ANALYSIS: Q3 Roundup: IPOs Keen for (Maple)bear Market to End

The ongoing IPO bear market has swallowed SPACs whole, but the recently completed quarter is generating cautious optimism that the bears plaguing traditional IPOs may finally be getting ready to hibernate.

Some big names decided to go public in the third quarter, not the least being Arm Holdings, the biggest IPO of the year so far at over $5.2 billion. Whether this is a genuine trend is difficult to say because Arm isn’t a startup; rather, it’s a well-established, previously publicly-listed semiconductor company that’s returning to the public exchanges and benefiting from the current surge in AI investment interest.

New listings by startups like Instacart (parent Maplebear) and e-marketing solutions provider Klaviyo made splashy debuts but their stock prices have since retreated, creating doubt about the strength of current investor appetites. As discussed below, regardless of some backsliding, traditional startups can take comfort that at least they aren’t special purpose acquisition companies.

Traditional IPO Market Improves but Trend Uncertain

The IPO market built upon improvement in the second quarter by raising $9.4 billion through 45 deals, the most capital raised in the last six quarters. The strength of Arm’s IPO, which not only priced at the top of its range but also enjoyed a first day price pop (increase) of 25%, led the way.

The top three listings in the period consist of over 76% ($7.2 billion) of the total quarterly IPO capital raised, indicating that broad-based market improvement hasn’t yet been reached. Online grocer Instacart, formerly Maplebear, was priced at the top of its range and rose as much as 43% on its debut. Klaviyo did even better, pricing above its marketing range. However, the shares of all three companies later fell near, or even below, the IPO price.

Expected persistent high interest rates are taking the blame for holding back the price of growth companies (such as startups), as high rates hurt the value of future earnings upon which growth stocks depend more than value stocks.

Peak SPAC Is Now Zero SPAC

It’s hard to believe that less than three years ago, SPAC IPOs displaced traditional IPOs as the leader in both count and capital raised. The SPAC IPO market got barmy during the cheap money days of the Covid-19 pandemic, but offerings slowed to a relative trickle by the close of 2021.

Now the IPO faucet that was slowly dripping new SPAC listings since early 2022 has shut off completely. After 22 SPACs went public earlier this year, not a single SPAC has gone public since 99 Acquisition on Aug. 17. Not one.

SPACs completed only five IPOs in the third quarter this year, raising nearly $820 million. The total capital raised by SPACs in Q1 2021 (peak SPAC) was over $98 billion, a decline of over 99%.

Special purpose acquisition companies did enjoy a piece of good news recently that has potential positive implications for the industry generally. A SPAC, Danimer Scientific, was successful at convincing a federal judge in the US District Court for the Eastern District of New York to dismiss a misrepresentation lawsuit.

Investors had sued Danimer, alleging that the company knowingly misled investors in disclosures about a SPAC deal. While some misrepresentations were found, the judge concluded the plaintiffs failed to adequately allege that the company and its executives had done so with fraudulent intent or motive. The case was dismissed with prejudice.

These types of securities litigation suits against SPACs aren’t uncommon, so achieving a dismissal with prejudice early in the litigation process is a real win for SPACs.

Japanese Startups Seek US IPOs in Record Numbers

At this time last year, I wrote about how the London Stock Exchange was loosening its listing requirements in an effort to draw more IPOs that had been going to US and EU exchanges. Fast forward one year, and the Tokyo Stock Exchange is taking the same step for similar reasons.

US exchange Nasdaq has convinced a record number of Japanese startups to list on its exchange, offering a more innovative market in a country with less uncertain growth prospects and a younger population. Five Japanese startups have already gone public this year, and roughly 10–20 more are reportedly on the way.

One of the principal reasons for this surge has been an observation also made by UK companies—the US markets have a greater risk appetite and value companies more, sometimes considerably more, than investors in the UK (or Japan).

Like the LSE’s rules changes, easing listing requirements in Japan won’t address cultural differences in the market that limit the appeal of a domestic listing, but they may reduce complaints of inflexible regulations. The new Tokyo Stock Exchange listing rules become effective Oct. 8.

Third Quarter New Proposed and Adopted SEC Rules

During the quarter, the Securities and Exchange Commission (SEC) adopted two new rules with significant industry impact. Money-market fund reforms are bringing sweeping changes intended to bolster the financial system during times of stress.

The other new rule demands much more disclosure from registrants about how they address cybersecurity. These new cyber rules will require public companies to file a Form 8-K within four business days after concluding it has suffered from a material cyber attack. Recent major cyberattacks against casino operators MGM Resorts and Caesars Entertainment have been reported in the press but aren’t subject to the new cyber disclosure rules as those don’t take effect until Dec. 18.

The SEC has proposed new rules to regulate the use of predictive analytics, including artificial intelligence. If adopted, these rules could significantly affect a wide range of industries.

Bloomberg Law subscribers can find related content on our In Focus: Special Purpose Acquisition Companies (SPACs) page, our Equity Deal Analytics page, our In Focus: SEC Rulemaking page, and on our Securities Practice Center resource.

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