With the approaching initial public offering of Kushner-Locke Inc.’s Internet spin-off, US Search Corp.com, there’s buzz around town about an obscure S-3 filing Kushner-Locke filed back in February.
As we mentioned a few weeks back, some online junkies are buying Kushner-Locke as something of a proxy for the US Search IPO stock. Some fear that otherwise, they’ll get boxed out of the US Search IPO by big institutional investors.
US Search conducts online background checks and finds other public records. Kushner-Locke, best known as an independent film and television producer whose stock has basically gone nowhere in the ’90s, will be the 86 percent owner of US Search after the IPO. If US Search becomes yet another Internet IPO skyrocket and there is no guarantee of that, as many tech stocks tumble Kushner-Locke stock could be a hit as well.
That speculation sent shares soaring in April, when it hit a high of more than $20, after trading below $5 for most of 1998. Last week the stock settled back in the $13 range.
Online investors aren’t the only ones snagging Kushner-Locke. According to the February SEC filing, Gordon Crawford and David Siminoff, both with behemoth downtown money fund Capital Research & Management Inc., in December 1998 acquired 20,000 and 25,000 shares, respectively, at $5 each, through a private placement that included other investors as well. Kushner-Locke raised $6 million, minus some fees, to help launch US Search.
People in brokerage circles are talking about the investment because it shows that even the big boys believe there’s something to Kushner-Locke. If size means you’re smart, Capital Research, with $275 billion under management, is plenty smart. By buying the stock through a private placement, Crawford and Siminoff assured that their purchase which would have likely resulted in a surge in Kushner-Locke’s stock if handled through the open market stayed under Wall Street’s radar screen.
The always reticent Capital Research wasn’t talking last week about Crawford or Siminoff. A spokesman for Kushner-Locke said that as of February, the two investors were free to sell or keep their shares without informing the production company.
Which means the pair may have already sold their shares and made a very nice return.
Teach the SEC a lesson
You can do an initial public offering in today’s robust markets, but part of the job may be a little friendly education for SEC staff lawyers, said Robert M. Steinberg, partner and securities expert with Jeffer, Mangels, Butler & Marmaro LLP in Century City.
“The securities markets have been on fire, for maybe five or 10 years, and the SEC hasn’t been able to train enough people,” said Steinberg. “Often times, a filing becomes part of the education process for the SEC examiner assigned to the filing, as well as for your clients.”
When a company files to sell stock to the public, it must register the equity with the SEC, and make public disclosures. An SEC examiner will vet the disclosures, usually for completeness. Steinberg said most SEC examiners are quick studies, “but it can take a little extra time and work to get it (a filing) past a new examiner.”
It isn’t only the public sector that gums up the works. With so many companies going public, and with less-skilled underwriters handling assignments, Steinberg finds that “the lawyer’s role tends to become time-consuming” in educating all parties about what has to be disclosed and why, as well as how.
Steinberg has been busy of late, recently acting as counsel for Costa Mesa-based Emulex Corp., which issued $128 million of common stock in a secondary offering May 20 though Steinberg is quick to point out that Emulex, having long ago done its IPO, was not one of the clients that needed a lot of handholding.
Like others in the IPO world, Steinberg has noticed the trend of underwriters taking private, pre-IPO stock in an offering. Even some law firms do it, but Steinberg said Jeffers, Mangel won’t do it as a matter of policy.
“There is the potential for a conflict of interest, for losing your objectivity as a lawyer,” said Steinberg.
Check the patents
The transition from start-up to a more mature company seeking second-stage venture capital en route to a possible initial public offering is not without some pitfalls, warns Ron Warner, partner in downtown Los Angeles with Arter & Haden.
Many entrepreneurs, busy enough running a growing enterprise, don’t think about attracting and retaining chief executives and other senior people who will make the right impression with Wall Street financiers. “They don’t tie the executives enough,” said Warner, a New York University grad.
Another common problem is neglecting patent products and trademarks. And if the second round of financing is won, companies need to think about marketing arrangements, and making sure solid contracts are in place with vendors and customers where possible.
“When a company is on a steep growth ramp, they need to make sure supply contracts are in place,” said Warner.
Naturally, negotiating financing is yet another ball of wax, said Warner. Like some others, Warner has noted a new wrinkle in investment banking more brokerages are offering venture capital, often taking private stock in a company, prior to an IPO.
Not overpaying
After 20 years banging around in venture capital circles, John Geer, managing director for Mellon Ventures Inc., had a surprising observation last week: He does not think companies are selling for overly rich valuations, despite the chorus of complaints about “too much money chasing too few deals.”
Venture capitalists tend to be more seasoned than stockbrokers and money fund managers, Geer says, and they’re not overpaying for early-stage companies because they remember the early 1990s, when values dissipated in the recession.
“There are a number of seasoned players in the market, who like me are over 50 years old,” said Geer. “We have a few scars to show for it.”
Nevertheless, Geer will go into somewhat iffy situations, “if the return is more than 30 percent.”
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
