A Registered Direct offering is a negotiated sale by an issuer to one or more investors of securities that have been registered pursuant to an effective shelf registration statement on Form S-3 under Rule 415 of the Securities Act of 1933, as amended. Rule 415 permits an issuer to register a specific dollar or share amount of securities without specifying the amount of any particular class or type of security or the timing or method of the offering. The issuer may then sell any or all of the registered securities directly to investors at a later date or dates of its choosing. A Registered Direct is like a PIPE in that securities are typically sold through a placement agent on a “best efforts” basis. Unlike in a PIPE transaction, investors in Registered Direct offerings receive free trading shares, and thus the pricing terms are typically more beneficial to the issuer than in a PIPE. The Firm is nationally recognized as one of the leading firms representing investment banks and institutional investors in private equity transactions of all types. These include registered direct and confidentially marketed public offering (or CMPO) transactions, PIPES and equity lines of credit, as well as more traditional underwritten public offerings. The members in our Corporate Practice group and their team have propelled the firm to be ranked at the top of all firms in the number of total completed PIPE and registered direct financings representing investors or investment banks according to the industry publications.
A PIPE or Private Investment in Public Equity is a private investment, either common stock or a convertible instrument, in a public company at a discount to the current market value per share. Within a short period following the investment in the public company, usually 30-60 days, the public company is required to file a registration statement and register the shares that were sold in the PIPE. The public company is usually required to have the registration statement declared effective within 90-150 days. A PIPE is a type of financing transaction undertaken by a public company, normally with a small number of sophisticated investors. In a typical PIPE, the company relies on an exemption from SEC registration requirements to issue investors common stock or securities convertible into common stock for cash. The company then registers with the SEC the resale of the common stock issued in the private placement or issued upon conversion of the convertible securities issued in the private placement.
The Firm has consistently been recognized as one of the most active law firms in the U.S. with respect to secondary offerings for public companies, including facilitating the consummation of registered direct offerings (RDOs), confidentially marketed public offerings (CMPOs), fully marketed public offerings, Reg A+ secondaries and private placements with or without registration rights (commonly referred to as PIPEs). In a typical year the Firm will be involved in over 100 secondary offerings per year. Below is a summary description of the more common structures our firm facilitates (which is by no means exclusive):
Registered Secondary Offerings
An issuer can register its securities in a secondary offering on either Form S-1 or Form S-3. Form S-1 is the long form registration statement which is available for to any issuer that wishes to undertake a registered offering. Form S-3 is a short form registration statement which may be used by issuers listed or quoted on a national exchange or market (not OTC) that meet the required filing obligations. Form S-3 permits an issuer to register a specific dollar or share amount of securities without specifying the amount of any particular class or type of security or the timing or method of the offering. One other thing to note about Form S-3 is that, if an issuer’s public market “float” is less than $75 million, that issuer is limited to using Form S-3 for the issuance of an amount of securities not to exceed 1/3rd of the issuer’s public float in any twelve month period (frequently referred to as “baby shelf” rules. If the issuer is not eligible to use Form S-3 or is unable to raise sufficient capital under the baby shelf limit, it may instead pursue a registration statement on Form S-1 which, as discussed above, may be used for any issuer for any offering. However, Form S-1 does not allow the same flexibility as Form S-3 and requires the issuer to be specific about the class and type of security being offered as well as the timing and method of the offering.
An RDO is a negotiated sale by an issuer to one or more investors of securities that have been registered in a primary offering directly to the investors. An RDO is never an “underwritten” offering (discussed further below) in the traditional sense since the placement agent, if any, is not purchasing the securities from the issuer and then distributing to the purchaser. Instead, the purchasers are entering into direct contractual commitments (either written or verbally through a prospectus) with the issuer and the agent, if any, receives a placement fee upon consummation of the offering. Prior receiving written or verbal commitments from the purchasers, the offering is conducted on a “best efforts” basis by the participants. Institutional investors are the typical investor in an RDO and in most cases require the issuer to enter into securities purchase agreements which may include substantial representations, warranties and covenants. However, in recent years some retail brokerage firms have entered the RDO market and conducted successful RDOs with retail investors through a simplified selling process by collecting verbal orders using just the prospectus supplement to the registration statement. The primary benefit of an RDO is that they may be executed on very quickly (in some cases hours) if sophisticated institutions are involved and negotiations with investors and pricing are almost always confidential before public announcement. The major downside of an RDO is that the issuer may be limited in what it can issue under the rules of the applicable trading market, as discussed further below.
A CMPO may be either “best efforts”, in which case it is very similar to an RDO, or “underwritten” by an investment bank. The primary difference between an RDO and a CMPO is that, after a period of confidential marketing, typically to institutions and retail brokers, the transaction is “flipped” to the public market. The CMPO structure has developed from Nasdaq and NYSE’s requirements for what constitutes a public offering for purposes of their 20% discounted offering rule. If conducted properly (after consultation with the primary trading market), the CMPO allows the issuer to issue in excess of 19.9% of its issued and outstanding shares at a discount without first obtaining shareholder approval. Traditionally, CMPOs have been underwritten affairs where the underwriter spends several weeks (or maybe less time) on a confidential road show with institutional investors and retail firms confidentially marketing the offering with the issuer. After sufficient feedback and institutional indications of interest from the marketing efforts, the issuer and the underwriter then make a determination as to whether they want to proceed with the offering (ie. go/no go call). If the issuer agrees to proceed, after the trading market closes for the day, the issuer will issue a press release and file a prospectus supplement announcing the offering to the public. The underwriters and its syndicate brokers will then seek as many other institutional and retail orders as possible with the goal of announcing final pricing and amounts prior to market open the next day. In a best efforts CMPO the same timeline is followed but instead of an underwriter the issuer enters into direct agreements with some if not all of the institutions and the retail brokers collect verbal orders from their respective accounts.
A fully marketed public offering is the most traditional form of secondary offering. In a fully marketed public offering the issuer does not conduct (or conducts very limited) confidential marketing but rather the commencement of the offering is made early on in the process. Typically these will take a week or more to conduct a deal roadshow and gather indications of interest. The major advantage to a fully marketed public offering is it allows the agent or underwriter to discuss the offering with potential investors without bringing them “over-the-wall”. Some institutions, especially mutual funds and very large hedge funds, will not agree to come over the wall to discuss an offering so this may have the effect of opening up the universe of investor to the investor. The obvious downside to such a structure is that the market for the securities is likely to receive downward pressure on the news.
Unregistered Secondary Offerings
A PIPE or Private Investment in Public Equity is a private investment, either common stock or a convertible instrument, in a public company. Initially, all the securities are restricted in the hands of the investors and may not be immediately resold. However, within a short period following the investment in the public company, usually 30-60 days, the public company is required to file a registration statement and register the shares that were sold in the PIPE. The public company is usually required to have the registration statement declared effective within 90-150 days. The benefit to a PIPE is it allows the issuer to raise capital quickly without having to have a registration statement effective at the time of the issuance. However, because a PIPE consists of restricted securities and is, by its very nature, far less liquid than registered securities, PIPEs will often come with a steep discount to the market price and substantial warrant packages.
At-the-market (ATM) offerings provide issuers with several advantages over traditional follow-on offerings, including the following:
• Minimal market impact: Issuers can quickly raise capital by selling newly issued shares into the natural trading flow of the market, without having to market and/or announce the offering. As a result, shares are able to “trickle” into the market, without impacting the issuer’s stock price. Investors cannot short the issuer’s stock in advance of the offering since the timing of any particular takedown is not known.
• Flexibility: Sales can be effected on an agency or principal basis, and the terms of each sale are agreed upon between the issuer and the agent, including its timing and size, at the issuer’s discretion. This enables an issuer to match its capital structure to its ongoing needs. For example, an issuer can implement a limit price below which sales will not occur and/or a percentage limitation on daily sales to reduce downward price pressure on its stock, as well as dilution.
• Low cost: The distribution costs for at-the-market offerings (usually 1-3%) typically are less than for traditional follow-on offerings, and the absence of an issuer commitment to sell means that there will be no sales below acceptable share prices.
• Minimal management involvement: At-the-market offerings require no “roadshows” and involve only limited prospectus preparation and delivery requirements.
Rights offerings are equity instruments similar to warrants that companies can use to raise capital. However, rights offerings usually expire within a much shorter time frame—within a month for rights offerings versus two to five years for warrants and are priced at a discount to the market price of a company’s stock.
To address potentially unsubscribed rights offerings, there exist “underwritten” rights offerings, in which unsubscribed rights offerings typically are pre-purchased by an investment bank or hedge fund at an agreed upon backstop price, versus an “uninsured” rights offering, for which there is no third-party agreement to pre-purchase the unsubscribed rights.
Ellenoff Grossman & Schole’s Corporate and Securities Practice Group has substantial experience in all forms of capital formation of publicly-held companies, including Rights Offerings. The Firm’s nearly 50 experienced securities professionals represent a portfolio in excess of 80 existing ’34 Act public companies.
The Firm has consistently been recognized as the most active law firm in the U.S. with experience in Registered Direct/PIPE transactions. The Firm has been involved in over 750 RD/PIPE Financings.
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