A new electronic IPO bookbuilding process has received regulatory approval from the UK's Financial Conduct Authority (FCA). SquareBook, founded by Richard Balarkas and Joe Sluys, aims to remove what it calls "the conflicts of interest inherent in the current bookbuilding process".
SquareBook says that it will provide a transparent, fair and automated way to IPO, and one that will "fix the IPO process for the benefit of everyone involved".
So what does it think is broken? The IPO market, Balarkas and Sluys argue, is in long-term decline, despite the attention garnered by a handful of very big deals in the US. Data from Dealogic shows that overall IPO deal numbers and volumes in Europe and the US have roughly halved since the heady days of 2000, and are still well down from 2007 levels too.
At least part of the reason for this, they add, is issuer and investor dissatisfaction with the process as it stands today.
|Richard Balarkas, SquareBook|
"We think things are coming to a head in the IPO market," says Balarkas. "In the past there has been an acceptance that investment banks had this virtuous circle of analysts, corporate relationships and secondary market distribution, and that if you wanted to get an allocation in an IPO then you had to feed commission dollars to the banks."
He adds that regulators are becoming increasingly concerned that IPO markets appear to be no longer fulfilling their role. In the UK, the FCA is still conducting investigations into conflicts of interest in investment banking, including in the IPO allocation process.
After the financial crisis, the US put in place the Jumpstart Our Business Startups (JOBS) Act, one aim of which was to smooth the path of growth companies to market by easing previous regulatory burdens. And it is small and growth companies in particular that SquareBook's founders think are no longer being served by the IPO market.
Sluys, who is SquareBook's CEO, notes that the lack of evolution in primary equity markets stands in stark contrast to what has been seen in secondary markets in recent years. "Automation, transparency and competition have been implemented in secondary markets to the point where performance is being measured down to fractions of a basis point, but there is very little mention of the fact that the liquidity pool is shrinking," he says. "The upstream source of assets in which to invest is being limited by the bottleneck that is the IPO process."
Big companies that are able to are resorting to non-traditional ways of going to market, such as Spotify and Slack with their direct listings in the US. But regulators like the FCA are going out of their way to encourage new fintech firms to explore ways of shaking up traditional areas of finance, including capital raising, in the hope that the process can be made more efficient and transparent for a wide variety of potential issuers.
This accumulation of factors gives SquareBook the confidence that the time is ripe for the unbundling story that it is pitching to the market. "We think there is a large wave coming to the shore, and we are going to catch it," says Balarkas.
SquareBook is not the first attempt to tweak the IPO process to make it more fit for purpose. STJ Advisors, run by ex-ECM banker John St John, is perhaps the firm most notable for having pioneered a data-driven approach that explicitly aims to improve pricing and allocation by focusing on the issuer's interests.
SquareBook differs from a traditional advisory firm, however. It is not offering corporate finance advice, but rather intends to demystify the IPO process for listing candidates, and then make available its technology platform for the actual bookbuild, pricing and allocation.
"It's more process advisory," says Balarkas. "We are holding their hand, as an unconnected, unconflicted party."
It's more process advisory... we are holding their hand, as an unconnected, unconflicted party- Richard Balarkas
This means the firm doesn't set out to replace the traditional suite of advisers and intermediaries that work on deals – issuers are still able to employ those as they see fit. But the platform will offer the mechanics of order-taking, pricing and allocation in a transparent and automated way, based on whatever algorithms the client wishes to plug into it. A wealth of investor behaviour data will allow issuers to control allocations to accounts known to be regular quick flippers of stock, for instance. And manual intervention in the process is still possible.
Just as important is pre-deal work. The company has an "IPO readiness programme" that it says takes no more than 20 hours of management time over 12 weeks. Part of the pre-deal work is analysis of data-driven indicators, but another will be communication with potential investors to begin to establish thinking around demand and pricing.
Easy access for the buyside is an important part of the fairness philosophy. An application programming interface allows SquareBook's systems to connect to electronic brokers that cover most private investors. Institutional investors will be able to connect over the internet, while the firm has also tested fixed gateways.
SquareBook built and tested its platform within the FCA's regulatory sandbox, an environment that the FCA set up in 2015 to allow companies to test new products with consumers with a view to achieving full authorization. It was one of 18 firms to have been successful in applying to cohort 3 of the sandbox, in June 2017.
Companies building what they hope will be more efficient ways for issuers to raise capital have been a regular feature of the FCA's sandbox.
|Joe Sluys, Squarebook|
One of the first – in cohort 1 of the sandbox back in 2016 – was Issufy, an artificial intelligence web-based platform that is intended to simplify the distribution process for all kinds of primary market deals, as well as having applications in engagement with research and non-deal roadshows. Its first deal was the listing of Falcon Media House on the London Stock Exchange in 2017.
Cohort 4 of the sandbox, announced in July 2018, included Globacap, a fintech that exited the sandbox last month with FCA authorization for a new blockchain-based capital-raising platform that tokenizes equity, bonds or fund investments.
A Globacap token is designed to be the actual legal shareholding in a company, rather than simply a digital receipt of ownership. Subsequent transactions involving the token, which are recorded on the blockchain, also fulfil the legal requirements of the transfer of equity ownership under UK law.
Other FCA sandbox projects include a digital bond issuance platform from BlockEx, a cohort 4 member that is still in the sandbox and which was also a member of cohort 2, in 2017. Another fourth cohort firm is Capexmove, a platform that uses smart contracts for debt issuance.
Fineqia, another cohort 4 firm, has been testing the issuance of bonds backed by blockchain-based cryptoassets like Bitcoin and Ethereum. TokenMarket, in the same cohort, this week closed a test capital raising via a security token offering (STO) that saw tokens distributed to 17,000 investors in less than three hours.
Another distributed ledger-based platform for capital raising is being worked on by 20|30, another cohort 4 firm, which in April was the first UK company to tokenize and issue its own equity. It carried out the sandbox test using TokenFactory, its capital-raising platform, and in partnership with fintech Nivaura. Nivaura itself was a cohort 2 member when it was testing its blockchain-based securities issuance and administration platform.
Cohort 5 of the sandbox was announced in April 2019, and includes Fractal, a platform that aims to facilitate SME financing and the securitization of SME debt by using distributed ledger technology to hook up credit applications and loan issuance with companies' underlying financials.
Torca, meanwhile, is another firm aiming to test a DLT-based capital-raising platform, also within cohort 5.