Uber Uh, technically, I guess: Uber priced its public offering on Thursday at $45 a share, near the bottom of its expected price range, valuing the ride-hailing company at about $82.4 billion. It raised $8.1 billion from the I.P.O. … Its $82.4 billion valuation, which factors in stock options and restricted stock grants, is above its last private fund-raising valuation of $76 billion, from August. But it is below the $100 billion that Uber forecast to some investors this year — and well below the $120 billion that some of its bankers floated last year. I mean, $82.4 billion is more than $76 billion, but it is not $8.1 billion more than $76 billion. Uber Technologies Inc.'s pre-money valuation in its initial public offering is about $74.1 billion, lower than its last private round: If you don't count the fresh money they are putting in, Uber's new public investors give the company a lower value than its most recent private investors did. As we discussed yesterday, Uber has been selling stock in private transactions for about three years at about $48.77 per share. Last night it sold stock to public investors at $45. "The Uber IPO is America's single greatest corporate wealth creation event since Facebook Inc.," writes Eric Newcomer, but viewed in a certain light it actually destroyed corporate wealth. The wealth was created by Uber doing stuff, building a business, and raising funds privately; the IPO was supposed to certify that wealth and make it liquid, but some wealth leaked out along the way. So this is true as far as it goes: Uber is also the first hotly anticipated tech offering in years to price near the bottom of its expected price range. Facebook, Twitter and Snap all priced well above expectations. But that is sort of an artificial measure; those "expectations" are just a marketing range set by the company and its bankers, and it's easier to price above conservative expectations than aggressive ones. More noteworthy might be the fact that Uber, the biggest and most famous of the current crew of unicorns, is also the biggest and most famous down-round IPO. I am told that "Unicorns that sell or go public below their last private valuation are known as undercorns," and while it is debatable—Uber did go public at a higher total post-money valuation—I think on balance I would say that Uber, the Ubercorn, is also the uber-undercorn. It's not the first high-profile undercorn, of course; Dropbox did a down-round IPO last year, and Pinterest did one last month. Still it is … not what Facebook would do, you know? It seems like a particular phenomenon of the current crop of unicorns, with their unprecedented ability to raise large quantities of private money at high valuations. We have talked for the last few years about how "people are worried about unicorns," with the worry being that eye-popping private valuations like Uber's had become disconnected from what public markets would pay for companies. That worry could only really be proved or disproved by comparing Uber's private valuations with what public markets actually paid. Now you know! The worries were … at least a little bit right. I mean, or not, really; by bad luck, Uber picked a tough week to price an IPO for reasons unrelated to its own business. And I suppose this will all be forgotten if Uber rallies to a $120 billion valuation by, like, the end of today. The good news is that there's nowhere for the stock to go but up. That's how it works, right? Prospective investors in Uber's I.P.O. showed huge interest near the bottom of the range, the people briefed on the matter said. The underwriters hope that by pricing the stock offering conservatively, shares will enjoy a healthy first-day gain — known in Wall Street lingo as a "pop." (The downside of such a strategy is not getting top dollar for the shares sold in the offering, meaning that investors who sold some of their holdings left money on the table.) Uh, actually Uber opened at $42 this morning, below the IPO price, so maybe that pop is not so guaranteed. By the way, that sentence about how "investors who sold some of their holdings left money on the table" if the stock goes up is a standard thing to say about IPOs, but the Uber IPO is actually a little different. In this IPO, early investors aren't actually selling any of their holdings—unless the stock goes up. Usually the way an IPO works is that the company raises money by selling a bunch of new shares, and also the founders, executives and early investors sell some of their existing shares for their own account. Uber's IPO is all "primary"; all 180 million shares in the IPO are newly issued by the company, and all of the $8.1 billion raised in the IPO will go directly to Uber.[1] But—as in every IPO—there is also a "greenshoe," an "overallotment option" allowing the underwriters to buy more shares at the IPO price. Uber's greenshoe is for 27 million shares, and it is all "secondary"; if the banks exercise the option, they'll buy 27 million more shares, for about $1.2 billion, exclusively from Uber's founders and early investors. Travis Kalanick will sell $168 million of stock, Garrett Camp $141 million, Benchmark Capital $259 million, the SoftBank Vision Fund $245 million, etc.[2] (This is a somewhat unusual split; it's more common for the primary/secondary mix of the greenshoe to be similar to that of the base offering.) As we've discussed recently, the purpose of the greenshoe is to allow Uber's banks to "stabilize" the stock in the first few days of trading. When the banks priced the IPO and allocated the stock last night, they allocated 207 million shares, but they only bought 180 million shares from Uber.[3] That leaves them short 27 million shares. If the stock trades up, they will just exercise the greenshoe option and buy the 27 million shares back at $45, no problem. But if the stock starts to trade down, the banks will buy back some or all of those 27 million shares in the open market—at or below $45—in an effort to keep the price up. (This looks like, and is, market manipulation, but it's the legal kind of market manipulation.[4]) If they need to do this—if the stock doesn't rise above the IPO price and stay there for at least a few days—then they won't exercise the greenshoe, and the early investors won't get any money from the IPO. And, because they've signed lockup agreements, they won't be able to sell any Uber stock for six months. Of course if the stock does go up, then those early investors will end up selling stock at $45 when the price is $50 or $55 or whatever, and they'll feel some regret. They sold a call option (for nothing) and it was exercised against them. But you'd have to assume—given, you know, the fact that they did sell that call option for nothing—that that's the outcome they want. Many of these people—co-founders Camp and Kalanick, early investors like Benchmark—have been in Uber since very early on, and are sitting on huge gains. (Unlike more recent investors.) The IPO is a chance for them to cash in some of those gains—but, unlike in most IPOs, only if it trades well. If the stock goes down, they don't get any money. It's an unusual set of incentives. Uber, as an entity, is selling 11 percent of itself, and it goes through money fairly quickly; it should want to get a high price on the stock it is selling. But several of its biggest shareholders, including four of its directors,[5] will only cash in if the stock trades up from the IPO price, which gives them an incentive to want a low IPO price. This is good for new investors—their desires (an IPO pop) are aligned with those of Uber's insiders—but it's a little odd for the company. Lyft shorts Here's a pretty good statistic about Lyft Inc.: Short interest in the No. 2 ride-hailing company has risen to 27 million shares, according to financial analytics firm S3 Partners, while Lyft's public float is about 33 million shares in total. Lyft has 285.9 million shares of stock outstanding (including regular Class A and high-vote Class B stock), but a big chunk of those are held by insiders and early investors who have agreed not to sell them for six months. Lyft only sold 32.5 million shares when it went public at the end of March. But now there are, apparently, some 60 million shares publicly available: 32.5 million from Lyft, and 27 million from short sellers. Short sellers have basically doubled the supply of Lyft stock. If you own a share of Lyft, there's about even odds that you bought it from (someone who bought it from (etc.)) the company as part of its fundraising efforts, or from a short seller as part of her bet against Lyft. Or, not necessarily her bet against Lyft. One thing that seems to be happening with Lyft is that some number of its pre-IPO shareholders have somehow managed to hedge their exposure, despite the lockups. The banks that are helping them hedge have shorted the stock. This means that some of the shares that are now publicly available are sort of phantom emanations of shares that aren't yet publicly available; they are locked-up shares that have nonetheless been sold short. They are not new shares created by short selling, but shares that will be available in the future and that have been moved forward in time by short selling. People always believe that there is some natural limit on the number of short sales, by the way, but there really isn't. If there are 32.5 million free-floating shares of Lyft, then some enterprising short seller can borrow all of them and sell them to other people. But now those other people own 32.5 million shares of Lyft, and they can further lend them to another (or the same) short seller, who can sell them to yet other people, who will now own shares and be able to lend them, etc. This tends to peter out—some holders won't lend the stock—but there is no physical requirement that it will. If enough people really wanted to short Lyft stock, and enough people really wanted to buy it, and also enough people wanted to lend it, then there could be 270 million short shares instead of 27 million. The stock market is not just a mechanism for financing companies and allocating their ownership; it is also a mechanism for betting on them. The financing and ownership things are limited by the actual size of the company, but the bets are not; they are limited only by the demand for betting. Crypto regulation Here's a speech from Securities and Exchange Commission member Hester Peirce that makes a pretty good point about the SEC's regulation of crypto tokens and initial coin offerings: On the same day the Corporation Finance staff issued the Framework, the staff also issued the first token no-action letter in response to an inquiry from TurnKey Jet, a charter jet company. The company intended to effectively tokenize gift cards. Customer members could purchase tokens that would be redeemable, dollar for dollar, for charter jet services. The tokens could be sold only to other members. This transaction is so clearly not an offer of securities that I worry the staff's issuance of a digital token no-action letter—the first and so far only such letter—may in fact have the effect of broadening the perceived reach of our securities laws. If these tokens were securities, it would be hard to distinguish them from any medium of stored value. Is a Starbucks card a security? If we are going that far, I can only imagine what name the barista will write on my coffee cup. And yet, the staff's letter did not stop at merely stating that the token offering would not qualify as a securities offering, but highlighted specific but non-dispositive factors. In other words, the letter effectively imposed conditions on a non-security. For example, the staff's response prohibits the company from repurchasing the tokens unless it does so at a discount. Further, as I mentioned earlier, the incoming letter precluded a secondary market that includes non-members. Does that mean that a company that chooses to offer to repurchase gift cards at a premium or that allows gift card purchasers to sell or give them to third parties needs to call its securities lawyer to start the registration process? We talked last month about the SEC's "Framework for 'Investment Contract' Analysis of Digital Assets," and about its ruling that TurnKey Jet's tokens were fine. Like Peirce, I thought that those tokens were obviously fine. "This is a useful precedent if you are planning to, like, put your retail gift cards on the blockchain," I wrote, "but not if you are planning a genuinely novel way of financing the development of decentralized economic activity." But Peirce's point is that, before the TurnKey Jet ruling, nobody was going around worrying that gift cards were securities. Now they might have to, and they might have to check with the SEC to make sure that all of the features of their gift-card program are compliant. Peirce means this as a criticism of the SEC staff, for overreaching to meddle in crypto offerings that are clearly not securities, but I am sympathetic to the staff. The backdrop here is that a lot of people raised a lot of money in crypto offerings that were obviously illegal securities offerings, completely flouting clear U.S. securities law. They dared the SEC to regulate, and the SEC did. As part of that regulation, the SEC will keep a close eye on crypto offerings that claim not to be securities offerings, and only give a pass to the ones that really clearly aren't. This is not so much a story of regulatory overreach as it is of regulatory-evasion overreach; if a whole industry develops on the incorrect theory that it can help you get around the rules, the people in charge of enforcing those rules are going to treat it with suspicion. This is a general problem with crypto; there were so many years of "illegality isn't illegal if it's on the blockchain!" that it is hard to retreat back to respectability. Last year, there was a suggestion that the U.S. Treasury might want to regulate initial coin offerings as money transmitters. I wrote: It is a fundamental problem. If you try to raise money by selling blobzooks, you might think "well, there is no agency that regulates blobzooks, so I can sell them with no regulation." But in fact the more likely outcome is that every agency will take a look at your blobzooks and decide that they fall under its purview. ICOs were a way to sell securities without calling them securities. But the SEC quickly saw through that and declared that ICO tokens were securities. But they're also money transmitters. They're probably commodities and insurance and cigarettes and nuclear waste too. They're not less regulated than stocks; they're more regulated than stocks: They didn't fit in any existing regulatory category, so they can be claimed by all of them. That's something like what's going on here. So many people used crypto tokens to avoid securities law that the SEC has now decided that all crypto tokens are under its jurisdiction, even the ones that aren't securities: People were so bad at deciding which tokens were securities that now the SEC will make that decision for them. Things happen SEC Moves to Ease Audits for Smaller Companies. Banks Waking Up to Fintech Threat Throw Billions Into Digital. Hedge fund manager succession. Moody's India Unit Probing Whistle-Blower Charges on Debt Rating. Ex-Fugees Rapper Poised to Be Charged in Case Tied to Obama Funding, 1MDB. Fake New York Socialite Scammer "Anna Delvey" Has Been Sentenced To At Least 4 Years In Prison. A Wake-Up Call for Grads: Entry-Level Jobs Aren't So Entry Level Any More. Scaramucci's Vegas Show Returns With an Accent on Trump Insiders. A unicorn-stampede chart. The Aperol Spritz Is Not a Good Drink. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Minus the bankers' fees, of course, which as I've previously noted seem to be 1%, or about $81 million. (You can tell from the "Use of Proceeds" section of the prospectus, which says that "Each $1.00 increase (decrease) in the assumed initial public offering price of $47.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $178.2 million": If selling 180 million shares for an extra dollar gets you $178.2 million, then you're paying $1.8 million in fees per $180 million raised, or 1%.) That's low for an IPO generally, but not so unusual for a blockbuster IPO; Facebook Inc. paid its bankers 1.1%. Also, I mean, Uber's bankers apparently promised it a $120 billion valuation and got it an $84 billion valuation. I'm not sure they deserve a big fee! [2] Again minus the fees. [3] I am basing this on normal practice, not any inside knowledge, and in fact it is theoretically possible that they allocated *more* than 207 million shares—that they went "naked short" some number of shares. Banks sometimes do this when they expect an IPO to trade poorly, and want additional ammunition to stabilize it. It's pretty uncommon, though, and given the noise that the banks have made about strong demand at the lower end of the range, expectations for a pop, etc., it seems unlikely that it happened here. [4] Really! There are specific Securities and Exchange Commission rules allowing and regulating it. (Among other things, it can only be done "for the purpose of preventing or retarding a decline in the market price," and you have to do it at or below the offering price.) It annoys people, though, and you occasionally see lawsuits questioning whether it's really legal. [5] Strictly, three directors (Camp, Kalanick and Ryan Graves) and one venture capital fund that is represented on the board by a director (Matt Cohler of Benchmark). |
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