Five names are on the IPO calendar this week, when Friday will mark the first day of spring. Two of these deals are best described in Wall Street jargon: One is a “BDC” and the other is an offering on a “best efforts” basis. And Alibaba Group Holdings (BABA) returns to the spotlight. Its IPO emerges from what some call the dreaded 180-day lock-up period.
Behind The Jargon
Goldman Sachs BDC (GSBD – proposed) filed to go public using the U.S. Securities and Exchange Commission Form N-2 rather than Form S-1. The Form N-2 is an initial filing of a registration statement for closed-end investment companies, which include business development companies. That’s where the jargon “BDC” comes in. The Form S-1 is an initial filing of a registration statement for IPOs.
Goldman Sachs BDC, not to be mistaken for The Goldman Sachs Group (GS), is a New York City-based externally managed specialty finance company. It is a non-diversified closed-end management investment company that has chosen to be regulated as a “BDC” – a business development company.
The company was formed by Goldman Sachs Group to invest mostly in middle-market companies in the United States. Its investment objective is to generate current income and, to a lesser extent, capital appreciation through direct originations of secured debt and, to a lesser extent, investments in equities.
Unlike many BDC offerings, the Goldman Sachs BDC IPO is attracting interest. The company was formed in 2012. For the year ended Dec. 31, 2014, the company reported net income of $36.9 million on revenue of $73.3 million. In addition, its board of directors has declared a distribution of 45 cents per share for the quarter ending March 31, 2015. At an annualized rate, the distribution would amount to $1.80 per share to yield 8.78 percent, based on the mid-point of the price range.
Just think: All this and Goldman Sachs, too.
“Best Efforts” Vs. Underwritings
Tantech Holdings Ltd. (TANH – proposed) is coming to market on what is called a “best efforts” basis. The bankers are acting as agents, not as underwriters. They have agreed to do the best they can to sell the shares. If they are unable to do it, the offering might not get out the door. Tantech’s prospectus states: “The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our underwriter after which the entire offering is sold or (ii) the close of business on March 15, 2015 (subject to extension to March 30, 2015, with our agreement with the Placement Agent).”
Underwritings are different. They are called firm commitments in Wall Street jargon. Here is what happens. The bankers buy all the shares from the issuer, re-offer them to investors and assume all the underwriting risks, such as owning all unsold shares.
Now back to the “best efforts” deal.
Tantech is a China-based provider of bamboo-based charcoal products for industrial energy applications and household cooking, heating, purification, agricultural and cleaning uses.
Defining the 180-Day Lock-up Period
There’s so much commotion in the financial press about the 180-day lock-up period that the term is often presented in the context of fear and loathing. This is nonsense. The 180-day lock-up period is an agreement between inside shareholders and their investment bankers that they will not sell shares for a period of 180 days from the IPO’s offering date “without prior agreement from the underwriters.”
In other words, the 180-day lock-up period is an agreement. It is not a rule. Insiders are free to sell before the 180-day expiration. All that is needed is the OK from the bankers, and they are looking at another round of underwriting fees.
As far as the IPO is concerned, every now and then it will get a flurry of volatility surrounding that expiration date, but there is no evidence that insiders dumped millions of shares into the market and drove the price through the floor.
Let’s take a look at an example.
On June 25, 2014, GoPo priced its IPO of 17.8 million shares at $24 each. The company offered 8.9 million shares and insiders offered 8.9 million shares. The 180-day lock-up period was to expire on Dec. 23, 2014.
Page 38 of GoPro’s prospectus stated: “Subject to certain exceptions, all of our directors and officers and substantially all of our stockholders and option holders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of Class A or Class B common stock without the permission of the underwriters for a period of 180 days from the date of our IPO.”
There you go: “Agreed not to sell any shares without permission of the underwriters.”
On Nov. 11, 2014, GoPro filed for a follow-on offering to sell $800 million of common stock. Both the company and selling shareholders would be selling an amount to be determined. The stock’s previous close was $79.06.
That was about six weeks ahead of the 180-day lock-up period’s expiration date of Dec. 23, but they had the permission from the underwriters.
On Nov. 19, 10.4 million shares were priced at $75 each. The company offered 1.3 million shares and insiders offered 9.1 million shares.
Fast forward to Dec. 23, the 180-day lock-up period’s expiration date. GoPro closed that day at $61.35 on volume of 13.4 million shares. It had closed the previous day at $58 on volume of 6.4 million shares. People were reportedly be surprised by the stock’s price jump on the expiration of the IPO’s 180-day lock-up period.
All Eyes on Alibaba – Again
Alibaba Group Holdings’ 180-day lock-up period ends on or about March 18, 2015, according to published reports. On Sept. 22, 2014, Alibaba priced its IPO of 320.1 million American Depositary Shares at $68 each. The company offered 123.1 million shares and selling shareholders offered 197 million shares.
Bailing out ahead of the lock-up period is not an issue with Alibaba’s IPO. It didn’t happen. Now we’ll have to sit back and wait to see what comes down this week.
This week’s calendar has five offerings that aim to raise a total of about $300 million. Looking into the week of March 23, bankers have four deals looking to raise about $331 million.
Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do we trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.