A Wake-up Call For America

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 © Grant Thornton LLP. All rights reserved.

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 © Grant Thornton LLP. All rights reserved.

“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 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 © Grant Thornton LLP. All rights reserved.

• there are no good 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. © Grant Thornton LLP. All rights reserved.

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 10 1991

Transactions raising less than $50 million 1993

1995

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1997

1999

2001

2003

2005

2007

2009 thru 6/30

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 83,167 jobs in 2008.

20,000,000

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 IPOs from 2000 lost IPOs from 1999 lost IPOs from 1998 lost IPOs from 1997 lost IPOs

15.0 million potential jobs lost (10.0% annual employee growth rate) 15,000,000

11.6 million potential jobs lost (5.0% annual employee growth rate)

10,000,000

5,000,000

1998 0 1997 © Grant Thornton LLP. All rights reserved.

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Capital Markets Advisory Partners, Global Insight (study cited by NVCA in its “4-Pillar Plan to Restore Liquidity in the US Venture Capital Industry”)

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 growth rate

Number of employees at IPO

361 IPOs (1998 actual)

568 IPOs (1991-1996 average)

5.0%

500 750 1,000 1,372

1,092,104 1,638,156 2,184,208 2,996,733

2,378,822 3,568,232 4,757,643 6,527,487

4,248,229 6,372,343 8,496,458 11,657,140

10.0%

500 750 1,000 1,372

1,322,139 1,983,209 2,644,278 3,627,950

2,964,342 4,446,514 5,928,685 8,134,155

5,475,569 8,213,354 10,951,138 15,024,962

17.8%

500 750 1,000 1,372

1,790,494 2,685,741 3,580,989 4,913,116

4,231,626 6,347,439 8,463,252 11,611,582

8,282,176 12,423,265 16,564,353 22,726,292

Source: Capital Markets Advisory Partners, Dealogic, Global Insight. IPOs exclude funds, REITs, SPACs and LPs. © Grant Thornton LLP. All rights reserved.

803 IPOs (1996 actual)

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 Innovation is Mobile and Global Today, innovation is mobile 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

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21

America is Late to Recognize These Key Interrelationships

America is late to recognize these key interrelationships





Funding Breakthrough Innovation



Licensing IP

Academic and Research Institutions

Funding Breakthrough Innovation



Government

Incremental R&D

Corporations

Innovative Solutions for Next Generation Infrastructure 

Core Building Blocks

Entrepreneurs

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Venture Capitalists



Development of IP



Process Knowledge & Best Practices

Why is American Innovation in Crisis and at Risk of Long-Term Decline? innovation in crisis and at Why is American

term decline?

risk of long-

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 Fuels Job job Creation Venture capital fuels creation

VC-Backed Companies Create Jobs Faster

92% of Job Growth Occurs Post-IPO

Employment CAGR (2006 - 2008)

VC-Backed Company Employment Growth

1.54%

97%

94%

88%

76%

92%

1970s

1980s

1990s

2000s

Overall

0.48%

All Companies

VC-Backed Companies

12.1M Jobs Created

Pre-IPO

Sources: Left: Global Insight, 2009 Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005 © Grant Thornton LLP. All rights reserved.

Post-IPO

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

M&As and IPOs

Longer Time to IPO and M&A Median Age at IPO

4.5 Years 1998

9.6 Years 2008

Median Age at M&A

3 Years 1998 Source: Thomson Reuters, Dow Jones VentureSource © Grant Thornton LLP. All rights reserved.

6.5 Years 2008

Dramatic Decline in IPOs in thein 2000’s Dramatic decline in IPOs the 2000s

Number of Venture-Backed IPOs vs. M&A Exits 1990s

1,776 IPOs

IPOs 56%

2000s

M&A 44%

(’92 – ’00)

392 IPOs

IPOs 13%

M&A 87%

(’01 – ’08)

Lack of IPOs is harmful to job creation and the economy Source: Thomson Reuters/NVCA © Grant Thornton LLP. All rights reserved.

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

$367M and provide 470K U.S. jobs today — the vast majority of these companies could not go public today!

1986 $6.1MM Raised 7,544 Employees Today

1972 $3.0MM Raised 14,824 Employees Today

1988 $27.0MM Raised 5,800 Employees Today

1981 $7.0MM Raised 13,200 Employees Today

1988 $30.2MM Raised 76,500 Employees Today

1989 $16.6MM Raised 9,100 Employees Today

1986 $41.3MM Raised 42,100 Employees Today

1986 $16.3MM Raised 20,000 Employees Today

1971 $8.3MM Raised 83,900 Employees Today

1989 $19.0MM Raised 17,600 Employees Today Source: Jefferies & Co.  

1993 $34.5MM Raised 8,200 Employees Today

1995 $39.5MM Raised 7,645 Employees Today

1972 $0.9MM Raised 50,072 Employees Today

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1986 $36.2MM Raised 84,233 Employees Today

1990 $28.8MM Raised 3,415 Employees Today

1983 $12.1MM Raised 12,600 Employees Today

1996 $38.9MM Raised 13,600 Employees Today

What are Sector Leaders Doing About What arePrivate private sector leaders doingThis? 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 E-commerce

Biotech Industrial

Clean Technology 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 [email protected] [email protected] [email protected] [email protected] © Grant Thornton LLP. All rights reserved.

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