BRIDGING THE FUNDING GAP

IN THE ERA OF THE VANISHING MIDDLE

MARKET IPO
Fundamental Changes
In IPO market Over Last Two
Decades:
1990s 2000s
# Of Companies: > 4,000 < 1,400
Total Gross Proceeds: approx. $290 B approx $323 B
Avg. IPO Size: approx. $70 MM approx. $200 MM
Avg. Market Cap: > $25 MM approx. $1 B
THE VANISHING MIDDLE MARKET IPO
Fundamental Changes
THE VANISHING MIDDLE MARKET IPO
Some Theories Why
Caused By Government Overregulation:
Additional costs of compliance with government regulations
(SBOX, SEC, Blue Sky, etc.) too burdensome for small/mid-
sized companies
Including audit, legal and related fees with initial offering, as well as,
continued compliance fees
Regulation ATS (Rule 301) - Increased Tick sizes making
small and mid-size cap stocks unprofitable for brokers
Caused increase in self-directed online brokerage accounts making
market for small and mid-size cap stocks even smaller
Litigation resulting from heightened regulatory enforcement
If you go public, you get sued; Litigation increases direct costs (e.g.
legal, insurance, etc.) and indirect costs (e.g. time and effort it takes to
litigate)
THE VANISHING MIDDLE MARKET IPO
Some Theories Why
Caused By Shifts In Market:
Market demand shift to favoring big firms over small firms
Small IPOs (< $75 MM Market Cap) more likely to voluntarily/involuntarily delist





Small IPOs largely remain small IPOs even if they do not delist
Investors simply tired of investing in small IPOs (< $75 MM Market Cap) due to their
inability to survive and grow in the public markets
Market shift toward indirect ownership of securities
Today most people own stocks in companies through mutual funds (401ks, IRAs,
etc.) not directly in the stocks of companies
As a result, mutual funds are currently driving the IPO market
Mutual funds invest in larger companies (> $300 MM Market Cap) to remain profitable
BRIDGING THE FUNDING GAP
Alternatives
With the slow death of the IPO as a financing/exiting strategy
for Middle Market companies, they are increasingly looking to
traditional and new alternatives which include:
Venture Capital;
Private Placements:
Angel Investors;
Crowdfunding;
Private Equity/Mergers & Acquisitions
BRIDGING THE FUNDING GAP
Venture Capital
Traditional VCs look for companies with rapid growth
potential and the ability to get to IPO quickly
Results in a greater % of todays VC money being invested in
later stage companies and in later funding rounds
BRIDGING THE FUNDING GAP
Venture Capital
Over the past several years, one of the most significant trends in
venture capital has been the rise of smaller micro VCs (< $100 MM)
Filling the gap left by traditional VCs with respect to smaller sized companies,
early stage rounds and smaller deal sizes
Internet and mobile dominate micro VC investments (> 85%) with eCommerce
marketplaces, apparel firms, accessories firms and Educational tech firms
rounding out the top 5
BRIDGING THE FUNDING GAP
Private Placements
Private placements represent the largest source of funding for middle
market companies today
Reg. D Private Placements represented an almost $1 Trillion industry in 2012
Rule 506 Offerings dominate (94% of total offerings; > 99% of total amounts raised)
Rising trend in # and total amount of Reg. D Private Placements since the 90s,
particularly, within the last 4 years
BRIDGING THE FUNDING GAP
Private Placements
Current Sources Of Funds
Angel Investors;
Crowdfunding (Rule 506(c)(3) Offerings)
Potential Future Sources Of Funds
Intrastate Crowdfunding
General Crowdfunding (Title III)
Issues:
Final SEC Crowdfunding rules (when/scope)
July deadline for SECs review of Accredited Investor
definition
BRIDGING THE FUNDING GAP
Private Equity/Mergers & Acquisitions
Many small firms are choosing not to remain independent, but instead
merging as a way of getting big fast
Small firms can often create greater operating profits by selling out in a trade sale rather
than relying on organic growth
Importance of getting big fast has increased over time as a result of increased
technological innovations; Many profitable opportunities potentially lost not quickly
seized
Leading to a increasing trend of M&A activity both as an exit strategy and for continued
growth
Coupled with piles of current PE dry powder, professionals expecting an
overall increase in M&A deal activity in 2014/2015
Significant dry powder increasing company valuations across the board
KPMG Survey: 63% of surveyed professionals expect their U.S. clients to make at least
1 acquisition in 2014 and 36% expect their companies will complete a divestiture in 2014
Expected to be a very few megadeals in 2014/2015, with middle-market deals
dominating M&A activity
BRIDGING THE FUNDING GAP
Effects of Regulations
Regulations
J.O.B.S. Act;
SECs Tick Size Pilot Program
Effects On The Middle Market IPO Market
Will it cause a significant increase in the Middle Market IPO market? Only if the
cause of the decline was primarily as a result of regulatory matters/costs
Title I of the J.O.B.S. Act may cause an uptick in Middle Market IPOs in the short
term but long term viability of the market is still in question
Effects On Middle Market Access To Capital
Regulations (particularly Title II) making it considerably easier and more cost
effective for Middle Market companies to access capital then ever before
Any changes in accredited investor definition may tighten available capital

TAKE-AWAYS
1. IPO Market will be continue to be dominated by large, later
stage companies for the foreseeable future
2. Middle Market companies increasingly looking to traditional
and alternative forms of private capital Including venture capital
(particularly Micro-VC capital) and private placements (Angel Investors & Crowdfunding)
3. The Future Effects of JOBS Act and similar regulations are
uncertain Whether they have a significant impact on the Middle Market IPO
Market depends on the underlying cause of the decline. They will, however, continue to
pave the way for easier and cheaper sources of capital for Middle Market companies
4. Middle Market IPO Market NOT coming back in the near future
Even if current regulations help this IPO market, it will take a significant amount of
time
5. Expect to see an increase in Middle Market M&A activity in
2014 & 2015 Particularly with respect to strategic acquisitions
THANK YOU

QUESTIONS??
Contact Info:
Anthony J. Zeoli, Esq.
Ginsberg Jacobs LLC
(773) 983-9133
azeoli@ginsbergjacobs.com
www.ginsbergjacobs.com
www.IllinoisCrowdfundingNow.com