“For a Fistful of Dollars”: IPOs and Concurrent Private Deals

Like much of what we do, this is a complex area and the consequences of getting it wrong are potentially significant (think Section 12(a)(1) rescission rights, or gunfights in the border town of San Miguel). We discuss below guidance from the SEC that helps chart a course through this terrain. But the actual path will depend on the specific facts and circumstances.

We are issuer’s counsel for an IPO. The registration statement has been filed, but the issuer needs to raise cash to fund itself while the IPO is pending. In particular, the issuer would like to do a concurrent private offering of its common stock. Is this possible? Or does the registration statement constitute a general solicitation that would preclude a private offering?

Yes, it is possible. Given that the IPO process can take many months, an IPO issuer may want, or need, to pursue a private offering that is not registered with the SEC on the same schedule as the IPO. Concurrent public and private offerings are permitted, but there are two primary concerns to keep in mind. First, you will not want to run afoul of Section 4(a)(2)’s restrictions on general solicitation in private offerings, in view of the public filing of the registration statement. Second, you will want to avoid inadvertently precluding offerees in the private placement from participating in the public offering by virtue of the type of information you provide them in the private process.

There are two ways to avoid tripping over the ban on general solicitation in private offerings. First, if the private offering purchasers are all qualified institutional buyers (or QIBs), then it will not matter that the registration statement has been filed. In the Black Box and Squadron Ellenoff no-action letters, the SEC Staff laid out a limited policy exception to allow concurrent private offerings to QIBs and two or three additional large institutional accredited investors even though there was an ongoing public offering.1 We call this the “who” exception. Alternatively, it is possible to structure a good private placement to investors who are not QIBs if they were attracted to the private offering by a means other than the registration statement, for example as a result of a substantive pre-existing relationship with the issuer.2 We call this the “how” exception.

The other issue that comes up in the context of concurrent public and private offerings is that potential private investors may expect information that is not typically part of the IPO disclosure package, particularly projections. Once a private investor has received projections from the issuer or placement agent in connection with the private offering, you will have to think carefully whether it will be wise to include that investor in the public offering. In most cases of concurrent public and private offerings, it can prove difficult to keep both the public and private options open as to the same institutional investor. At some point, you and your banks will need to decide which investors are exclusively private side and which are exclusively public side.

Why don’t I have to worry about integration in this scenario? What if the private offering and the public offering are part of the same plan of financing?

Integration refers to the concern that two (or more) offerings will be treated as a single offering for purposes of determining whether an exemption is available. The integration doctrine started life as a concern about whether separate exempt offerings should be treated as a single non-exempt offering. The term later developed to include more generally any scenario where separate sales of securities are part of the same offering.

Traditionally, the SEC applied a five-factor integration analysis. See Release No. 33-4552; see also Rule 502(a). The SEC Staff has indicated that the five-factor analysis should be used only “to test whether two or more otherwise exempt offerings should be treated as a single offering.” C&DI 139.25. The relevant question for concurrent private and public offerings, on the other hand, is whether the private offering investors “became interested in the private offering by means of the registration statement” used in the public offering. C&DI 139.25. If so, the two offerings would be integrated and Section 4(a)(2) would not be available for the private offering. But if not – for example, if there is a substantive, pre-existing relationship between the private offering investors and the issuer – then the private offering would not be integrated with the public offering.

The overlap of the potentially distinct concepts of integration and general solicitation can be confusing. But what is clear is that you do not need to worry about integrating concurrent private and public offerings if the private investors come to the offering by some appropriate means other than the registration statement.

All our private offering investors live outside the United States. What about the offshore angle?

You may be in luck. Absent unusual circumstances, a concurrent offshore offering under Regulation S will not be integrated with a concurrent offering (public or private) in the United States. See Release No. 33-7943 at note 21. Global equity offerings are often structured as an offshore piece under Regulation S, and a parallel private US piece (typically under Rule 144A).

So, you need to test whether your concurrent offshore offering meets the requirements of Regulation S. Bear in mind that Regulation S comes in three flavors, Category 1, 2 and 3. Category 1 is the least restrictive, while Category 3 is the most restrictive (and consequently the least attractive). If your issuer is a US company raising equity, you will fall in Category 3. Regulation S has various ins and outs, so if you need to head abroad to raise your fistful of dollars, let’s talk.

______________________1   See Division of Corporation Finance no-action letters to Black Box Incorporated (June 26, 1990) and Squadron Ellenoff, Pleasant & Lehrer (Feb. 28, 1992). The SEC stated in 2007 guidance that the Black Box and Squadron Ellenoff no-action letters remain valid. See Revisions of Limited Offering Exemptions in Regulation D, Release No. 33 8828 (Aug. 3, 2007) [2007 Regulation D Release], n.126.

2   2007 Regulation D Release, pp. 55-56; see also C&DI 139.25 (discussing the SEC’s 2007 guidance).

 



 

 

 


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