Law360: A Big Year For US IPOs By Chinese Companies

Washington, DC – January 10, 2018 – The article co-authored by Fang Liu and Yangyang Jia and titled “A Big Year For US IPOs By Chinese Companies” was published today in Capital Markets and Banking Law360.

A copy of the published article is reproduced below:

The U.S. capital markets produced 24 initial public offerings by China-based companies in 2017, up from nine in 2015 and 10 in 2016, making 2017 the most active year for IPOs by China-based companies since the previous IPO fever about seven years ago. Two distinctive trends emerged in 2017.

While the first half of 2017 witnessed only three IPOs, fairly consistent with the slow pace in the past two years, we saw a significant surge in market activities starting in August, reaching a peak of seven IPOs for the month of November alone. In the second half of 2017, there were eight IPOs during the third quarter and 13 during the fourth quarter.

The 24 IPOs together raised approximately $3.8 billion, including seven companies with offering amounts of less than $30 million, five in the range of $30 million to $100 million, eight in the range of $100 million to $200 million, and four over $200 million. Qudian Inc. (NYSE: QD), which went public on Oct. 18, 2017, was the largest of the 24 IPOs surveyed, raising $900 million, followed by Sogou Inc. (NYSE: SOGO) ($658 million), Best Inc. (NYSE: BSTI) ($517 million) and PPDAI Group Inc. (NYSE: PPDF) ($221 million). Interestingly, the four largest IPOs all chose the New York Stock Exchange over Nasdaq as their listing exchange.

Since 2012, when an increasing number of Chinese companies rushed to the U.S. capital markets, the IPOs by China-based companies have demonstrated some distinctive trends. In this article, we compile data of 2017 IPOs to showcase two of such trends.

First, a dominant number of the Chinese companies were emerging growth companies (EGCs).

Among the 24 companies surveyed, all but one (Best Inc.) were emerging growth companies under the Jobs Act, indicating that these companies’ annual gross revenue during the most recently completed fiscal year was below $1.07 billion (threshold since April 2017) or below $1 billion (threshold between April 2012 and April 2017).

As measured by revenues for the 12-month period that ended June 30, 2017 (trailing 12 months, or TTM), six of the 24 IPOs reported revenues of less than $30 million. Twelve companies reported TTM revenues in the range of $30 million to $300 million. Six companies reported TTM revenues above $300 million. Overall, 75 percent of the 24 IPOs reported TTM revenues of less than $300 million, highlighting the relatively small size of the Chinese companies as measured by revenues.

Since the enactment of the Jobs Act in April 2012, approximately 85 percent of all IPOs by both U.S. and foreign-based companies have been EGCs. In 2017, approximately 96 percent of the IPOs by China-based companies were EGCs.

Compared to bigger and more seasoned companies seeking an IPO, EGCs are granted confidential submissions of registration statements, a lower registration threshold, test-the-water communications with potential investors, exemptions from certain analyst restrictions and financial disclosures, delayed compliance with certain Sarbanes–Oxley Act rules, and other benefits under the Jobs Act that help improve their access to the capital markets and ease their compliance burdens.

It seems that China-based companies are not the only ones taking advantage of the Jobs Act to fuel their growth efficiently; the act also became a significant driver of the U.S. capital market.

Second, two parallel tracks have emerged. Specifically, the IPO market for China-based companies are divided as those with an offering amount below $20 million (the small IPO track) and those above $100 million (the large IPO track).

The two tracks can also be discerned by the companies’ revenues; the larger the revenues, the larger the offering amount. The companies’ revenues and IPO offering amounts are generally in line with their choice of IPO service providers at a fee level compatible with the size and reputation of these service providers.

The large IPO track featured representations by large investment banks, Big Four auditing firms, international law firms and large investor relations firms.

In this track, Morgan Stanley and Credit Suisse were the clear winners in 2017, with each participating in seven of the 24 IPOs, followed by Citigroup with five IPOs. Goldman Sachs, JPMorgan and China Renaissance each participated in four IPOs. Morgan Stanley led the largest IPO by Qudian, with Credit Suisse, Citigroup, CICC, UBS, Stifel, Needham and Nomura in the underwriting syndicate. These large investment banks typically underwrite IPOs by firm commitment. The average amount raised by these banks in 2017 was $271 million.

Naturally, international law firms, Big Four auditing firms and large investor relations firms represent the same group of companies served by the large investment banks. In 2017, large international law firms dominated the market for company’s counsel, covering 76 percent of the surveyed Chinese IPOs, while the Big Four accounting firms (Ernst & Young, Deloitte, PwC and KPMG) served 62.5 percent of the Chinese companies surveyed. Among all the investor relations firms serving China-based companies, the Piacente Group led the pack with seven new IPO clients.

In contrast, the small IPO track is represented by smaller or boutique investment banks, small auditing firms, boutique law firms and boutique investor relations firms, closing IPOs below $20 million.

Network 1 Financial Securities, Boustead Securities and ViewTrade led the boutique investment banks in the small IPO track, each taking three companies public in 2017. Boutique investment banks typically underwrite IPOs by best efforts, with average offering amount at $21 million in 2017. Excluding the three anomalies mentioned below, the average offering amount raised by the boutique investment banks was $12 million.

Most of the company’s counsel in this track were law firms with less than 100 attorneys. Similarly, smaller auditing firms served the majority of the companies in the small IPO track, with Friedman, MaloneBailey and Marcum Bernstein each auditing two IPOs in 2017. Weitian Group and ICR were the most active investor relations firms in this track — each won four new IPO clients. Six other investor relations firms each managed to represent one IPO client during 2017.

The two tracks rarely intersect unless when the companies engage a large law firm or a Big Four auditing firm (for example, in the case of Hexindai, which completed a $50 million IPO with an international law firm, a non-Big Four auditing firm and a boutique investment bank, and iClick, which completed a $35 million IPO with an international law firm, a Big Four auditing firm and a mid-size investment bank), or when the company hits investor enthusiasm (like in the case of Dogness, which completed a $55 million IPO with a small law firm, a non-Big Four auditing firm and a boutique investment bank).

However, the current market seldom sees a large investment bank representing an IPO smaller than $100 million or a boutique bank representing an IPO bigger than $50 million. As the IPO size usually dictates the choice of underwriters, the companies planning to do IPOs between $50 million and $100 million may be pushed to adjust the deal size to fit in the capacities or comfort zones of their underwriters.

To reach their desired offering amount, these companies are left with limited options. They either have to engage an international law firm or a Big Four auditing firm, if they agree to take on the companies, in order to enhance the companies’ credibility in the eyes of prospective investors, or these companies have to push back on their underwriters to go beyond the banks’ comfort zones. In 2017, 21 IPOs still remained in their respective tracks with only three anomalies, as mentioned above. However, we have not seen any intersection beyond $55 million. The market vacuum may soon be filled by those IPO service providers willing to adjust their fees and services to accommodate these companies’ expectations.

From the number of IPOs closed in 2017 and the number of IPOs filed previously and to be closed in 2018, it is clear that China-based companies will keep leading the IPOs by foreign-based companies. We may predict that most of the companies seeking IPO in 2018 will continue to be emerging growth companies. We also expect that the market for IPO sizes between $50 million to $100 million may become more active, attracting a more diverse group of companies.

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Fang Liu leads the corporate and securities practice group at Mei & Mark LLP in Washington, D.C. She has assisted China-based companies in conducting IPOs in the United States.

Tony Tian is the founder and president of Weitian Group LLC, a boutique investor relations and capital market advisory firm based in New York, and was previously a senior sell-side equity research analyst at various investment banks.

Yangyang Jia is a law clerk in Mei & Mark’s corporate and securities practice group in Washington.

Shunyu Zheng is an intern at Weitian Group.

DISCLOSURE: Mei & Mark represented underwriters in three of the 24 IPOs discussed here. Weitian Group was involved as an investor relations firm in four of the 24 IPOs.


The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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