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OPINIONFinancing

Mini-IPO companies find little love on Wall Street

Fat Brands and iPic Entertainment have both struggled to create investor enthusiasm, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

So much for the idea that the mini IPO will take over restaurant finance.

A year ago, the small-scale initial public offerings were all the rage. Numerous companies, including restaurant operations such as Fat Brands and iPic Entertainment, were using a relatively new federal law, Regulation A+, to sell stock to their customers in a bid to raise growth capital.

But so far, those companies have struggled to win over Wall Street. Both Fat Brands’ and iPic’s stocks have floundered in the months since they were listed on the Nasdaq stock exchange.

Fat Brands priced its shares at $12. It closed Monday below $8 a share, down 30%.

And iPic, which sold its shares at $18.50, is currently trading below $7, a decline of 65%.

By contrast, restaurant stocks are up 5% over the past year, according to the S&P 500 Restaurant Index, and 2% over the past six months—though, to be fair, this has been a generally weak market for restaurants.

The industry has underperformed the broader market over the past year: The S&P 500 is up more than 16% over that time frame.

Yet the performance of the mini IPOs on Wall Street probably make it less likely that other up-and-coming restaurant chains will use the funding mechanism anytime soon.

Regulation A+ enables companies looking to raise smaller amounts of capital to do so by marketing their IPOs to their customers. Small companies traditionally struggle to get the attention of the big investment banks that control the traditional IPO market. This gives them the option to raise funds from customers or fans of the product.

Theoretically, this would be a great idea for restaurant chains that have a lot of customers and a heavy need for capital. So it was an interesting idea last year when a handful of concepts opted to try this funding strategy for themselves.

One, Bobby’s Burger Palace, never got off the ground.

Another was Muscle Maker Grill, which wanted to raise $20 million in a mini IPO it announced last year. It raised just $143,497. Yesterday, we wrote about the lawsuits the company faces after it closed eight of its 13 company-run units.

Muscle Maker had warned in its SEC filings during its IPO that its auditors had expressed doubt about the company’s ability to continue as a “going concern.”

The experience of the restaurant chain mini IPOs is common across industries. In February, Audit Analytics analyzed 290 companies that tried Regulation A+ offerings.

Only 40 of the 290 companies were able to complete their offerings. Nine companies at the time were listed on a major exchange, eight of which lagged the market.

The ninth was LongFin, which rose from $5 to $140 after acquiring a blockchain company before settling at $35. It has since been hit with a securities suit and is trading at … around $5.

Both iPic, a movie theater-restaurant hybrid, and Fat Brands, owner of Fatburger, have had same-store sales growth. Same-store sales rose 6.9% in the second quarter at iPic and its store-level EBITDA, or earnings before interest, taxes, depreciation and amortization, rose 66%. But it reported a net loss of $8.5 million.

Same-store sales at Fatburger rose 9.5%, meanwhile. And the company has agreed to acquire Hurricane Grill & Wings since its IPO, in addition to its previous purchase of Ponderosa and Bonanza.

But the company is also facing some lawsuits from shareholders that claim Fat Brands doesn’t have the cash to meet its promised dividend of $5 million, and that sales at Ponderosa and Bonanza haven’t been as strong as projected when the brands were purchased.

Fat Brands’ stock has surged a bit in the past couple of days and was up another 4% Tuesday.

These are just a couple of companies, and it would only take one strong mini IPO for the small offerings to become the next big thing again.

But the early performances of the mini IPOs make that less likely. On top of that, they’re not even that necessary. The market is providing plenty of financing for growth companies.

There’s a lot of private-equity money flowing into restaurants—probably too much, in fact. Small chains are also getting a lot of help from venture capital firms and restaurant accelerators. Other types of investors are buying struggling chains, hoping to pair them together and help their long-term survival as cash generators.

The public markets can be painful, with expenses and earnings reports and investors who are less keen on long-term growth investments. That probably keeps stronger growth chains, the one that theoretically would get the most investor enthusiasm, from needing something like a mini IPO to raise cash.  

In other words, there just isn’t quite the demand for financing that there was in early 2012 when the mini IPOs were made possible by the JOBS Act.

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