21st Century Miracle

Gene editing? CRISPR? Everyone has heard the term CRISPR from mainstream media. But few can explain what it is or its significance for the future of human medicine. Hailed as a 21st century miracle, Jennifer Doudna and Emmanuelle Charpentier were recently awarded the Nobel Prize for their breakthrough research on CRISPR technology in December 2020. But the discovery of CRISPR actually dates as far back as the 1980’s. Scientists just had no idea what they were looking at except that some bacteria carried strange repeating bits of DNA which was eventually given an acronym CRISPR (clustered regularly interspaced short palindromic repeats).

What is the significance of these repeating patterns of DNA in bacteria? Just like humans, bacteria are also attacked by viruses. To fight against future viral infections these bacteria have evolved their own immune system through a CRISPR region in their DNA, which encodes molecules that can recognize viral genes and cut them before they invade the bacterial host. Scientists have figured out how to harness this natural genetic engineering to artificially create CRISPR molecules that can snip out pieces of genes, swap in a new piece of DNA, which can then stitch itself back together. The fact that CRISPR exists in nature, is cheap to make, is so accurate due to years of natural genetic evolution and requires little effort on the part of the researchers is what gives it a potential advantage over previous gene editing technologies conceived in labs such as TALEN (transcription activator-like effector nucleases) and ZFN (zinc finger nucleases). There are also new gene editing approaches emerging such as base editing, prime editing, and even gene writing. Certain companies are also developing proprietary editing technologies that do not necessarily belong to any of the above groups. It is still unclear which is the superior gene editing technology and there are proponents for each but given the number of companies using CRISPR and how it has changed the field, it appears to be the most popular.

Humans are burdened by thousands of different genetic diseases, which are due to inherited mutations. Most small molecule drugs target proteins that result in disease symptoms due to the faulty gene but do not address the actual underlying inherited mutation in the gene. Gene editing offers the possibility to potentially edit such inherited mutations so that patients no longer have to keep taking life-long medications. Sickle cell anemia is an example of a disease currently being studied in the clinic using CRISPR. People with sickle cell anemia inherit two faulty genes for hemoglobin, the oxygen carrying molecule in red blood cells, which results in red blood cells that are shaped like sickles or crescent moons instead of the usual flexible and round shape. These sickled cells can block blood flow and cause pain, organ damage, fatigue, and infection. Sickled cells also tend to die earlier than healthy red blood cells and thus compromise oxygen delivery. Ironically sickle cell anemia is an evolutionary genetic condition that protects against malaria, which ravages sub-Saharan Africa, but results in the very symptoms listed above and reduced life expectancy. Current medications only address symptoms. Stem cell or bone marrow transplants can induce cure but have significant risks associated with the procedure and are rarely done. CRISPR and other gene editing approaches offer a new possibility, whereby the mutation can be erased that causes sickle cell anemia.

Gene editing has so many potential applications beyond just genetic medicine and can be used to make tweaks to DNA of other animals and plants in order to create new breeds of livestock or plants to address potential future food shortages. There is still tremendous regulation when it comes to gene editing. In 2018 a rogue scientist in China (who is currently in prison) used CRISPR on the DNA of human embryos to edit out the gene that codes for a protein that HIV uses to enter cells. Does this forecast an ominous future of designer babies or DNA tinkering to gain an unfair advantage? Only time will tell but a precedent has now been set to reflect on.

CRISPR and other gene editing technologies still require more experiments, research grant applications, investment pitches, regulatory approval, manufacturing agreements, supply chain configurations and so much more, which will take years to navigate, but the future of gene editing as a functional therapy as well as for diagnostics and biomarker discovery is near.

Current leading publicly traded gene editing therapeutics companies:

Majority of gene editing companies are still private but have tremendous venture capital investments and will likely IPO in the coming years. Some of the well-known names that are using gene editing for therapeutic or diagnostic purposes are:

Gilmartin has direct expertise within the space and has partnered with many clients to start building an Investor Relations program when private. For additional information, please contact our team today.

Priyam Shah, Principal

 

 

Disseminating Information to Employees on Your IPO

While transitioning to become a public company is a significant milestone in the corporate journey, moving forward toward this achievement, executives and employees face limitations around communications, along with an increased level of scrutiny by the SEC. Given these restrictions and heightened level of review, it is important for companies to implement a structured and comprehensive communication plan around their IPO and have policies in place to avoid any negative consequences to the IPO process. As part of this planning, let us walk through some considerations to keep in mind when disseminating information to employees around the IPO.

First, Some Background 
Gun-jumping is a common term referring to a company making offers of securities before those offers are permissible, as defined under Section 5 of the Securities Act. Under Section 5, and as a short summary of the IPO timeline, an IPO registration process begins once a company engages its underwriters for the securities offering. It continues until the consummation of the offering, typically 25 days following the pricing of the securities. In between these two endpoints, the S-1 is first filed confidentially, then filed publicly; following the public flip of the S-1 is the pricing of the securities offering.

During this time, a quiet period is in effect; and consequently, employees should avoid any public statements or discussions about a potential IPO. Although companies can continue to communicate about their business and products in the ordinary course of business (consistent with past practices), restrictions around gun-jumping are complicated; as a result, it is prudent to carefully plan out communications during this time.

Tips for Messaging the IPO to Employees

  • Establish designated contacts and/or spokespersons whom employees can address with regard to questions about the IPO.
  • Send out an email to employees about the IPO following the S-1 flip from a confidential filing to a public filing to congratulate the team on this great achievement and to indicate that the company is under a strict quiet period.
  • Create and circulate FAQs on what it means to be a public company that employees can reference.
  • Host a townhall about the IPO process. A townhall forum would be a useful way to share some background on the journey of the IPO. Executive teams could also summarize the rationale to go public, what it means to be a public company, the implications of the quiet period, the steps that have been taken to get to this stage, and next steps for the IPO process.
  • Offer a series of teach-ins, or have material resources available, that dive deeper into different topics, such as insider trading, material nonpublic information (MNPI), and employee stock plans. Employees have different levels of sophistication, so having more targeted sessions may lead to better discussions.
  • Implement disclosures and social media policies to establish more effective parameters on the types of information that can be communicated publicly. Consider, for example, setting up an approvals process for external communications to preemptively help avoid gun-jumping or the sharing of MNPI.

Lastly and most importantly, plan ahead – executive teams should be aligned with their IR and legal teams on a timeline and strategy.

Gilmartin has partnered with many clients to achieve public company readiness. For additional information on the IPO process and planning effective communications around your IPO, contact our team today.

 Ji-Yon Yi, Associate

 

Early 2021 Trends and 2020 in Blogs

Retail Momentum
Market participant demographics are changing as new brokerage platforms like Robinhood, which offers convenient mobile apps and low commission trading, continue to attract the next generation of investors. This group is more engaged across social media, where “influencers” have demonstrated the ability to incite herd mentality trades that can generate meaningful momentum and drive significant stock price movements. Reddit’s r/wallstreetbets was most recently cited by financial media as the source for the violent short squeeze in GameStop. Monitoring social media, both what investors and companies are saying, is now an important component of a comprehensive investor relations program.


Equity Financings
As public equity valuations continue their climb to new all time highs, evoking memories of the most historic bull markets, many are shifting their corporate timelines because this may be an opportune time for companies to finance with minimally dilutive equity. With low interest rates and a Fed that has vowed to keep rates low to help the economy though the pandemic, investors have shown a near insatiable appetite for follow-on offerings and new issues alike.

SPACs
The percent of capital raised in IPOs for SPACs is accelerating significantly. According to Dealogic, in 2019 it was around 20%, in 2020 it was just under 50%, and most recently in January of 2021, SPACs have pulled in more than 70% of all money raised through IPOs. Right now, there are 287 active SPACs looking to merge with targets that are interested in going public. Given the dry powder sitting in SPACs and the 18-24 month time frame allotted to complete mergers, this alternative process for going public will be a more viable option for companies in the years to come.

Past Blogs that Help Understand the Trends of Today
We all wanted a fresh start in 2021, but that will not exactly happen. Reflecting back and taking inventory of the lessons from last year, we can be hopeful that the application of these lessons will make 2021 better because, as we all know, history repeats itself. Now we’ll take a look at some of our previous blogs that can help companies address the early trends of 2021 and capture these opportunities to maximize long-term shareholder value.

  1. Why does trading volume matter?
    Volume is a technical indicat    or used by traders that represents a stock’s activity and momentum. Increasing volume is associated with higher prices and decreasing volume with lower prices. Low average trading volumes are unfavorable for both companies and investors. It acts as a barrier to entry for institutional money managers who are interested in building a meaningful ownership position. Trading in these names is less efficient; prices are more sensitive to volume, which creates situations where investors are bidding up prices on themselves.
  2. What is a shelf registration?
    SEC Form S-3 is known as a shelf registration. This allows public issuers to “pre-register” securities of a specified total dollar value without specifying the issuance date or terms, such as type, amount, and price. For growth companies that will inevitably look to raise capital within the three-year duration of the registration, these filings are considered good housekeeping. They provide expedited access to capital markets, since the SEC has already provided clearance. With that, issuers can be opportunistic in favorable market environments.
  3. Considerations if your company is planning on going public through a SPAC
    An IPO is not the only way your company can go public. In fact, one of the fastest ways to go public is through a merger with a special purpose acquisition company or an SPAC. Essentially, these are shell companies, where reputable investors and operators attract money in an IPO with the intention of finding a private company to merge with, thereby taking a large stake in the company and offering the immediate public company infrastructure. This is why SPACs are referred to as “blank check” companies and how target or acquired companies can become public in as little as two months at a cost significantly less than a traditional IPO. This forms a compelling proposition for the right situation.

If you have any questions about our outlook for 2021 or would like to discuss how we implement best practices based on fundamental IR principles, please don’t hesitate to reach out to our team.

Philip ‘Trip’ Taylor, Vice President

 

The Purpose and Goals of Testing The Waters Meetings

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In September 2019, the SEC expanded the scope of Testing the Waters meetings to all companies, from previously being limited to only Emerging Growth Companies.

Broadly speaking, Testing the Waters (TTW) meetings are designed to help inform a management team about whether they should endeavor to raise capital from the public equity markets. The process is designed to help a company conduct meetings with Qualified Institutional Buyers (QIB) and/or Institutional Accredited Investors (IAI).  By meeting with QIBs and IAIs, the company can gather information about potential investor receptivity to the company as a public entity. Following a successful series of TTW meetings, a company will have a more informed view of the likely success of an IPO.

TTW meetings are designed to educate QIBs and IAIs about the company’s business, strategy, and basic financial profile. In return for educating potential investors, the company receives initial feedback from investors about the company’s relative investment attractiveness. Having an initial understanding of how the company is perceived is of tremendous value to the company and its underwriters as public equity financing decisions are contemplated.

This feedback loop from TTWs provides the company and its underwriters with an important perspective on a potential capital raising process. Through the TTWs, the company can learn about what resonates with investors, what additional information investors might need to make an investment decision, and how to improve the materials used in investor meetings. Often, the TTWs help inform management about how to articulate certain aspects of the business in a more investor friendly manner.

In the virtual world of 2020 and now 2021, the TTW process can be executed in a more efficient manner than was previously done with in-person meetings. As a result, more TTW meetings are conducted, which provides a more comprehensive feedback loop. Having held more meetings initially during TTWs, a company may find that the IPO roadshow is more efficient if TTW meetings have been held. The IPO roadshow becomes more of a conversation, rather than an education, about the business following TTWs, allowing investors to make more informed decisions on the IPO as a result of TTWs.

The goals for a successful TTW process are:

  1. Educate a wider audience of QIBs and IAIs about the company
  2. Gather feedback from investors about the investment merit of the company
  3. Utilize the TTW experience to improve messaging and materials for future meetings
  4. Prepare capital market participants about a potential public equity offering

Following a comprehensive TTW process, the company and the underwriters may look to accelerate anticipated timelines for a public equity offering. Conversely, the company may look to delay financing to incorporate the feedback from investors so as to better position the company for the eventual IPO. Either way, the education of the investment community and the feedback loop the TTW process provides can be instrumental in helping to execute a successful IPO.

To learn about Gilmartin and how we strategically partner with our clients, contact our team today.

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David Deuchler, CFA, Managing Director

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Employee Sales on First Day of Trading

Should Employees be Allowed to Sell Shares on the First Day of Trading?
Airbnb’s IPO Pop: Auction Transparency, Public Market Appetite & Equity Compensation

The first day of trading, when a newly minted public company begins to trade on the exchange, is a day marked with excitement and accomplishment.  It is a day of celebration, as it denotes the successful completion of a capital raise and the potential for future value creation in the open market.  Yet, when the stock price rises more than 25% above its IPO price, with company employees allowed to sell shares against this strength, does the situation call for merriment or concern?

In days of old, investment banks played the lead role in the pricing of IPO shares, balancing demand, mainly from long term investors, in the allocation of shares to issue.  This process, part science and part art, at its very core aims at pricing discipline.  The goal is for the efficient and effective matching of supply and demand such that both buyer and seller come away from the transaction satisfied with the amount paid for the value received.  With the book filled and closed, attention turns to the first day of trade, as the public market helps validate the merits of the IPO transaction.  When the IPO pop lands at around 20% – 25% of the IPO price, the transaction is generally deemed reasonable.  The IPO was priced such that investors received a reasonable discount for shares purchased on assumed investment risk, and the company maximized on the amount of capital raised.

Last week, however, was witness to three new public technology companies, Airbnb, Doordash, and C3.ai, whose stock price at the first day of trade came in well above its IPO price, with gains over 85%.  Despite an increase in IPO pricing range and the use of a hybrid auction process by two of the three companies, this better reflects positive investor interest.

While these marked IPO pops are rare, what draws further attention is the relative novelty of how Airbnb employees were allowed to sell 16.8 million shares beginning the first day of trading and, to a lesser extent, Airbnb’s use of the hybrid auction process.  This is a departure from Doordash and C3.ai, who did not allow employees to sell shares. Furthermore,C3.ai used the traditional IPO bid and allocation model.  Early into trading, with the stocks still finding their footing, we note that while all three companies continue to trade above their IPO price, C3.ai share prices remain above its IPO pop, while Airbnb and Doordash prices have eased from its first day of trade high.

Significant IPO pops beg the question: did the company leave money on the table? Do hybrid auction processes work?  Did investors get too much of a discount?  Did the bankers fail to secure a reasonable price?  Or, were the number of shares freely traded post-IPO limited, driving relatively large movements in share prices on high demand?

All things considered, it appears IPO pops reflect some mismatch in demand vs. the initial shortage of stocks offered in the IPO, which results in a limited number of shares currently available for trade in the secondary market.  This scarcity value, in today’s robust US – and global central bank fueled – market liquidity, including appetite from the retail investment community for growth stocks, appears to contribute to notable share price gains.

In a review of their respective prospectus, by our calculation, around 9% of Airbnb’s outstanding shares became available for trade in the open market following its IPO.  This compares to approximately 10% and 20% of Doordash and C3.ai shares, respectively.  Of these three companies, Airbnb holds the largest footprint given its global hosting business, which was posited to attract stock participation from an international retail and consumer audience.  By comparison, Doordash’s business model has a US retail and consumer appeal, while C3.ai is notable in enterprise artificial intelligence software.

Given demand dynamics, including Airbnb and Doordash’s appeal to a wide audience, their use of the hybrid auction process to determine the IPO price is noted.  Given the transparency, the process aims at maximizing capital raise, as well as measured bids, pricing, and long term investor base selection, following rigorous due diligence and valuation analysis by all parties.  What the hybrid auction process does not fully consider nor predict, however, is the impact of aftermarket support, retail investors, and limited secondary market supply.

Allowing employees to sell shares in the first day of trade is relatively new and uncommon.  Prior to Airbnb’s December 2020 IPO, Unity Software, a leading video gaming software developer, allowed employees to sell shares in their September 2020 IPO.  Compared to Airbnb’s 16.8 million employee shares, Unity allowed 9.1 million employee shares to be sold.

Typically, employees and other company insiders are not allowed to sell shares after the IPO for a lockup period of 180 days.  The lockup is designed to help stabilize share prices by preventing an influx of shares in the secondary market in the short term.  While lockup periods can be shortened, allowing employees to sell shares on the first trading day after the IPO prices is generally prohibited.

Company shares granted to employees – directly or through an option plan – is a form of equity compensation.  It is also aimed at retaining, incentivizing, and recruiting talent.  In allowing its employees to sell 15% of vested shares on day one, Unity wanted its employees to participate in the IPO.  For Airbnb, allowing employees to sell shares on its first trading day appears to embody equity compensation in its many forms, as it facilitated the cashing in of company stock received as part of compensation packages.  Both with a global presence, Unity has 3,700 employees across 17 countries, while Airbnb hosts in over 200 countries and has offices in 24 cities with 2,390 employees internationally.

A balancing act, it may be that an overriding question in allowing employees to sell shares on the first day of trade is whether the additional supply destabilizes the secondary market such that confidence in a company’s future prospects or other fundamental or technical factors are undermined.  For Airbnb, it appears the low number of shares available to trade after the IPO is aided by additional shares coming into the market from employee sale of shares, improving overall stock liquidity.  This is in the face of potential stock trading interest from a global retail and consumer audience, given growth expectations in the company’s international hosting business.

To date, Airbnb’s IPO selling strategy appears to be holding.  Early into Airbnb’s first day of trade, CNBC reported ABNB with the most active retail trading, with 47K buy vs. 1K sell orders.  And while Airbnb’s robust 113% IPO pop has eased somewhat in recent trading days, the stock continues to trade above pricing.  In a similar trend, Unity’s shares continue to trade above its IPO price and, on a more modest 31% IPO pop, continues to post returns ahead of its first day of trade.


Source:  CNBC, Fidelity.

So should employees be allowed to sell shares on the company’s first day of trading? An uncommon practice, it appears the need to cash in on equity compensation may be balanced against the risk of destabilizing share prices in the secondary market.  Factors to evaluate include the potential impact on company fundamentals and technical trading considerations.

Turning the page, is this selling strategy – in part or in whole – transferable?  Can it be adopted by other growth companies, such as those in the healthcare sector?  With the jury out, we note that the process has been laid and the path forged, all while strong comps – ABNB and U – maintain lead.  We would not be surprised by IPO pipeline candidates evaluating this strategy to include healthcare companies driving rapid growth, as they challenge current norms with innovation, novel technologies, proprietary capabilities, unique business models, differentiation, or other competitive advantages.

To learn more about Gilmartin and how we strategically partner with our clients, contact our team today.

Vivian Cervantes, Managing Director

__________

1 In a hybrid auction process, companies play a larger role, compared with a traditional model, in determining the bid price and allocation of shares given visibility into investor demand and pricing sensitivities.  With increased transparency, companies essentially “choose” their long term investor base, including IPO pricing.
2 As additional shares come into the open market, through lock up expirations typically at 180 days post-IPO, secondary, and follow-on offerings, demand-supply dynamics typically recalibrate.
3 Ari Levy, CNBC, Unity is Letting Employees Sell 15% of Vested Shares on Day One, September 18, 2020.
4 Erin Griffith, The New York Times, Inside Airbnb, Employees Eager for Big Payouts Pushed It to Go Public, September 20, 2019.
5 Ari Levy, CNBC, Unity is Letting Employees Sell 15% of Vested Shares on Day One, September 18, 2020.  Airbnb prospectus.

What to Consider When Providing KPIs Post IPO

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A public company’s first earnings call is an opportunity to set a precedent with Wall Street on how it plans to report. It is important to be intentional, consistent, and thoughtful with key performance indicators (KPIs).

Metrics & KPIs
Revenue is important for growth companies, but the strategy is in demonstrating metrics beyond revenue to show the business’ traction and acceleration. Metrics are quantifiable measures used to gauge performance or progress. KPI metrics are essentially the kinds of metrics that will help you track your company’s performance over key goals. Most KPIs tend to be specific and measurable so that you can easily gauge your performance. In short, KPIs track whether you hit business objectives/targets, and metrics track processes.

Why are KPIs important?
KPIs help you evaluate your company’s performance where it matters most. As these performance indicators highlight how well you’re achieving your core business objectives, you can easily monitor your organization’s and team’s performance in achieving those key goals.

KPIs show a company’s holistic progress through time and performance. As you transition to a public company, focus on the metrics that best represent how you think about the business. You should be mindful of the balance between choosing metrics that show traction, growth, and momentum in the first year versus the longer-term outlook. For example, you may be excited about providing metrics that are currently showing traction, but do these make sense to be reporting on a few years down the road? Could these metrics become less relevant?

KPIs should be consistent, and you should only retire metrics when you can make an argument that they are no longer the right way to think about the business. Use year-end to reevaluate metrics and see if anything has changed or needs to be retired. This is the time when you can also introduce new metrics.

Changing KPIs
Firstly, it is important to be consistent when giving KPIs (no cherry-picking based on a good or bad quarter). Retiring a metric without explanation can indicate a bad signal, such as not having a good line of sight into the business.

The year-end call is an opportunity to reassess KPIs and determine if anything needs to be changed moving into the next fiscal year. As you grow, the business will change. Your metrics you choose to report on will need to reflect this change, and this is normal. In order for Wall Street to understand (and accept) this, you have to give convincing reasoning as to why this isn’t the right way to think about the business anymore. Being transparent and clear of what to expect going forward will address investor expectations.

For example, due to a shift in core business or revenue mix, previous metrics may not be the right proxy for traction. Point out the factors you are considering or how working with customers has changed, and point to the new metric as a better way to note acceleration and progress.

Here at Gilmartin, we have extensive experience helping our clients through the intricacies of their quarterly reporting. For additional information on navigating the reporting as a newly public company, please contact our team.

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Carrie Mendivil, Principal

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