LegalZoom flotation postponed as investors turn cautious

LegalZoom, the US online legal services platform set up in 2001, has postponed its planned initial public offering amid concerns that investors saw it as overvalued in the current market.

The flotation, intended to raise US$96m, was due to take place on the New York stock exchange on Thursday last week (2 August) with eight million shares being offered at between US$10 and US$12 each.

“The price was too high”, said Richard Cohen, solicitor and chief executive of legal document-assembly company Epoq, “and this deferral might affect their ability to move into other markets.”

LegalZoom posted a US$156m turnover last year, for a profit of US$12.1m, and had estimated cash reserves of US$20m.

But Cohen said current shareholders were probably a significant draw on the company’s profits, suggesting that an IPO price of about 30 times earnings was unrealistic when the company was probably just about breaking even.

UK expansion

Cohen said the deferral decision left LegalZoom “light in terms of free cash”, which would probably limit their expansion in other areas or jurisdictions, such as the UK.

LegalZoom senior executives made several trips to the UK last year as the company took its first steps towards launching on this side of the Atlantic. These plans could now be on hold, according to Cohen.

With initial investment from Polaris Ventures, the Glendale-based start-up raised a further $66m last year from venture capitalists Kleiner Perkins Caulfield and Byers and Institutional Venture Partners.

According to Reuters more than half of the shares being sold, 4.2m, were from current shareholders, and mostly from Polaris Ventures.

Richard Granat, founder of US online forms platform DirectLaw – in which Epoq has a 50 per cent stake – said institutional investors were willing to pay between US$7 and US$8 per share and were probably concerned at the competitive pressure on LegalZoom from other providers.

Many law firms, he said on his eLawyering blog, were fighting back and started offering cheaper online forms, often bundled with legal advice.

“Law firms are going virtual and are finally figuring out ways to compete against LegalZoom on its own playing field”, he said.

Another reason, according to Freeserve co-founder and the man behind Legal365, Ajaz Ahmed, could be that investors were worried about lawsuits being brought against LegalZoom in several US states.

The risk is highlighted specifically in LegalZoom’s listing prospectus, which says that as a business providing alternative services to traditional legal advice, it could be the subject of allegations of unauthorised practice of law.