A wake-up call for America

A study of systemic failure in the

U.S. stock markets and suggested
solutions to drive economic growth

www.GrantThornton.com/WakeupCall
Today’s presenters

• David Weild, Capital Markets Advisor at

Grant Thornton LLP and former vice chairman of
NASDAQ
– overview
– moderator

• Edward Kim, Capital Markets Advisor at

Grant Thornton LLP and former head of product
development at NASDAQ
– job implications

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Today’s presenters (cont)

• Pascal Levensohn, founder and managing partner

of Levensohn Venture Partners, board member of the
NVCA 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 information

that will
• reframe the debate
and
• debunk common myths
and
• call for a restructuring of markets
to better
• support investors and economic growth (jobs)

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Myths exploded

• Sarbanes-Oxley caused • there are no good

the IPO Crisis
• 200 IPOs is a great IPO
market
• the IPO market is back
• cheaper transaction costs
are always better for the
consumer
• the Dot-Com Bubble was
a listings bubble
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companies to take public
• banks are causing the
economic problem by not
lending to small business
• U.S. equities markets are
the best in the world
Catastrophic failure
A “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

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Great Depression in Listings began with the advent of
online brokerage and the Order Handling Rules —
SOX and peak of Dot-Com Bubble came later

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)

-43.3% Decimalization (2001)

Sarbanes-Oxley Act (2002)

S&P 500
NYSE Composite
NASDAQ Composite

Values are indexed to zero on January 31, 1991.

Source: Capital Markets Advisory Partners, World

Federation of Exchanges, NYSE Euronext,
NASDAQ Stock Market. Domestic companies
listed, excluding funds.

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

100

90
Transactions raising at least $50 million
80

70

60

50

40

30

20
Transactions raising less than $50 million
10

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

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Relative to key segments of the stock market, the
ideology is false that cheaper trade execution by itself
is better for consumers

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The United States is losing ground to all other
developed nations — steep decline since
implementation of Order Handling Rules in 1997 …

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… and destroying the ecosystem that supported small
business formation

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The United States should have twice (2x) as many
publicly 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 — Asia
is adding companies even faster than GDP growth
rates

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It takes many more IPOs to sustain listed markets (and
the economy) than anyone realized — until we
conducted this study

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

Listings lost
“Replacement” Level to match GDP growth = 520
1,000 IPOs gained
Average “Replacement” Level = 360
800
Average IPOs 2004-2008 = 209
600

400

200

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

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

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

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.
22.7 million potential jobs lost
(17.8% annual employee growth rate)
Each color band represents the
progressive effects of “lost” IPOs
on job growth potential. For
example, the loss of 10 IPOs in 1997
translates into the potential loss of
20,000,000 83,167 jobs in 2008.
Job costs
15.0 million potential jobs lost from 2008 lost IPOs
(10.0% annual employee growth rate)
from 2007 lost IPOs
15,000,000 from 2006 lost IPOs
11.6 million potential jobs lost from 2005 lost IPOs
(5.0% annual employee growth rate) from 2004 lost IPOs
from 2003 lost IPOs
from 2002 lost IPOs
10,000,000 from 2001 lost IPOs
from 2000 lost IPOs
from 1999 lost IPOs
from 1998 lost IPOs
from 1997 lost IPOs
5,000,000

Source: Capital Markets Advisory

Partners, Global Insight (study
cited by NVCA in its “4-Pillar Plan
to Restore Liquidity in the US
0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Venture Capital Industry”)
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When primary capital formation (IPOs) fails, quality job
formation fails in both public and private enterprise

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

Annual
employee Number of 361 IPOs 568 IPOs 803 IPOs
growth rate employees at IPO (1998 actual) (1991-1996 average) (1996 actual)

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

750 1,638,156 3,568,232 6,372,343
5.0%
1,000 2,184,208 4,757,643 8,496,458
1,372 2,996,733 6,527,487 11,657,140

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

750 1,983,209 4,446,514 8,213,354
10.0%
1,000 2,644,278 5,928,685 10,951,138
1,372 3,627,950 8,134,155 15,024,962

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

750 2,685,741 6,347,439 12,423,265
17.8%
1,000 3,580,989 8,463,252 16,564,353
1,372 4,913,116 11,611,582 22,726,292
Source: Capital Markets Advisory Partners, Dealogic, Global Insight. IPOs exclude funds, REITs, SPACs and LPs.

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Five hundred $100-million companies equals one $50
billion Madoff, but the companies contribute jobs,
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 model

that supports the “value components” (research, sales
and capital commitment) in the marketplace. It would
establish a new, parallel market segment that benefits
from a fixed spread and commission structure.

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Recommendation —
Enhancements to the private market

• a private market solution that enables the creation

of a qualified investor marketplace — consisting of both
institutional investors and large accredited investors — that
allows issuers to defer many of the costs of accessing
private 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 the
future.

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Venture capital industry and entrepreneurial
implications; U.S. security interests

• Pascal Levensohn
– founder and managing partner of Levensohn
Venture Partners, board member of the National
Venture Capital Association (NVCA), and member
of the Council on Foreign Relations

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 Today,
Today innovation
Innovation is mobile
is Mobile and global
and Global

INNOVATION
Thrives In an Environment Which:
Encourages Collaboration and Diversity

Is Defined by Resource Constraints and a Sense of Urgency

Promises Ample Rewards for Success

nton LLP. All©rights

Grantreserved.
Thornton LLP. All rights reserved.
21
 America is Late to Recognize These Key
Interrelationships
America is late to recognize these key interrelationships
 Funding Breakthrough Innovation
 Licensing IP

Academic and
 Funding Breakthrough Research  Incremental
Innovation Institutions R&D

Government Corporations
Innovative Solutions
for Next Generation
Infrastructure
 Core Building  Development
Blocks Venture of IP
Entrepreneurs
Capitalists  Process
Knowledge &
Best Practices
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Why is American Innovation in Crisis and at Risk of
Why is American
Long-Term Decline? innovation in crisis and at risk of long-
term decline?

Global Financial Crisis Exposes Structural Flaws in U.S. Capital

Markets from Unintended Regulatory Consequences

 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 sustainable
growth in our economy. While entrepreneurs can be successful
without VC’s, venture capital is the most efficient job growth
creation engine in this country
 Serious Negative Implications for America’s Economic Growth for
the Security of Critical Infrastructure and for National Security

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Venture capital
Venture Capital fuels
Fuels Job job creation
Creation

VC-Backed Companies 92% of Job Growth

Create Jobs Faster Occurs Post-IPO
Employment CAGR (2006 - 2008) VC-Backed Company Employment Growth
1.54%

97% 94% 88% 76% 92%

0.48%

All Companies VC-Backed 1970s 1980s 1990s 2000s Overall

Companies
Pre-IPO Post-IPO
12.1M Jobs Created

Sources: Left: Global Insight, 2009

Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005

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The Recent Realities of Venture-Backed
The
M&Asrecent realities of venture-backed
and IPOs
M&As and IPOs

Longer Time to IPO and M&A

Median Age at IPO
4.5 9.6
Years Years
1998 2008

Median Age at M&A

3 6.5
Years Years
1998 2008
Source: Thomson Reuters, Dow Jones VentureSource
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Dramatic decline
Dramatic Decline in IPOs
in IPOs in thein the 2000s
2000’s

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

1990s 2000s

1,776 IPOs M&A 392 IPOs M&A

IPOs 56% 44% IPOs 13% 87%

(’92 – ’00) (’01 – ’08)

Lack of IPOs is harmful to job creation and the economy

Source: Thomson Reuters/NVCA
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 17 Venture-Backed Companies Raised $367M;
17 venture-backed
Provide 470K U.S. Jobs companies
Today raised
$367M and
provide 470K U.S. jobs today — the vast majority of
these companies could not go public today!

1986 1972 1988 1981

$6.1MM Raised $3.0MM Raised $27.0MM Raised $7.0MM Raised
7,544 Employees Today 14,824 Employees Today 5,800 Employees Today 13,200 Employees Today

1988 1989 1986 1986

$30.2MM Raised $16.6MM Raised $41.3MM Raised $16.3MM Raised
76,500 Employees Today 9,100 Employees Today 42,100 Employees Today 20,000 Employees Today

1971 1993 1995 1986 1983

$8.3MM Raised $34.5MM Raised $39.5MM Raised $36.2MM Raised $12.1MM Raised
83,900 Employees Today 8,200 Employees Today 7,645 Employees Today 84,233 Employees Today 12,600 Employees Today

1989 1972 1990 1996

$19.0MM Raised $0.9MM Raised $28.8MM Raised $38.9MM Raised
17,600 Employees Today 50,072 Employees Today 3,415 Employees Today 13,600 Employees Today
Source: Jefferies & Co.  
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What arePrivate
What are private sector
Sector leaders
Leaders doingThis?
Doing About about this?

New 501(c)(6) established October 2009

“Coalition for Restoration of U.S. Listings and Markets”
 Active leadership from David Weild, former EVP NASDAQ, Patrick
Von Bargen, former Deputy Chief of Staff, SEC, Steve Bochner,
CEO, Wilson Sonsini, Pascal Levensohn, and others
 Targeted reform of technical securities regulations to restore
positive economics for risk taking on behalf of small company IPOs
 Reaching out to Congressional leadership for support
 Reaching out to our nation’s largest pension plans for support
 Raising awareness with the media

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The private market, implications for business, and
changes 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 marketplace
for illiquid assets

• hybrid marketplace
• offices in NYC and
Silicon Valley
• 5,000 participants
managing over $1
trillion
• ~$25 billion for sale
• ~$2 billion in
transactions in 2009

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Secondary trading in many of the most exciting
venture-backed start-ups is underway — opt-in and
company controlled

Alternative Energy Biotech Clean Technology

E-commerce Industrial IT
Life Sciences Retail Social Media
Software Storage Telecommunications

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Significant interest in private company shares from
leading private and public investors

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A robust IPO market …

… drives capital
(equity plus credit) into
the private market

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Regulatory considerations to be addressed to
accelerate growth and participation

• key considerations:
– amend general solicitation rules: vetting should occur before
purchase, rather than before marketing
– amend 144A rules to include both QIBs and accredited investors
– review investment intent rules to allow for more active “market
making”
– add exemption to 500 shareholder limit for accredited investors

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Discussion and comments

Visit www.GrantThornton.com/WakeupCall
for the complete study.

For current reports and updates, visit

www.GrantThornton.com/subscribe and
select the Capital Markets Series.

David.W eild@gt.com
Edward.Kim@gt.com
Pascal@levp.com
BSilbert@secondmarket.com
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© Grant Thornton LLP. All rights reserved.