Financing Public Companies
Through Exempt and Hybrid
Securities Offerings
October 7, 2009
NY2 659815
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© 2009 Morrison & Foerster LLP All Rights Reserved
Market windows
• Sources of liquidity are critical in today’s capital markets.
• It is important to understand the range of financing
alternatives and the potential advantages and
disadvantages associated with each.
• It is important to prepare for a financing so that when a
market “window” opens, an issuer can finance quickly.
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Financing continuum
Private
• Conventional
private
placements
• Private
placements with
trailing
registration rights
Hybrid
• Traditional PIPEs
• Structured PIPEs
• Private equity
lines
Less Liquid
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• Registered direct
offerings
• 144A offerings
More Liquid
Public
• Underwritten
offerings
• Bought deals
• At-the-market
offerings
• Equity shelf
programs
• Rights offerings
Liquid
3
Capital raising approaches
• Offerings that do not involve an extended marketing
period
 Public deals with lead investors or “anchor” investors
 Public deals with pre-marketing done on a confidential basis
 PIPEs and registered directs
 At-the-market offerings
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Capital raising approaches (cont’d)
• Offerings that are not subject to SEC comment.
 Requires that the issuer have an effective shelf registration
statement
• Offerings that include an offering to existing investors
 Rights offerings
• 144A offerings — both debt and equity
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Developments Affecting PIPEs
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PIPE
A PIPE (Private Investment in Public Equity) is the privately
negotiated sale (i.e., a private placement) of a public
issuer’s equity or equity-linked securities to investors,
where the sale is conditioned upon a resale registration
statement being filed with, and declared effective by, the
SEC (permitting immediate or prompt resale).
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PIPEs: changing terminology
“PIPE” has come to mean any private investment in a
public company, including:
•
•
•
•
•
•
A traditional PIPE;
A private placement with delayed (or trailing) resale registration
rights;
A private convertible preferred (fixed or floater) or structured
PIPE;
A venture-style, or change-of-control, private placement;
A registered direct; and
A private “equity line” or equity shelf program.
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Standard PIPE terms
• Private placement to selected accredited investors;
• Investors irrevocably commit to purchase a fixed number
of securities (common stock or fixed rate/price preferred
stock) at a fixed price, not subject to market price or
fluctuating ratios;
• Purchase agreements are negotiated and executed with
investors;
• Transaction funds and closes; and
• Issuer undertakes to file a registration statement
covering the resale by the investors of their shares.
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PIPE trends
Number of Deals
Dollars Raised
2008
1,211
$ 121 billion
2007
1,859
$ 66 billion
2006
1,755
$ 35 billion
2005
1,492
$ 19 billion
*Data: PrivateRaise.com
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PIPE trends (cont’d)
• More deals and more larger deals getting done
 the average deal size in 2008 continued to increase; and
 over ¾ of the deals were done by companies eligible to use an
S-3 on a primary basis (over $75 million in public float, excluding
affiliates).
• More “mainstream” financing being used by large public
companies as an alternative to a marketed follow-on, a
bought deal or an overnighter.
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PIPE trends (cont’d)
• More common stock and common stock with warrant
deals; fewer convertible deals
• More sector/institutional buyers and financial sponsors
participating in PIPEs
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Registered Direct Offerings
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RDs allow an issuer to achieve
•
A Registered Direct offering is a “best efforts”
placement of registered common stock off an issuer’s
existing effective shelf registration statement,
generally, to a limited number of institutional investors;
the securities are immediately eligible for resale.
•
The Registered Direct is a “private style” public
offering which is, in some ways, an extension of the
PIPE; the number of Registered Direct offerings has
been trending upwards in the last several years and
now accounts for approximately 10-15% of overall
“PIPEs.”
•
Registered Direct offerings have characteristics of
both public and private offerings; thus, they are
governed by the rules, regulations and market
practices specific to each type of offering.
public style pricing while
maintaining the relative
confidentiality of a private
placement.
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Registered Direct offerings
• The market is in a cycle where registered direct offerings
work well;
• A registered direct is most efficient when the issuer
already has an effective primary shelf registration
statement (although registered directs also can be used
to sell secondary stock); and
• Registered directs are being marketed and sold by the
private placement groups of many large investment
banks as “registered PIPEs” or “strategic publics.”
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Registered directs
• With a greater number of issuers eligible to use a shelf,
registered directs will become an even more important
financing alternative
• Two considerations:
 Nasdaq and other 20% rule limitations
 1/3 cap on primaries or smaller public companies
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More “tandem” deals
• Smaller public companies may need to consider
pursuing contemporaneous offerings in order to address
the 1/3 cap
• Important to keep an eye on integration issues
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Standard terms of registered directs
•
If a shelf registration statement does not already exist, a registration
statement on the appropriate form is filed with the SEC;
•
Offering is conducted on an agency basis by the placement agent. Although
the placement agent is likely to be a statutory underwriter, use of the firm’s
capital is not required;
•
Offering is either on an all or nothing basis (escrow required) or on a
minimum/maximum basis (escrow required) or on an any or all basis
(escrow not required);
•
Purchasers generally do not negotiate or sign individual purchase
agreements with the issuer;
•
Closing can occur as soon as the registration statement is declared
effective (if there is no shelf in place); and
•
Closing occurs on a normal T+3 schedule.
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Considerations for issuers
• Press release announcing filing of registration statement (if no shelf)
mentions that offering is targeted to selected institutional investors.
This factor tends to limit, or eliminate, shorting of the securities
between filing (if no shelf) and closing;
• Registered directs normally are used for follow-on offerings, but can
be used for IPOs. With follow-on offerings, discount to market is
usually no greater than with a standard follow-on;
• Because the distribution of securities is covered by a registration
statement, investors have immediate liquidity. In fact, the securities
trade on a “when issued” basis;
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Considerations for issuers
• The 20% Rule is being applied to Registered Directs unless agents
can demonstrate broad distribution;
• Because these transactions are registered, offering can be made to
virtually any potential investor, subject to appropriate suitability
requirements;
• Registered directs are typically faster (and cheaper) than firm
commitment deals and not subject to a significant discount (like a
private transaction); and
• Hedge funds are unlikely to short between filing and closing.
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Registered Direct offerings market
Considerations
Benefits
Description
Summary Comparison of Financing Alternatives
Common Stock PIPEs
Common Stock RDs
• Company sells unregistered common
stock to a targeted group of institutional
investors in a private placement, with an
agreement to file to register the
securities typically within 30 days after
the offering
• Company sells registered equity off an
existing shelf registration statement to a
targeted group of institutional investors
following a 3-day marketing period
• Company sells equity off an effective
registration statement to a large group
of investors in a registered offering,
typically following a 10-day marketing
period
• No upfront SEC registration
• Can be executed quickly, usually within
1-2 weeks post transaction launch
• Limited market risk as transaction is
confidential/discreet
• Ability to size transaction to company
needs and investor response
• Broad addressable investor base
• Can be executed very quickly,
oftentimes with 3-5 days post
transaction launch
• Ability to size transaction to company
needs and investor response
• Pricing dynamics similar to fully
marketed follow-on
• Best opportunity to communicate
strategy and company story
• Best opportunity to broaden shareholder
base
• Improves liquidity
• Offered at a negotiated discount to
recent average closing price given
illiquidity of shares
• Limited improvement to liquidity in shortterm
• May require the issuance of warrants
• Offered at a negotiated discount to the
then current market price
• Shelf registration statement must be
effective prior to transaction launch
• Requires legal opinion and comfort
letter
• Most significant roadshow time
commitment
• Requires up-front SEC registration
• Potential share price impact from
announcement to pricing
• Public transaction
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Fully Marketed Follow-on
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Registered Direct offerings market
Agents/
Managers
Timing
Pricing
Description
Summary Comparison of Financing Alternatives
Common Stock PIPEs
Common Stock RDs
Fully Marketed Follow-on
• Typically sold to a targeted group of investors
(usually 15 or fewer, subject to offer size)
• Opportunity to attract new institutional
shareholders by offering key institutions
enough shares to give them a core position
• Investors include mutual funds, public crossover investors, private equity investors,
financial institutions and hedge funds
• Typically sold to a targeted group of investors
(usually 15 or fewer, subject to offer size)
• Opportunity to attract new institutional
shareholders by offering key institutions
enough shares to give them a core position
• Investors include mutual funds, public crossover investors, private equity investors,
financial institutions, and hedge funds
• Significant opportunity to attract new
institutional investors
• Key institutions can be allocated enough
shares to give them a core position
• Investors include mutual funds, public crossover investors, financial institutions and hedge
funds
• Modified book building; usually priced at a
negotiated discount to recent average closing
price
• Transparency of order book between issuer
and agent
• Modified book building; usually priced at a
negotiated discount to the then current market
price
• Transparency of order book between issuer
and agent
• Book building; pricing will be based on the
then current market price subject to sensitivity
in order book
• Typically negative share price impact between
filing and price
• Lack of transparency of order book between
issuer and “underwriter”
• Offering does not require up-front SEC
registration
• Can be completed in 1-2 weeks post
transaction launch
• Targeted marketing over a 3-5 day time
period, predominately via a limited number of
one-on-ones and conference calls
• Offering requires up-front SEC registration
(shelf registration statement must be
effective)
• Can be completed in 3-5 days post
transaction launch
• Targeted marketing over a 3-day time period,
predominately via a limited number of one-onones and conference calls
• Can be completed in 4 weeks from filing
(assuming no review); 8+ weeks (with a
review)
• Marketing process via multi-city roadshow
usually lasts approximately 10 days
• Typically sole agented given quick process,
targeted investor set, premium on consistent
message, negotiated transaction
• Typically sole agented (“best efforts”
underwriting) given quick process, targeted
investor set, premium on consistent message,
negotiated transaction
• Typically multiple managers (“firm
commitment” underwriting) given larger
transaction size, broad marketing effort
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Registered Direct offerings market
• Summary Comparison of Financing Alternatives
RDs Summary Comparisons
RDs are similar to PIPEs:
• Generally targeted marketing to
institutional investors primarily via limited
number of one-on-ones and conference
calls
RDs are similar to underwritten public
offerings:
• Investor overlap (i.e, mutual funds, public
cross-over investors, hedge funds, etc.)
• Similar documentation, due diligence
• “Stealth” execution / confidential
marketing
• Pricing similar to (or sometimes better
than) public offerings
• Investor overlap (i.e, mutual funds, public
cross-over investors, hedge funds, etc.)
• Shares immediately available for resale
• Flexible sizing; accommodative of smaller
deal size
• Typically sole-agented
• Usually subject to Nasdaq 20% Rule
RDs are dissimilar to PIPEs:
• Registered vs. unregistered distribution
• Requires an effective shelf registration
prior to transaction
• Pricing similar to public offerings
RDs are dissimilar to underwritten
public offerings:
• “Best efforts” vs. “firm commitment”
• Generally no public announcement until
commitments are in place to close the
offerings
• Offering terms (shares, pricing, etc.) not
filed before marketing
• Confidential marketing
• Generally limited distribution
• Research not required / necessary
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Securities Exchange Requirements
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Considerations for issuers
• NASDAQ Rule 5635(c) (other exchanges have similar
rules) requires shareholder approval for certain types of
transactions:
 Issuances that may exceed 20% of the pre-transaction total
shares outstanding (“TSO”) or voting power that are priced at
less than greater of book or market value.
 Sales by officers and directors are aggregated with those issued by
the company.
 “Market price” is the closing bid price on the date immediately
preceding the date of execution of binding agreements.
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Considerations for issuers (cont’d)
• Issuances that may exceed 20% of the TSO or voting
power if made in connection with the acquisition of stock
of another company.
 This applies to both above and below market issuances.
• Issuances that may result in a change of control.
 If a transaction results in an investor (or group of investors)
obtaining a 20% interest, or the right to acquire such an interest,
the transaction likely is a change of control for 20% rule
purposes.
 There is an exception for pre-existing control positions.
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Considerations for issuers (cont’d)
• NASDAQ will consider the following factors in
aggregating private placement transactions for purposes
of the 20% rule:






Timing of the issuances;
Commonality of investors;
Existence of contingencies between the transactions;
Similarities between deal structures;
Commonalities as to use of proceeds; and
Timing of the board of director approvals.
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Considerations for issuers (cont’d)
• Rule 5635(c) applies to issuances of equity securities and any
security convertible into or exercisable for equity securities.
• Issuers and placement agents must be cautious of the impact
of warrants.
 Blended average test: if the common stock portion alone is less than the
applicable threshold and is priced below the greater of market and book
value, but the deal includes warrants that push the offering over the
threshold, shareholder approval is required unless the warrants are
issued at or above market and are not exercisable for at least six
months (the warrants are excluded from the calculation).
 1/8 test: if the common stock portion alone is more than the applicable
threshold, NASDAQ will attribute at least $0.125 in value to the
purchase of the unit for each share purchasable by a warrant,
regardless of whether the exercise price exceeds the market price.
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Considerations for issuers (cont’d)
• Rule 5635(c) does not apply to “public offerings.”
• An issuer may avoid triggering the 20% rule by
implementing a share cap, or pricing floor.
 The cap or floor must remain in place for the life of the security
or until shareholder approval is obtained.
 Caps cannot contain penalty provisions or “sweeteners,” which
are triggered on the outcome of the vote.
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At-the-Market Offerings
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What is an at-the-market offering?
• An offering of securities into an existing trading market at the
publicly available bid price, rather than at a fixed or negotiated price.
• Commonly referred to as “equity distribution” or “equity dribble out”
programs.
• Shares are “dribbled out” to the market over a period of time at
prices based on the market price of the securities.
• The number of shares sold in any single offering is not considered
significant relative to the public float or daily trading volume.
• Do not involve any special selling efforts.
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Compare to traditional follow-on
At-the-Market Offering
Follow-on Offering
•
A continuous offering.
•
A “bullet” or single offering.
•
Shares are dribbled out.
•
Shares are sold all at once.
•
Sold on an agency basis through
one or more placement agents, or
on a principal basis.
•
Sold as principal through a
syndicate of underwriters.
•
Issuer determines timing, amount,
floor price and duration of any
issuance.
•
The timing and size of issuance is
based on demand.
•
Quiet sales eliminate “front
running.”
•
Investors can “front run” the
offering.
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Market for ATMs
• EDPs have become more common.
• In 2008 and 2009, a number of large, WKSI issuers
conducted successful at-the-market offerings:




Carnival Corporation;
Ford Motor Company;
Freeport-McMoRan; and
Financial institutions, including Bank of America, KeyCorp and
SunTrust.
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Shelf Registrations
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Forms S-3 and F-3 Available for Primary
Offerings by Smaller Reporting Companies
• Previously, an issuer needed a $75 million public equity
float in order to use these forms for a primary offering.
• Conditions:
 Issuer must satisfy the other form requirements.
 Issuer is not, and has not been for at least 12 months before
filing, a “shell company.”
 Issuer must have a class of common equity listed on a national
securities exchange. (i.e., not the OTC-BB or the “pink sheets”)
 Issuer does not use Form S-3 to sell, in any 12-month period,
more than one-third of its public equity float.
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Why Is Form S-3/F-3 Eligibility Important to
Smaller Issuers?
• Permits shelf-takedowns in primary offerings under Rule 415.
• Incorporation by reference of periodic reports filed after the effective
date of the registration statement – no need to file post-effective
amendments to reflect new business and financial developments.
• Historically, the SEC Staff has been less likely to review, and
comment on, short-form registration statements than long forms.
• No SEC review of documents for a specific take-down.
• In short, Forms S-3 and F-3 provide quicker access to capital when
a “market window” is open.
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Use of Shelf Registration Statements and Shelf
Takedowns Has Increased in Recent Years
• According to Thomson, in 2002, 1,583 shelf registrations
were filed raising $1.86 billion in offering proceeds.
Thomson reports that 2,264 shelf takedowns were
completed raising $581 million.
• In 2007, Thomson reports that 1,997 shelf registrations
were filed raising $3 billion in proceeds. Thomson
reports that 1,142 shelf takedowns were filed in 2007
and raised $831 million in offering proceeds.
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The Use of Shelf Registration Statements and
Shelf Takedowns Has Increased in Recent Years
• According to Dealogic, shelf takedowns accounted for
$71.3 billion in 2007, or 66% of SEC registered follow on
offerings. According to Dealogic, preliminary 2008
numbers show that shelf takedowns accounted for
$149.2 billion, or 74% of SEC registered follow on
offerings.
• Thomson’s preliminary 2008 numbers report that 1,522
shelf registrations were filed raising $1.55 billion in
proceeds. Thomson’s preliminary 2008 numbers for
shelf takedowns show 942 shelf takedowns accounted
for $857 million in proceeds.
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Limitation of Sales Equal to 1/3 of Public Float
During Any 12-Month Period
• June 2007 proposing release initially proposed a
limitation of 20% during any one-year period.
• Commentators objected strongly, and the SEC increased
the limitation to 1/3.
• Companies that exceed the 1/3 cap under Form S-3 or
F-3 can still complete offerings using a form such as
Form S-1/F-1, or in unregistered (exempt) transactions.
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Calculation of the 1/3 Limitation
• Public equity float may be based upon any date during the 60
calendar trading days prior to the proposed sale.
 Similar to the previous requirement for S-3/F-3 eligibility, except that it
relates to the “time of sale,” as opposed to the “time of filing.”
• The price of all securities sold under the Form in the previous 12
months, including those subject to the new sale, will be used to
determine whether the 1/3 cap has been exceeded.
• As a result of this method, it is possible that an issuer’s capacity
may increase or decrease, as the market price of its shares
increases or decreases.
• The relevant prospectus supplement will be required to disclose the
calculation on the front cover.
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Relationship of 1/3 Cap to Size of Shelf
• Although the 1/3 cap will limit actual sales, smaller reporting
companies can register an amount of securities that exceeds
this amount.
• Any unused amount may be “rolled over” into subsequent
shelf registration statements, for purposes of calculating the
required filing fee.
• Smaller reporting companies, unlike WKSI’s, are not entitled
to use the “pay-as-you-go” system for the SEC registration
fee.
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Possible Removal of the 1/3 Limitation due to
Increased Public Float
• The 1/3 cap will be removed from an issuer if its public float
exceeds $75 million after the effective date of the registration
statement.
• However, if the public float of such a company falls below $75
million at the time that it files its next annual report, the cap
will be reimposed.
• Contrast: companies that initially file at a time at which they
satisfy the prior $75 million equity float for S-3/F-3 eligibility
will not be subject to the 1/3 cap, even if their public float
declines to less than $75 million after the effective date.
(As per the existing rules.)
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Contemporaneous offerings
• There may be smaller issuers that may choose to
consider a take-down off of a shelf (subject to the 1/3
cap) AND a contemporaneous exempt offering
 offering conducted in reliance on Reg S; or
 offering only to QIBs (in reliance on no-action letter guidance); or
 offering that is exempt from registration in reliance on 4(2) and/or
Reg D.
• Considerations
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Amendments to
Rule 144 and Rule 145
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Restricted Securities
• Restricted securities are securities that have been
acquired in transactions exempt from the registration
requirements of Section 5 of the Securities Act.
Includes, among other things:
 Pre-IPO stock;
 Stock issued in private placements; and
 Rule 144A securities.
• Rule 144 permits the resale of restricted securities,
subject to certain conditions, without registration under
Section 5.
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Restricted Securities (continued)
• Rule 144 provides a non-exclusive safe harbor under
Section 4(1) for selling securityholders that seek to resell
their restricted securities.
• A selling securityholder that complies with Rule 144 will
not be deemed to be engaged in a “distribution” of
securities and, therefore will not be considered an
underwriter.
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Rule 144/Rule 145 Amendments - An Overview
• Shorter, six-month holding period for public securities.
• One-year holding period for non-public securities.
• Non-affiliates have fewer sales limitations.
• Debt securities will no longer be subject to the manner of sale
restrictions.
• Form 144 filing requirements are simplified and reduced.
• Rule 145 has been revised, eliminating the “presumptive
underwriter” rule, except for transactions involving shell companies.
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Regulatory Environment
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Regulatory considerations
• SEC enforcement actions against hedge funds
• SEC investigation of prime brokers “reserving” borrow for
hedge fund participants in PIPEs
• SEC comments relating to small-cap companies in
PIPEs that result in a substantial increase in total shares
outstanding
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PIPE enforcement actions
• Stemmed from SEC hedge fund investigation
• Involve three basic findings:
 Insider trading: hedge funds that traded in possession of material
non-public information (prior to a PIPE being publicly
announced)
 Shorting: naked shorting, shorting using Canadian brokers and
covering shorts with PIPE stock
 Market manipulation: engaging in sham transactions to drive
down price or affect volume in PIPE stock
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PIPE enforcement actions (cont’d)
• The SEC has suffered some recent set backs in the
PIPEs cases
 SEC v. Mangan
 SEC v. Lyon (Gryphon Capital)
 SEC v. Berlacher
• Likely to result in additional SEC guidance on short sales
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Best Practices
and
Areas of Risk
for
Unannounced Financings
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Actively managing the process
Step One
Step Two
Step Three
Step Four
with an eye on best practices
will mitigate risk
Preparation, Analysis & Due
Diligence for the Transaction
 PA advises and prepares
the Company
• Conduct
organizational
meeting
• Watch list
• Prepare offering
materials and
documentation
• Prepare script and/or
NDA
• Conduct due
diligence
• Establish investor
targets
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Marketing
Execution & Placement
Closing, Settlement & Funding
 PA conducts the
marketing process
• Market through
trained sales force
• Target investor
group
• Focus on know-yourcustomer obligations
• Arrange investor
conference calls
 PA manages the execution
and placement process
• Elicit timely
indications of interest
• Supervise and
streamline investor
due diligence, if any
• Negotiate pricing and
terms
• Coordinate legal
opinions, comfort
letter and closing
deliveries
• Secure investor
commitments;
announce deal through
a press release
 PA closes the transaction
• Manage trade
settlement process
• Document and close
• Assure timely
transfer of funds and
securities
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Best practices and areas of risk
• Unannounced financings in a Reg FD world
 Omnibus confidentiality agreements
 Transaction-specific confidentiality agreements
 PIPE/registered direct scripts
 Restricted lists
 Chinese Walls/Information Walls
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• Marketing practices
 Who markets PIPEs and registered directs within the institution?
 What training and supervision do the groups marketing PIPEs
and registered directs receive?
 What materials are sent to potential purchasers and by whom?
 How are reverse inquiries handled?
 Do non-deal roadshows still exist?
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Material non-public information
• What information is being shared with potential
purchasers?
• What is the anticipated duration of the marketing period?
• When will information shared with potential purchasers
be publicly disclosed? When will the information
become stale?
 Covenant to file an 8-K
 “Standstill” agreement
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Pre-marketing public offerings
• Assumes that the issuer already has an effective shelf
registration statement
 Will the eventual offering be a public or a private offering?
 Is the issuer’s disclosure grid current? is it necessary to file
updated risk factors? is it necessary to provide guidance on the
current quarter? on write-downs? On anticipated ratings
actions?
 What is the best approach for doing so (if needed)?
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Pre-marketing public offerings (cont’d)
 Plan ahead all of the required (or desired) filings (e.g., these may
include: 8-K, preliminary prospectus supplement or FWP, term
sheet, press release, final prospectus supplement)
• Issuer’s internal policies and procedures
 Consider communications/Reg FD policy
 Trading windows
 Insider participation
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Pre-marketing public offerings (cont’d)
From the financial intermediary’s perspective:
• Consider length of the marketing process
• Who will be involved in the marketing effort? (consider “Best
Practices”)
• Trading lists
• Selling restrictions
• Confidentiality agreements
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