The roadshow is a right of passage for any company raising capital through debt or equity issuance. Senior executives, well coached by their underwriters, give a presentation to institutional investors to generate demand for the offering. Typically, the presentation lasts a couple of hours and is often part of a breakfast or lunch. These roadshows take place in as many major financial centers as the executives’ underwriters think is appropriate, or can afford.
But since the webcasting of conferences and corporate announcements first took off among US companies in the late 1990s, many public companies have also begun extending the scope of their roadshows by using new technology. The benefits of electronic roadshows include lowering the cost of promoting an offering while reaching a wider audience, reducing wear and tear on company executives and providing a consistent message to prospective investors.
When the first companies began to provide services in this emerging niche, they were faced with some major hurdles. These were not of the bandwidth or video software variety, but rather regulatory.
Until 1997 companies were not really allowed to offer a video of an IPO roadshow on the internet, or through other means; the SEC only allowed the prospectus itself to be distributed. However, prompted by developments in webcasting and a tech boom that was featuring dozens of new IPOs every month, several issuers saw the opportunity to use technology to market their securities. It was then that they asked the SEC for a ruling.
Spoken or written?
The basic question was whether video on the internet was defined as written or oral communication. Written communication about an issue or about an issuer’s prospects – apart from the prospectus itself – was banned, but the SEC had previously ruled that one-on-one meetings and traditional live roadshows were oral communication. That meant they were allowed under the 1930s era regulations.
In a series of letters between 1997 and 1999, the SEC confirmed internet video could be classified as oral communication and that it would take no action against the applicant companies doing electronic roadshows as long as they met certain conditions. Namely, they had to limit the distribution of the broadcast; ensure that subscribers received prospectuses before the broadcast; and take reasonable steps to ensure information in the roadshow broadcast was not inconsistent with the filed prospectus.
‘We were the first to get the approval from the SEC to do roadshows in this way and it was all over the cover of the Wall Street Journal,’ says Brad Hammond, vice president and general manager of Yahoo NetRoadshow. ‘It has dramatically changed the way securities are offered. At one time it was kind of a novel medium, but now it has become more widely accepted and straightforward.’
Although other firms have been providing electronic roadshows, particularly for private placements which have fewer regulatory hurdles, NetRoadshow and Bloomberg have emerged as the two leading service providers.
Both companies offer an audio or video stream along with synchronized slides. The roadshows are typically recorded in front of the institutional salespeople at the issuing company’s investment bank. This live audience might ask questions that are likely to be of interest to the wider audience of investment managers, or the roadshow might include just the presentations. The broadcast is usually only accessible by the institutional audience for a short period of time, after which it is destroyed.
NetRoadshow early on took a dominant position in equities roadshows. Bloomberg, which got its no-action letter from the SEC soon after NetRoadshow, built upon its debt expertise to quickly build market share for fixed income roadshows. At first it offered access to the roadshows only through its proprietary institutional network, but in the past six months Bloomberg has made a concerted effort to grow its business on the equities side by introducing dual distribution on the internet and its network. According to Angela Smith-Domzal, who is in charge of the roadshows product at Bloomberg, the company has also added functionality and made its system easier to use.
Indeed, Hammond explains that the internet is currently being used more and more at financial institutions. ‘What has happened is that many people who were just doing everything on the [Bloomberg] terminal a few years ago are now using the terminal and the internet.’
But Smith-Domzal says the internet is still far from being the main tool used by traders and people in the primary areas of the marketplace. ‘The institutional market very much wants an institutional platform, and that’s usually a Bloomberg platform. There is free information out there but I think the institutional market needs quality and information that they can be sure is credible enough for them to base their decisions on,’ she adds.
International outlook
Live roadshows in support of deals from large US companies often take in major European and Asian financial centers. By making a roadshow available to investors who might not otherwise get to see the management and hear about the deal in person, the underwriters can boost the chances of achieving success in their book-building mission. Most countries don’t object to US deals being marketed electronically, though the situation for deals originating in other markets isn’t yet clear.
For international deals by US companies, the consensus among market regulators is that if you have the agreement of the SEC, you’re blessed in other markets. This is mainly because of the stringency of SEC requirements. Bloomberg’s Smith-Domzal points out that Europe has less regulation around deal-related information generally, including roadshows.
‘We would also like to do more in emerging markets where there has been a lack of clarity on the status of electronic delivery of deal-related information,’ she says. ‘We have applied for no-action letters and are talking to the regulators and trying to get approval. This is the case in Asia particularly.’
NetRoadshow, too, is keen to extend its operations to other markets, says Hammond. ‘We’ve met with securities regulators in the UK, Hong Hong and Japan and we’re in talks with China,’ he explains. ‘We have the attorneys in place and we’re working on the details now. Things are going well in Europe, and we anticipate no problems there. In Hong Kong we’re still working on it and I expect by the end of the year we’ll be in a position to announce something. In Tokyo we’ve been working at it for about 18 months and we have just started talking to the regulators in China.’
These talks aren’t really aimed at getting new legislation put out just for electronic roadshows, adds Hammond. ‘It’s just getting to a stage where the regulators are comfortable with what we do, and we’re comfortable that we understand the regulatory environment.’
Level playing field
But while the providers of electronic roadshows grapple with regulators in new markets, the SEC itself has yet to finalize its rules for electronic communications. Since its last no-action letters in this area in 1999, the commission has been working on this and other technology related issues. Of key concern to many market participants is how the current rules on electronic roadshows relate to the SEC’s other rulings on selective disclosure. Indeed, retail investors have almost always been locked out of roadshows for new deal issuance.
As SEC staff have gained more experience with electronic roadshows, the commission has relaxed the restrictions by expanding the number of qualified viewers. Charles Schwab has received no-action letters that allow it to offer access to electronic roadshows to its frequently trading, high net worth customers, but only if Charles Schwab is involved in the underwriting syndicate for the deal.
But despite stating that a more level playing field is one of its goals, the SEC still has concerns that currently limit retail investor access. It wants to make sure underwriters don’t develop two different versions of the roadshow – a full-bodied version for traditional institutional audiences, complete with earnings projections and other material information often presented at roadshows but not included in the prospectus, and a watered-down ‘roadshow light’ version for retail investors that consists primarily of management interviews.
Industry bodies such as the Securities Industry Association (SIA) and Bond Market Association have called for electronic roadshows to be allowed for both institutional and retail investors while still being viewed as oral communications. In addition, they want to eliminate the requirements that the preliminary prospectus be delivered to participants before the broadcast, and that the electronic roadshow has to be a live or recorded transmission of a roadshow that is actually presented to a live audience.
For now, what was an innovative use of technology in 1997 has become a standard part of new deal issuance in the US; and in their current form electronic roadshows will likely spread to other markets. Further innovation, however, will have to wait until the SEC issues new rules which, considering the regulator’s current preoccupation with auditors and accounting rules, may not be very soon.
