ClickIPOis a mobile platform that lets everyday investors discover and invest in initial public offerings (IPOs) and secondary offerings using their existing brokerage account.
In this episode of Industry Focus: Tech, Motley Fool analyst Dylan Lewis interviews Scott Coyle, CEO of ClickIPO, about the platform. Tune in to find out how the IPO investing process has changed in the last few years, how the ClickIPO platform will allow smaller and individual investors to get in on offerings, and what trends Coyle sees in the IPO space.
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A full transcript follows the video.
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This video was recorded on March 29, 2017.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, April 7, and we're going to hear from an innovator in the IPO space. I'm your host, Dylan Lewis, and today we're going to be airing an interview I did on March 29 with Scott Coyle, CEO of ClickIPO. It's a platform that's aimed at allowing the average investor to participate in IPOs and secondary offerings. Like theconversation on equity crowdfundingfrom my time at South by Southwest, this chat isgoing to look atinvestment opportunitiesthat are starting to become available to theaverage investor. Hope you enjoy it.
Scott, how's it going? Thank you fortaking the time to talk to me. I know you're a busy manover at Stocktoberfest East this week.
Scott Coyle: It's going great. We gotin town yesterday, and we're really lookingforward to the conference.
Lewis: Before we get into the IPO landscape, and your platform, ClickIPO,I want to talk a little bit abouthow you got into the space.
Coyle: OK. The wayI got into the space,I've been in the securities business since the late '80s, and through the '90s and 2000s,I was involved with lots of different capital raises, plenty of IPOs andsecondary offerings. After that, the market changed, and the market got a lot tougher for IPOs for a number of years. And there isn't a way like there used to be forretail investors to participatein initial public offerings or secondary offerings. So,we decided to develop a platform through the use of technology that would make that easier, make itbeneficial for everybody in the process.
Lewis: Tohighlight that challenge, howthe average investor is being excluded right now,I'm going to throw out a couple of stats that I've seen in some of the press that ClickIPO has gotten. I've seen that there are over 400 deals in the U.S. every year. Non-institutional IPO allocationsrepresent approximately 20% of most offerings, and yet less than 0.1% of investors have beenable to access IPOs. That, to me, sounds like the average investordoesn't have much of a shot ofgetting shares at issuance price.
Coyle: They really don't. And that 400-plus offerings, that includes IPO andsecondary offerings. That's not just IPOs, that includes secondary offerings. What happened was, back in the '90s, when regulations were different, and there were many small firms taking companies public, andwhat happened when the NASDAQ crashed,after that, the rules changed. The exchanges madethe requirements to list on the NASDAQ and the New York Stock Exchange, they made them higher. And regulatory requirements came in when you'redealing with smaller investors. So, what happened is, the companies thatstarted going public started being larger and larger companies,so it was mostly the larger investment banks that were taking companies public,and the smaller ones were left out. The larger investment banks, at the same time, their account minimums for small investors keptgoing up higher and higher. The major banks don't have customers with $10,000-$20,000 in their account. Because of that, a lot of the smaller investors now are at onlinebrokerage firms and there hasn't been a way developed yet for smallerinvestors to have access to IPOs. Large investment banks don't have small customers. For that reason, small investors have been left out, and there hasn't been technology created to allow small investors to have access to IPOs andsecondary offerings until now.
Lewis: Andhow exactly are you guys at ClickIPOlooking to change that?
Coyle: Wedeveloped a technology platform and the way it works, it starts in the form of an app. A small investor can download our app, and they canconnect it with their broker-dealer. Initially, when we roll this out in the second quarter of this year, we're going to be supported by a few brokerage firms, but we're talking to many others. So, the idea is, an investor can download our app, connect it with their brokerage firm or one that supports us initially, and then the app is essentially an order-entry system, it will list all the IPO and secondary offerings. And then, the underwriters that we havedeveloped a relationship with, they'll be able to place an order for those offerings. That order actually runs through their existing online broker-dealer. Then, that order goes to ClickIPO, and weaggregateall those orders and show the underwriter thenumber of shares that we have to purchase. The underwriter allocates shares to us, and then we reallocate those shares to the broker-dealer and to their customers. That's the way it's going to work. So, eventually, what we're going to do is create agiant liquidity play to smallerretail investorsto give them access to offerings, to both IPO and secondary offerings.
Lewis: And it seems like, inaddition to some of the regulatory things that you mentioned earlier, one of the barriers to getting the average investor access to these deals is that, as a point of practicality, it's a lot easier for underwriters to work with high net worthindividuals and institutional accounts,because they can take a much larger slice with the assets under management they're working with. It seems like what you guys are looking to do is collectively pool and wield that same power, but democratize it down through your platform. Is that right?
Coyle: That'scorrect. Hopefully, eventually as our app rolls out and our platform rolls out, we'll havehundreds of thousands of people. For the underwriter, they would be dealing with just one order from us. Let's say we have a million shares of an offering to buy. They're going to do one allocation to us for a million shares, and then we redistribute those shares to different broker-dealers, then we actually allocate, we assist them with allocation into their customer accounts. The other thing that we've done as part of the platform is, we've created a scoring system. The scoring system actually rates investors. What this platform is for is, investors, if they see something likeSnap(NYSE: SNAP)going public, everybody knows about that, but if they see a company they like, an IPO or a secondary, and they like the business, they like it longer-term, then this might be a good platform for them to make an investment in that company. Then,when they buy the shares, we have a rating system that rates them onhow long they actually hold those shares. So,it works like a FICO score. The biggest component of that system is how long you buy and hold a security. If you buy and hold it for 30 days or more, that increases yourinvestor score. And that increase in your investor score,when the next offering comes along,or when some of the offerings come along that are oversubscribed,it's going to give you a better opportunity toactually participate in those versus somebody who buys IPOs and sells them the first day. That's not the type of customer we're looking for. Actually,that's the type of customer we'retrying to eliminate, that'skind of rampant in the IPO system. There are a lot of investors that seem toreceive allocations currently, andsome of those allocations get flipped, they're called IPO flippers, and they just sell them,and they don't really create a lot of benefit in the system. We believe, at least my experience is, there are plenty of retail investors out there that willlook at a company and like it and they're willing to hold it for a period of time,more than a day or a week.
Lewis: Yeah. We are certainly "buy and hold" here at The Motley Fool,so I can understand that ideology well. You mentioned Snapchat.Incorporating that mindset into your platform seems like the kind of thing that would really help sell you guys with underwriters and with the companies that are going public, as well. Snapchat, I know when they were in the process of going public, they'd floated this idea of having roughly 25% of the shares in long-term lock upcommitments that were being allotted. It's unclear whether that happened, but it's clear thatit is something that was on their mind. If they can get people to commit toholding the shares and not immediately flipping them,that was something they were definitely interested in.
Coyle: If you think about it, if you look at this 30,000 feet, what we're saying is, we can bring a liquidity play tounderwriters, to retail investors that are more buy-and-hold investors. From an issuer's perspective, if you're going public, the issuer, even the underwriter, essentially,if you have investors that like your stock, theytend to buy it and hold onto it. If that happens, the price of the stock tends to go up and trade better. That's primarily what we're trying to bring to the table. We're trying to become an industry utility that optimizes retaildistribution for IPO and secondary offerings. That's our mission as a company.
Lewis: WhenI first heard about you guys,one of the first things I thought of was,it seems to me like this is another example oftechnology really being on the side of the individualinvestor. Look at online low-cost brokerages, you look atwidespread information,financial statements, EDGAR, stuff like that. You look at equity crowdfunding now coming into the fold. It seems like this is the next phase in that, where the barriers that existed in the investment industry are coming down. And a large part of that is what we're able to do on the tech side.
Coyle: That's exactly right. Years ago, you wouldn't be able to do something like we're doing. The other thing we're trying to do, too, is, if you think about it, we're trying to roll off the online industry, in a way. We're trying to create one liquidity price. The way it'll work is, if you're an investor, then it doesn't matter where your account is. But if you buy and hold IPOs, then your score will rank better, and that will give youbetter access to future IPO or secondary offerings,relative to other people. Again,this depends on our allocation. On offerings that are oversubscribed we won't get a huge allocation. Things like Snap,nobody gets as many shares as they want. So, we'regoing to have to work through those issues, but basically, through the use of technology, trying to make it easier and beneficial to everybody in the system. This should benefit underwriters, it should benefit issuers, it should benefit the retail investor, too.
Lewis: That sounds great, totemper expectations a little bit. You talked about it beingoversubscribed, I remember seeing, I think Snap was something like 12X oversubscribed. So,you might ultimately wind up getting some allotment, butprobably not what you ultimately requested, at least forsome of these very hot IPOs. Looking over to the IPO landscape in general, what kind of trends are you seeing there?I'm sure this is something that, in addition to enabling this platform, it's a space that you're pretty in touch with, and youhave your finger on the pulse of.
Coyle: The IPO market was really good in 2014, and then it started to taper toward the end of 2015. 2016 was a pretty slow year for IPOs. There were maybe 100 IPOs in 2016. But, to give youan example, in 2017,I think there have been 24 or 25 deals that have priced so far this year. At this time last year, there were six offerings that had been priced. So,the calendar has really picked up. The IPO market, what happens is, when the stock market acts better, there tends to be more IPOs. Back in 2014, when the IPO market was much better, when that happens,there's a lot more money in private equity and venture capital thatgoes into private companies. The valuations get higher, and there's more money in the private sector,because everybody's looking at it and thinking, "OK,look at all these deals gone public." It increases theliquidity price in the private sector. And then what happens is the IPO market slows down because ofuncertainty with the presidential election or the market'snot acting as well. And that creates a pent-up list of private companies that are going tolook for a liquidity path. Now, some of those could go down an M&A path,but many of those companies are eventually going to go public. So, it expands and contracts over time. We just went through a contraction. I can'tpredict what the IPO market is going to do, but so far, this year, it's better. I think there are another sevenofferings coming in the next couple weeks that are close. They've announced the dates theyexpect them to trade. I think there areanother seven dealsright now on the calendar. So, it appears, looking at it at 30,000 feet, that the market is going to pick up.
Lewis: You mentioned VC money. I think one thing thata lot of people see when they look out at the unicorn and start-up space is these huge VC-backedcompanies seemingly staying private longer than, maybe,companies would have in the past. There are so many names out there,you have your Ubers of the world, your Airbnbs of the world,your Palantirs,companies like that. Do you think that'ssomething that also might contribute to deal flow, and something that might change or continue to be the status quo for theforeseeable future?
Coyle: The names you just mentioned, the three big ones, Uber, Airbnb and Palantir, those type of names,in my opinion,they are more likely to continue to get private funding and can stay private as long as they want to, because if they need private capital they can go get it,they can get it at a good valuation. If they haveinsiders or employees that want to sell, that's something that's gone on more lately, where you can -- in the old days, a CEO wanted to go public, or the company insiders,because they wanted to be able to sell their stock. Or,when they went public, six months later, they couldtake some liquidity,take some chips off the table. Nowadays, the private equity of VC guys, they'll take you out privately, if you're like one of those three companies you just named. So,they're going to have a choice. Again, it depends on the valuations. It's a question of, "OK, in the private sector, I can get a $1 billion valuation. In the public sector, I can get a $1.2 billion or $1.5 billion." Somewhere along the line, it'llbecome a valuation question. Andthe public sectorstill does represent a better liquidity path. So,I don't know, necessarily, the big names you just mentioned. I think eventually those companies are likely to go public. But there are many other names under those three that are more likely to go public in the near future.
Lewis: Scott, this is an investing show, andyou're in the IPO space.I'm going to throw a long-debatedphilosophical question your way. If you are leading a company public, you're the CEO, would you rather see the IPO price and then drop 15%-20% on the first day, or have the IPO price and pop 15%-20% on the first day?
Coyle: You'd always much rather have it go up. Again, the long-term value of these companies is going to be based on execution and numbers and what the market will pay. You'd much rather have the price go up, if you're the CEO of a company. It's goodwill for the company, it's positive, all the employees see the stock go up, shareholders seethe stock go up. Of course you wouldlike your stock to go up. It's a balancing act. If you are a CEO, youwant to sell your sharesat the highest price,because that's how you get the leastamount of dilution. But you still want it to work. Youdon't want your stock to dropright after it goes public.
Lewis: So,some optimism is good,even at the cost of a little bit of capital, perhaps?
Coyle: Yeah. It's a decision --you're asking my opinion,that's what I would think. But, it depends on the CEO and the company. Andit depends on the investment banks, too. When these investment banks price these things, when they have a price range, an investment bank has a price range, like on Snap, and they say, "It's going to be priced $14-$16, that's what the range is," andthey go to the institutions and sell 80% of these offerings too, and more than that, in the case of Snap, theinstitutions, they have the deal and they look at it, and they determine the value for it, too. So, there is a vetting process there, there's a pricing mechanism. It has to make sense to the institutional investors, when they price these offerings. It's a balancing act.
Lewis: Before I let you go, Scott, do youwant to talk a little bit about when people can expect to see andparticipate in your platform, and what the timeline looks like for that?
Coyle: Ourplatform is in internal testing right now. We're testing the app. Weexpect to have the app in the App Store,could be by the end of April,if not sometime in May. Then, in the April-May-June time frame, we'regoing to be running some beta testswith some broker-dealers that are supporting our app. Those will be small tests on some IPO and secondary offerings. Then, I would say, sometime by the end of Q2, we'll start to roll this out and let some people --we have a waitlist at clickipo.com. As soon as the app is available, we'll let people know. The first thing they would do is, they'dgo on the waitlist and download the app. Then,as soon as we allow other people in to start using the app, they'll be able to connect it with a broker-dealer that supports the platform. It might even be a broker-dealer they're using already. That's the time frame we expect. So,we expect to reallystart rolling with this by, maybe, the June-July time frame, and on through the rest of the year.
Lewis: That's great. Fools,something to keep your eyes out for. Certainlysomething that's interesting if you follow the IPO market and want to startparticipating in these rounds you're seeing. Scott,thank you so much for your time!
Coyle: All right, thank you, Dylan! It wasgreat to chat with you.
Lewis: Well, listeners, that does itfor this episode of Industry Focus. If you have any questions, or if you want to reach out and say, "Hey,"you can shoot us an email at email@example.com. You can always tweet us @MFIndustryFocus, too. If you're looking for more of our stuff, you can subscribe on iTunes, or check out The Fool's family of shows at fool.com/podcasts.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Scott Coyle, I'm Dylan Lewis, thanks for listening and Fool on!