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SEC Conference An Accounting & Reporting Update for Public Companies Private Investment in Public Equity (PIPE) Transactions
About the Presenter Brian C. Daughney, a member of Ellenoff Grossman & Schole LLP, is a corporate and securities attorney and has approximately 20 years experience representing broker-dealers, publicly traded and privately held corporations and other entities in various aspects of securities, corporate and commercial law. Mr. Daughney specializes in public and private finance, merger and acquisitions and general securities law and transactions. Mr. Daughney has represented public companies in connection with their initial public offerings, secondary public offerings, private placements (PIPE transactions), regulatory compliance as well as general corporate governance matters. He assists public company clients with compliance issues mandated by the Sarbanes-Oxley Act and related SEC, securities exchange and Nasdaq regulations. In addition, Mr. Daughney has extensive experience in assisting broker-dealer clients with their respective ongoing (SEC and FINRA and State level) regulatory compliance matters. Prior, Mr. Daughney was a Partner at the law firm of Goldstein & Di. Gioia.
About Ellenoff Grossman & Schole LLP is a New York-based law firm with over 35 professionals offering its clients legal services in a broad range of business related matters. The Firm specializes in many areas of commercial law: Corporate, Securities, Broker-Dealer Regulations, Hedge Funds, Real Estate, Litigation, Tax and Estate Planning. The philosophy of the Firm is to provide the highest quality legal advice and counsel, dedicating consistent, personalized attention to each client at a reasonable price. The Firm has over 20 securities professionals specializing in a range of activities, including: § PIPEs § Public Offerings (IPOs and Secondaries) – Including SPACs § Mergers and Acquisitions § Exchange Act reporting (Form 10 -Ks, 10 -Qs and Proxies) § FINRA (formerly NASD), AMEX, NASDAQ and OTC compliance § Broker-dealer regulations § Rule 144 transactions § Section 16 compliance l l l l Barry I. Grossman Douglas S. Ellenoff Brian C. Daughney C. David Selengut Lawrence A. Rosenbloom Stuart Neuhauser Eden Rohrer Stacy Nathanson Adam Mimeles James Mangan Martin R. Bring Asim Shaikh-Grabowski Christopher E. Celano Tamar Donikyan Michael Midura Phi H. D. Nguyen Sarah E. Williams Joan Adler Annie Y. Wong Brian Lee Steven Saide Kathleen Cerveny
Overview of Typical PIPE Structure l 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 the resale of the common stock issued in the private placement, or issued upon conversion of the convertible securities issued in the private placement, with the SEC. l “Traditional” PIPE versus more recent structures l Institutional versus Retail l Legal framework/Registration Exemptions
Marketplace Statistics l The following table sets forth the annual number of PIPE deals and aggregate dollar amount raised from 1995 to 2006. The data excludes PIPE deals by Canadian companies. Year Deal Amount 2006 1, 334 $28, 256, 264, 578 2005 1, 303 $19, 988, 894, 164 2004 1, 268 $15, 628, 405, 069 2003 882 $12, 632, 749, 396 2002 707 $12, 264, 034, 876 2001 898 $14, 604, 527, 934 2000 1, 106 $24, 337, 925, 804 1999 676 $10, 258, 789, 616 1998 428 $2, 998, 805, 923 1997 448 $4, 747, 221, 485 1996 306 $4, 101, 292, 110 1995 114 $1, 334, 025, 502 Total 9, 700 $158, 771, 466, 858 *Source: Sagient Research Systems, Inc. , Placement. Tracker – Private Placement Resources
Attractiveness of the PIPE l Who likes PIPEs? l Investor rate of return l Effect upon the Issuer
Overview of the Typical PIPE Registration Process l l l Issuer will file on Form S-3 or S-1 or SB-2. PIPE terms usually require registration within 30 to 90 days of the underlying securities if a convertible security is issued in the PIPE. Issuer registers for resale by the PIPE investors any common stock and any common stock underlying convertible securities issued in the PIPE. Small. Cap companies – those with less than $75 million market cap can only use Form S-3 for secondary resale registrations. No primary offerings on Form S-3 for those Issuers with less than a $75 million market cap or if listed on OTCBB or Pink Sheets. Also, the Issuer cannot be in default of debt since its last fiscal year end and must have been a reporting company for at least 12 months. If the Issuer is allowed to use Form S-3 for resales then the registration statement will be “evergreen”. As the Issuer files its Exchange Act reports, the S-3 is automatically updated.
Continued l l If the Issuer cannot use Form S-3 for primary offerings and the registration is deemed a primary offering, Form S-3 will be unavailable for the PIPE registration. This is important for investors because the likelihood of a black out period or a registration statement going stale is reduced or eliminated with a Form S-3. If the Issuer has to use an S-1 or SB-2 Registration format, it still would normally rely upon Rule 415 to allow continuous resales by selling shareholders. The SB-2 format does not stay “evergreen” – will have to be amended or supplemented.
Rule 415 and Recent SEC Related Issues Rule 415 is one of the rules under which resale registration statements are filed by issuers on behalf of investors following PIPES. Designed in part to allow continuous offerings or “shelf offerings” by selling investors. Salient Provisions of Rule 415: (a) Securities may be registered for an offering to be made on a continuous or delayed basis in the future, provided, that: (1) The registration statement pertains only to: (i) Securities which are to be offered or sold solely by or on behalf of a person or persons other than the registrant, a subsidiary of the registrant or a person of which the registrant is a subsidiary; (ii) Securities which are to be issued upon the exercise of outstanding options, warrants or rights; (iii) Securities which are to be issued upon conversion of other outstanding securities.
Historical SEC Positions on Rule 415 Maybe this is not an entirely new Issue? JULY 1997 TELEPHONE INTERPRETATIONS Section D #5 As discussed in Release No. 33 -6383 there are no presumptive underwriter standards under Rule 415. Thus, the determination whether a person is an underwriter with respect to a large amount of securities acquired in one or a series of offerings under the rule depends on the particular facts and circumstances. Section D # 10 An insurance company acquired 55% of the common stock of a company in a private transaction. It now holds these restricted securities as a reserve against claims. As the result of an annual state inspection, the insurance company has been questioned regarding the sufficiency of its reserves. In order to enhance the value of the restricted securities, it wishes to have them registered. Any registration statement filed for this purpose would be governed by Rule 415 because the insurance company does not intend to sell the securities immediately. Since the issuer would be deemed a subsidiary of the insurance company, it would unable to rely upon Rule 415(a)(1)(vi). Therefore, another paragraph of Rule 415 (a)(1) would have to be available.
Continued Section D # 29 Rule 415; Form S-3 It is important to identify whether a purported secondary offering is really a primary offering, i. e. , the selling shareholders are actually underwriters selling on behalf of an issuer. Underwriter status may involve additional disclosure, including an acknowledgment of the seller's prospectus delivery requirements. In an offering involving Rule 415 or Form S-3, if the offering is deemed to be on behalf of the issuer, the Rule and Form in some cases will be unavailable (e. g. , because of the Form S-3 "public float” test for a primary offering, or because Rule 415 (a)(l)(i) is available for secondary offerings, but primary offerings must meet the requirements of one of the other subsections of Rule 415). The question of whether an Offering styled a secondary one is really on behalf of the issuer is a difficult factual one, not merely a question of who receives the proceeds. Considerations should be given to how long the selling shareholders have held the shares, the circumstances under which they received them, their relationship to the issuer, the amount of shares involved, whether the sellers are in the business of underwriting securities, and finally, whether under all the circumstances it appears that the seller is acting as a conduit for the issuer. (emphasis added)
Primary versus Secondary/ Resale Offering Look Primarily to the Language in Rule 415 Primary Offering by registrant Offering by a subsidiary of the registrant Secondary “other than the registrant” Traditional Arguments Justifying Secondary/Resale Offering Who is the beneficiary of the proposed sale of securities being registered? Holder of securities of the Issuer What is the transaction being registered? Issuance of the securities or resale by the holder What is the relationship of the holder of the securities to the Issuer? “other than the registrant” or any subsidiary
Continued Is the holder an affiliate of the Issuer? (SEC has stated this is not a controlling factor in the analysis) Ownership level Control of Issuer Director Seats Covenants in PIPE documents (4. 99% conversion prohibitions) What is the percentage of shares being registered and held by the holder(s) compared to the capitalization of the Issuer? How long has the PIPE Investor held the securities? Is the holder of the securities in the business of underwriting? Has the Issuer previously conducted a public offering? Is this a post “shell company” registration?
Impact of Underwriter Status if Rule 415 not Available Liability, Liability!!! Responsible for the registration statement contents Potential liability for all purchasers, including subsequent purchasers in the chain, not just the first sale into the market Increase due diligence requirements Affects ability to resell As reflected in SEC sample comments above , the SEC may require a defined offering period; may require set pricing
Possible Solutions to Rule 415 Denial Limitations on size of the PIPE to avoid large blocks being registered (private contractual limitation on conversion (i. e. 4. 99%) or ownership level have not been accepted by the SEC). Limit the amount of shares to be registered in any given registration. Issuer or PIPE Investors retain an Underwriter for the resale registration. Recent SEC Pronouncements
Other Recent Regulatory Initiatives Affecting PIPEs l Changes to standards for use of Form S-3 by Issuers l Changes to Regulation D l FINRA RULE 2710
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