FREQUENTLY ASKED QUESTIONS
ABOUT PIPES
Understanding PIPEs
participate in a PIPE transaction.
See “How is
‘accredited investor’ defined?” below. However, the
What are “PIPEs”?
placement agent must take care not to engage in any
marketing or sales activity that would constitute a
A PIPE (Private Investment in Public Equity) refers to
“general solicitation.”
any private placement of securities of an already-public
company that is made to selected accredited investors
(usually to selected institutional accredited investors).
See “How is ‘accredited investor’ defined?” In a typical
PIPE transaction, investors enter into a purchase
agreement that commits them to purchase securities and
How is “accredited investor” defined?
Rule 501 promulgated under Regulation D of the
Securities Act of 1933 sets forth the definition of an
“accredited investor.” The definition was updated
following the passage of the Dodd-Frank Act.
usually requires the issuer to file a resale registration
statement covering the resale from time to time of the
What kinds of securities are sold in PIPE transactions?
privately purchased securities.
PIPE transactions may involve the sale of common
Equity lines of credit are not PIPE transactions. See
“What is an equity line of credit?” below.
stock,
convertible
preferred
stock,
convertible
debentures, warrants, or other equity or equity-like
securities of an already-public company.
Are all public companies permitted to engage in PIPE
transactions, or are there eligibility requirements?
Yes, all public companies that are reporting companies
There are a number of common types of PIPE
transactions, including:
the sale of common stock at a fixed price;
the sale of common stock at a fixed price,
may engage in PIPE transactions. See Section F.
Requirements for an Issuer below.
together with fixed price warrants;
Is there a limit to the number of purchasers that may
the sale of common stock at a fixed price,
participate in a PIPE transaction?
together with resettable or variable priced
If all of the offerees are accredited investors, there is no
warrants;
limit on the number of offerees or purchasers that may
the sale of common stock at a variable price;
the sale of convertible preferred stock or
What are some of the weaknesses of a PIPE
convertible debt;
transaction?
a change of control transaction; and
PIPE transactions have a few disadvantages for issuers,
a venture-style private placement for an
including:
already-public company.
investors will require a discount to market on
the purchase price (in order to compensate for
What are some of the advantages of a PIPE
the initial resale restrictions);
transaction?
there will be a limit on the number of “black-
A PIPE transaction offers several significant advantages
out” periods for the issuer while the resale
for an issuer, including:
registration statement is effective (see “What is
transaction expenses that are lower than the
a “black-out” period?” below);
expenses that an issuer would incur in
connection with a public offering;
marketed to accredited investors (see “How is
the issuer will expand its base of accredited
“accredited investor” defined?”); and
and institutional investors;
as a general matter, the offering can only be
an issuer cannot sell more than 20% of its
for fixed price transactions, investors will have
outstanding stock at a discount without
less incentive to hedge their commitment by
receiving prior stockholder approval.
shorting the issuer’s stock;
“Does a PIPE transaction require any prior
the transaction will be disclosed to the public
approvals from regulatory agencies or self-
only after definitive purchase commitments are
regulatory organizations?” below.
See
received from investors;
investors
receive
only
very
streamlined
Traditional PIPE Transactions
offering materials or information, including
publicly filed Exchange Act reports; and
What is a traditional PIPE transaction?
a transaction can close and fund within seven
A traditional PIPE transaction is a private placement of
to ten days of receiving definitive purchase
either newly-issued shares of common stock or shares of
commitments.
common stock held by selling stockholders (or a
Some of the advantages for an investor include
combination of primary and secondary shares) of an
receiving a discount to the current market price (in
already-public company that is made through a
order to compensate for the initial resale restrictions)
placement agent to accredited investors.
and, once the SEC declares the resale registration
Investors in a traditional PIPE transaction commit to
statement effective, having unrestricted, freely tradeable
purchase a specified number of shares at a fixed price,
securities.
and the issuer commits to filing a resale registration
statement covering the resale from time to time of the
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purchased shares.
The closing is conditioned upon,
investors. The transaction closes once the SEC indicates
among other things, the SEC’s preparedness to declare
its preparedness to declare the resale registration
that resale registration statement effective.
statement effective.
Consequently, investors in a
traditional PIPE transaction have a resale registration
What is a “black-out” period?
statement available at the time of closing.
In connection with a PIPE transaction, an issuer
Non-traditional transactions generally are structured
typically must keep a resale registration statement
as private placements with follow-on (or trailing)
effective for an agreed-upon length of time so that the
registration rights.
securities may be sold freely, without reliance on Rule
scheduled when investors enter into a definitive
144. During this period, the issuer may suspend the use
purchase agreement. Investors fund and the transaction
of the resale registration statement to amend it or to
remedy a material misstatement or omission.
This means that a closing is
closes. Post-closing, the issuer has an obligation to file a
This
resale registration statement and use its best efforts to
suspension is often referred to as a black-out period.
have it declared effective.
During a black-out period, PIPE purchasers will have
Typically, the purchase agreement or a separate
limited liquidity, as they will not be able to rely on the
registration rights agreement outlines specific deadlines
resale registration statement to sell the securities
purchased in the PIPE transaction.
for the issuer to file, and then to seek effectiveness of,
Investors will
the
negotiate a limit on the length and number of black-out
resale
registration
statement.
Some
PIPE
transactions require the issuer to make penalty
periods.
payments for failure to meet those deadlines.
How do traditional PIPE transactions differ from non-
In the case of a PIPE structured as a private placement
traditional PIPE transactions?
with follow-on registration rights, the investor will not
In a traditional PIPE transaction, investors enter into a
have the benefit of a resale registration statement for
definitive purchase agreement with the issuer in which
some time—usually 45 to 90 days following the closing.
they commit to purchase securities at a fixed price.
During that period, investors will hold restricted
Thus, the investor bears the price risk from the time of
securities.
pricing until the time of closing—a period ranging from
What are the standard terms of a traditional PIPE
three to thirty days, depending on the SEC’s review of
the resale registration statement.
transaction?
The issuer is not
A traditional PIPE transaction generally involves the
obligated to deliver additional securities to the PIPE
following features:
investors if the stock price fluctuates (or for any other
reason).
placement
to
selected
accredited
investors;
Investors in a traditional PIPE do not fund when they
enter into a purchase agreement.
private
Instead, the issuer
investors irrevocably commit to purchase a
fixed number of securities at a fixed price, not
then files a resale registration statement covering the
resale from time to time of those securities by the PIPE
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subject to market price adjustments or to
When does the PIPE purchaser in a traditional PIPE
fluctuating ratios;
transaction pay for the securities?
purchase agreements generally contain a
No money is exchanged when the purchase agreement
limitation on black-out periods;
is executed. Purchasers pay the purchase price only
immediately following execution of purchase
when they are informed that the resale registration
agreements with investors, the issuer files a
statement is ready to be declared effective.
resale registration statement covering resales
What are the other closing conditions for a traditional
from time to time of the restricted securities to
PIPE transaction?
be sold in the transaction, naming the
A traditional PIPE transaction generally involves the
purchasers as “Selling Stockholders”;
following closing conditions:
closing
of
the
PIPE
transaction
occurs
promptly upon notice of the SEC’s willingness
warranties made in the purchase agreement
to declare the resale registration statement
(which are similar to those contained in an
effective; and
the issuer must update the representations and
underwriting agreement) and deliver a comfort
the resale registration statement is effective
letter and legal opinions (including a 10b-5
until shares may be sold free of restrictions
negative assurance relating to the private
under Rule 144.
placement
memorandum
the
resale
registration statement) to the placement agent;
Does the placement agent or a lead investor control the
process in a traditional PIPE transaction?
there can have been no material adverse
In a traditional PIPE transaction, the process is
change
controlled by the placement agent, rather than by a lead
agreement; and
investor.
and
The placement agent conducts its own
business and financial due diligence.
since
execution
of
the
purchase
the SEC must have stated its willingness to
declare
the
resale
registration
statement
effective.
Do investors conduct their own due diligence in a PIPE
Purchasers will receive legended securities at the
transaction?
closing.
Investors generally limit their diligence investigation to
(unlegended)
discussions with management and the company’s
independent auditors.
However, a purchaser can receive clean
securities—either
at
the
closing
or
afterwards—by delivering to the issuer’s transfer agent
Traditional PIPE purchasers
a certificate (in contemplation of transferring or
generally do not negotiate for themselves ongoing
otherwise disposing of the shares) acknowledging that
negative covenants or covenants relating to information
the purchaser recognizes its obligation to deliver a
rights or corporate governance.
prospectus to any prospective purchaser of the shares
and making certain representations concerning future
sales of the shares.
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Typically, the resale registration statement is declared
effective on the day of (but subsequent to) the closing or
a private placement to selected accredited
investors;
on the following business day.
investors commit to purchase securities at a
fixed price or at a variable/reset price;
How does a traditional PIPE transaction settle?
A traditional PIPE transaction settles outside of the DTC
for
transactions
involving
variable/reset
pricing, the purchase agreement generally
(Depository Trust Company) system. Investors receive
contains specific pricing parameters, which
actual physical stock certificates representing the
may include a cap on the maximum number of
securities. The issuer works with its transfer agent to
shares that may be issued to the PIPE
make arrangements for the closing of the transaction.
purchasers;
What are the benefits of traditional PIPE transactions
compared to non-traditional PIPE transactions?
the purchase agreement generally contains a
limitation on black-out periods;
By comparison to a non-traditional PIPE transaction,
which is structured as a private placement with follow-
the transaction closes and funds promptly after
investors execute purchase agreements;
on registration rights, a traditional PIPE transaction
involves less uncertainty, market risk, and illiquidity.
the issuer files a resale registration statement
covering resales from time to time of the
Purchasers in a traditional PIPE transaction are not
restricted
securities
sold
in
the
PIPE
required to close until a resale registration statement is
transaction, naming the purchasers as “Selling
available for subsequent sales of the purchased shares.
Stockholders”;
Traditional PIPE purchasers can obtain unlegended
the issuer may be obligated to make penalty
shares at, or shortly after, closing, which allows them
payments if it fails to file the registration
flexibility in disposing of the shares.
statement within an allotted period, or if the
For most registered investment funds, securities
issuer fails to use its best efforts to have the
purchased in a traditional PIPE transaction are counted
registration statement declared effective within
in the funds’ public basket.
a defined period; and
the resale registration statement is kept
effective until shares may be sold freely under
Non-traditional PIPE Transactions
Rule 144.
What are the standard terms of non-traditional (or
When does the purchaser pay for the securities in a non-
structured) PIPE transactions?
traditional PIPE transaction?
A non-traditional (or structured) PIPE transaction
In a non-traditional PIPE transaction, the purchaser
generally involves the following features:
pays for the securities at the closing, which takes place
promptly after the execution of all of the applicable
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purchase agreements. Purchasers pay for and receive
there can have been no material adverse
restricted securities bearing a Securities Act legend.
change
since
Unlike purchasers in a traditional PIPE transaction,
agreement.
execution
of
the
purchase
purchasers in a non-traditional PIPE transaction will not
Do purchasers receive restricted (legended) securities at
have the immediate benefit of an effective resale
closing?
registration statement.
Yes.
What are other closing conditions and covenants in
At the closing of a non-traditional PIPE
transaction, purchasers receive legended securities.
non-traditional PIPE transactions?
Typically, purchasers will hold these restricted
A non-traditional PIPE transaction generally involves
securities for a period of 45 to 90 days (or longer)
the following closing conditions:
following the closing. During this period, the issuer will
the purchase agreement contains standard
file the resale registration statement with the SEC and
representations and warranties (similar to
seek to have it declared effective. If the issuer fails to
those
underwriting
meet any of the deadlines for filing or effectiveness
agreement), which will be brought down at
outlined in the purchase agreement, the issuer may be
closing;
required to make penalty payments to the purchasers.
for
contained
variable/reset
agreement
also
in
an
deals,
may
the
purchase
contain
covenants
Purchasers have limited liquidity while the resale
registration statement is pending.
requiring the future issuance of additional
registration
securities by the issuer at no cost to the
purchasers can sell their securities pursuant to the resale
purchaser;
registration statement, although they will be required to
the purchase agreement may, depending on
deliver their legended stock certificates and a legal
the nature of the purchaser, contain ongoing
opinion to the transfer agent in advance of any trade.
covenants relating to corporate governance
This process often results in significant delays.
(board
blocking
representation
rights,
or
etc.)
observer
or
rights,
declared
effective,
the
Although some of the features of a registered direct
offering (i.e., sales to selected institutional investors by a
filings or other information to the purchaser);
placement agent) give it the appearance of a private
the issuer must deliver a comfort letter and
placement, a registered direct offering is a public
legal opinions to the placement agent;
is
Is a registered direct transaction a PIPE?
information
requirements (regular deliveries of public
statement
Once the resale
offering. The offered securities are sold pursuant to an
each investor must deliver to the issuer and the
effective registration statement.
issuer’s transfer agent a certificate as to the
Investors receive a
preliminary prospectus (or red herring) during the
investor’s compliance with the prospectus
marketing phase and a final prospectus prior to closing.
delivery requirements in order to obtain
The offering closes through DTC and investors receive
unlegended stock certificates in the future; and
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their shares through DTC rather than receiving physical
In a variable/reset price transaction, the price risk is
certificates like they would in a PIPE transaction.
shared between the investor and the issuer. Usually, the
investor will negotiate some price protection for itself.
Pricing and Other Negotiating
What are the other frequent negotiating points in PIPE
transactions?
Points of PIPE Transactions
In addition to negotiating specific carve-outs for
Will purchasers agree to purchase securities at a fixed
representations and warranties, the placement agent,
price or a variable price?
purchaser, and issuer typically negotiate the following
PIPE transactions may be fixed price or variable/reset
points:
price transactions.
negative assurance in its opinion;
Variable/reset price transactions often include price
protection.
whether issuer’s counsel will include a 10b-5
For example, investors seek “downside
whether the issuer will be required to cause its
protection” by negotiating rights for themselves that
independent auditor to furnish the placement
protect the value of their investment in the event of a
agent (if any) with a comfort letter at closing;
downward price fluctuation. Conversely, issuers may
negotiate a “cap” or “floor” to limit their exposure with
whether there will be a limitation on the length
and number of black-out periods;
respect to the maximum number of shares that may be
issued as a result of stock price fluctuations or other
whether there will be a time limit for filing the
resale
conditions.
registration
statement
following
execution of the purchase agreements;
How is the price set?
the length of time given to the issuer to have
The price is set through discussions between the
the resale registration statement declared
placement agent and the issuer, just as it is during the
effective (most often 60 days); and
course of an underwritten (firm commitment) offering.
whether there will be penalty payments tied to
the filing and effectiveness of the resale
Typically, PIPEs are priced at a modest discount to the
registration statement.
closing bid price for the stock to compensate for the
temporary illiquidity of the purchased shares. Often, in
variable/reset transactions, the price is set based on a
Sharing Transaction Details with Potential Investors
formula that relates to the average closing price of the
stock over several days preceding the pricing.
Who may participate in PIPE transactions?
Who bears price risk?
Accredited investors are eligible to participate in PIPE
In a fixed price transaction, the purchaser bears the
transactions. Funds, including mutual funds, pension
price risk during the period from execution of the
funds, and hedge funds, are frequent PIPE purchasers.
purchase agreement until the closing.
More recently, distressed funds and venture funds have
7
begun participating in PIPE transactions.
Distressed
PIPE transactions have received negative press in the
funds and venture funds typically negotiate additional
past. How does the market view PIPEs today?
covenants in their purchase agreements relating to
In the past, PIPEs have been confused with death spiral
corporate governance rights and information rights.
transactions and equity lines of credit. See “What is a
death spiral or toxic convert?” and “What is an equity
What information do investors receive?
line of credit?” below. Unlike PIPEs, these transactions
All investors in a PIPE transaction receive the same
information:
can result in ongoing and substantial dilution. Also, the
a private placement memorandum
SEC’s enforcement division has brought a number of
containing the issuer’s Exchange Act documents.
actions against hedge funds and other investors in PIPE
Investors do not receive projections or other information
transactions that traded in advance of the public
that has not been disclosed publicly.
announcement of the transaction while in possession of
material nonpublic information or that engaged in
Should investors sign a confidentiality agreement?
manipulative trading practices in connection with PIPE
Because investors do not receive material nonpublic
transactions.
information, it may not be necessary for them to sign a
PIPE deals have grown in popularity over the past few
general confidentiality agreement. However, the issuer
years. The types of issuers taking advantage of the PIPE
will be sharing information (the fact that the issuer is
structure has broadened from small companies to New
considering a financing transaction) that is not known to
York Stock Exchange traded companies. In addition,
the market. Thus, the placement agent and the issuer
the numerous publications, websites, and conferences
should obtain from each prospective investor an oral or
that cover the PIPE market have made the PIPE
written agreement stating that the investor will keep
information
relating
to
the
potential
structure more familiar to investors.
offering
confidential and acknowledging that the investor
understands how confidential information must be
Requirements for an Issuer
treated under the securities laws. Any such agreement
should contain an express agreement to refrain from
What kinds of issuers finance through PIPE
trading in the issuer’s securities. See “Regulation FD
transactions?
and other Legal Concerns.”
Historically, PIPE transactions have been used by
issuers with significant capital requirements, including
Will investors know what a PIPE transaction is?
There
are
many
misconceptions
about
life
PIPE
science
and
biotech
companies,
real
estate
investment trusts, and technology companies.
transactions, but typically, within each institution, there
In recent years, as the volume of PIPE transactions has
is a compliance or legal person who is familiar with the
increased, the variety of issuers coming to market with
PIPE structure.
PIPE transactions also has increased. PIPE issuers now
range in size and include larger, more established
8
companies.
These
issuers
usually
view
PIPE
Must an issuer be eligible to use a Form S-3 registration
transactions as an alternative to shelf takedowns,
statement on a primary basis in order to complete a
traditional follow-on offerings, or bought deals.
PIPE transaction?
In
addition, many issuers use PIPE transactions to provide
Issuers need not be Form S-3 eligible on a primary basis
liquidity to existing stockholders.
in order to complete a PIPE transaction, but must be
eligible to use Form S-3 on a resale basis. An issuer may
What are an issuer’s typical considerations relating to
use a Form S-1 or a Form S-3 registration statement as a
a PIPE transaction?
resale shelf registration statement in connection with a
In evaluating a PIPE transaction as a possible financing
PIPE transaction, but using a Form S-3 is cheaper and
option and in considering a PIPE transaction versus
less time-consuming than using a Form S-1. The Form
other potential financing options, an issuer should
S-3 is less burdensome and may be updated by the
generally consider the following:
periodic filing of Exchange Act reports, without the
usually the issuer cannot issue more than 20%
need to file post-effective amendments.
of its total shares outstanding at a discount in
the PIPE transaction without shareholder
What are the eligibility requirements for use of a Form
approval and prior notification to exchanges
S-3 registration statement for resales?
(see “Does a PIPE transaction require any prior
In order to use Form S-3 for resales (secondary shares):
approvals from regulatory agencies or self-
1.
regulatory organizations?”) below;
An issuer must:
the purchaser (not the issuer) bears market
operations, in the United States or one of its
risk;
territories;
the transaction can close quickly, provided
there is no SEC review;
the
format
is
familiar
have a class of securities registered pursuant to
Section 12(b) of the Exchange Act or a class of
to
sophisticated
equity securities registered pursuant to Section
institutional investors;
12(g) of the Exchange Act, or be required to file
PIPEs typically involve a modest discount to
reports pursuant to Section 15(d) of the
market price;
Exchange Act; and
the SEC is comfortable with the PIPE format;
have been public and have timely filed all
required filings for a period of at least 12
and
be organized, and have its principal business
calendar months immediately preceding the
PIPEs do not have any of the negative effects
filing of the Form S-3 and have filed all
associated with a “death spiral,” preferred
required reports in a timely manner; and
stock offering, or an equity line of credit. See
“What is a death spiral or toxic convert?” and
2.
The issuer, and its consolidated and un-
“What is an equity line of credit?” below.
consolidated subsidiaries, must not, since the end of the
last fiscal year for which certified financial statements of
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the issuer and its consolidated subsidiaries were
private transactions within the same six-month period,
included in an Exchange Act report: (1) have failed to
the aggregate effect of such transactions, all of which
make any required dividend or sinking fund payment
may be aggregated by the exchange. Each of the New
on preferred stock or (2) defaulted on the terms of any
York Stock Exchange, the NYSE MKT, and Nasdaq has
borrowing or on any long-term lease, which defaults in
a similar requirement.
the aggregate are material to the financial position of the
issuer
and
its
consolidated
and
A New York Stock Exchange-listed company must
unconsolidated
comply with Rule 312.03(c), which requires that the
subsidiaries, taken as a whole.
issuer obtain shareholder approval prior to the issuance
of common stock, or of securities convertible into or
May an issuer use an existing shelf registration
exercisable for common stock, in any transaction or
statement to complete a PIPE transaction?
series of related transactions if: (1) the common stock
Generally, if an issuer has a shelf registration statement
has, or will have upon issuance, voting power equal to,
on file, it is a primary shelf registration statement
or in excess of, 20% of the voting power outstanding
covering the sale by the issuer of its newly issued
securities.
before the issuance of such stock or of securities
An issuer may have a shelf registration
convertible into or exercisable for common stock; or (2)
statement on file that includes primary (issuer) shares
the number of shares of common stock to be issued is,
and secondary (selling stockholder) shares. In that case,
or will be upon issuance, equal to, or in excess of, 20% of
the issuer may be able to use that registration statement
the number of shares of common stock outstanding
for a PIPE and name the PIPE purchasers as the “selling
before the issuance of the common stock or of securities
stockholders”. Generally, though, the issuer must file
convertible into or exercisable for common stock.
and have declared effective a resale registration
Shareholder approval is not required under this rule if
statement covering the resale by the PIPE purchasers (a
the common stock is sold in a private financing for cash,
selling stockholder shelf registration) from time to time
at a price at least as great as each of the book and
of the securities that were purchased in the PIPE
market value of the issuer’s common stock.
transaction.
Section 713 of the NYSE MKT Company Guide
Does a PIPE transaction require any prior approvals
requires that an issuer obtain shareholder approval for a
from regulatory agencies or self-regulatory
transaction involving (1) the sale, issuance, or potential
organizations?
issuance by the company of common stock (or securities
convertible into common stock) at a price less than the
A PIPE transaction may require prior approval from the
greater of book or market value which, together with
exchange on which the issuer’s common stock is quoted
sales by officers, directors, or principal shareholders of
if the transaction will be completed at a discount and
the company, equals 20% or more of presently
may result in the issuance of 20% or more of the issuer’s
outstanding common stock; or (2) the sale, issuance, or
total shares outstanding. The issuer should consider not
potential issuance by the company of common stock (or
only the effect of completing the proposed PIPE
securities convertible into common stock) equal to 20%
transaction, but also, if the issuer has completed other
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or more of presently outstanding stock for less than the
that has not already been included in the issuer’s
greater of book or market value of the stock.
Exchange Act reports.
Rule 5635 of the Nasdaq Marketplace Rules requires
A private placement memorandum for a PIPE
that an issuer obtain shareholder approval in connection
transaction usually contains the issuer’s Exchange Act
with a transaction other than a public offering,
reports, together with legal disclaimers. It is prudent to
involving: (1) the sale, issuance or potential issuance by
limit the information contained in the private placement
the issuer, at a price less than the greater of book or
memorandum unless the issuer will be receiving signed
market
securities
confidentiality agreements. Although the issuer is not
convertible into or exercisable for common stock) that,
sharing material nonpublic information about its
together with sales by officers, directors or substantial
business with potential PIPE investors, the issuer is
shareholders of the company, equals 20% or more of
sharing its plans concerning a potential financing
common stock or 20% or more of the voting power
transaction. The fact that the issuer is contemplating a
outstanding before the issuance; or (2) the sale, issuance,
PIPE
or potential issuance by the company, for less than the
nonpublic information. This will depend on the
greater of book or market value, of common stock (or
particular facts and circumstances. In any event,
securities convertible into or exercisable for common
however, an issuer will not want to be forced to make a
stock) equal to 20% or more of the common stock or 20%
premature disclosure regarding a financing.
value,
of
common
stock
(or
or more of the voting power outstanding before the
transaction
may
itself
constitute
material
The issuer should ensure that, before the placement
issuance.
agent reveals the issuer’s name, the placement agent
Shareholder approval also may be required by the
obtains an oral or written agreement from each potential
rules of the securities exchanges for a private placement
purchaser it contacts that information shared will be
completed in connection with an acquisition, or a
kept confidential, and that agreement contains an
private placement that results in a change of control, or
explicit undertaking to refrain from trading in the
a private placement involving related parties.
issuer’s stock.
Given that an issuer that is contemplating a PIPE
transaction generally seeks to preserve its flexibility and
Regulation FD and Other Legal Concerns
only make a disclosure once definitive agreements have
been executed, it is unlikely that an issuer will want to
How does an issuer ensure that it has complied with
engage in any form of general solicitation, even if
Regulation FD in the context of conducting a PIPE
permissible.
transaction?
An issuer is owed a duty of confidence from its agents,
What must the placement agent do in order to comply
such as its placement agent, accountants, and other
with Regulation M?
participants in the PIPE process. Generally, an issuer
Most PIPE transactions are “distributions” for purposes
does not share any information with potential investors
of Regulation M.
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The placement agent must refrain
from making a market in the issuer’s securities during
seller is acting as a conduit for the issuer. Of course, to
the applicable Regulation M “restricted period.”
the extent the SEC is comfortable that the private
Depending on the average daily trading volume of the
placement was properly completed, the issuer can
issuer’s security, the restricted period for an agent
proceed with the use of the resale registration
participating in a PIPE transaction is either one or five
statement.
days prior to the pricing (as opposed to the funding or
The SEC has said that in instances where it will not
closing of the transaction). The placement agent also
permit the resale registration statement to proceed, the
must file a Regulation M notice with FINRA.
issuer can cut back the number of shares and then file a
second resale registration statement for the shares that
What are the sources of the “primary” versus
were cut back.
“secondary” offering questions that some issuers have
received in connection with resale registration
statements that have been reviewed?
Equity Lines of Credit, “Future-Priced” Securities,
Certain issuers that have filed resale registration
and Death Spiral or Toxic Converts
statements to cover the resale of shares originally
offered in a PIPE transaction have received comments
What is an equity line of credit?
from the SEC questioning whether it is appropriate for
Under an equity line of credit, the company enters into
the issuer to use a resale registration statement (rather
an agency agreement with an investor pursuant to
than a primary registration statement) for those shares,
which the company has the right, during the term of the
particularly in the case of PIPE transactions involving
equity line and subject to certain conditions, to put its
convertible securities.
securities to the investor.
This is especially the case for
small cap issuers, as well as for issuers that have sold a
Some equity lines of credit are completed using a shelf
disproportionately large number of shares in a PIPE,
registration statement and others are completed as
which has been understood to mean shares in excess of
private placements with an obligation to register the
33% of the total shares outstanding prior to the PIPE
resale of the securities sold under the equity line.
transaction.
What is a “future priced” security?
In these cases, the SEC will take a look at the facts and
circumstances of the issuance and the resale registration
Future priced securities are convertible securities, often
statement. The SEC will look at the factors it outlined in
issued through a private placement or in a Regulation S
its 1997 interpretative guidance. Specifically, the SEC
offering. For example, death spiral or toxic converts are
will consider: the amount of securities involved; how
“future priced” securities. See “What is a death spiral
long the securities have been held; whether the
or toxic convert?”
investors are at market risk from the time they purchase
The conversion price or conversion ratio of the
the securities; the circumstances under which the
security is tied to a percentage discount to the market
securities were acquired; and whether it appears the
price of the underlying common stock at the time of
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conversion. As a result, the conversion price floats, or
varies, based on the market price of the underlying
common stock. The lower the market price at the time
of conversion, the greater the number of underlying
shares that will be issued upon conversion.
What is a death spiral or toxic convert?
The terms death spiral or toxic convert refer to a
privately placed convertible security that has a floating
conversion ratio, without a “floor.”
The conversion
ratio of the security adjusts based upon the market price
of the company’s securities at some point in the future,
usually at the time of conversion. Death spirals or toxic
converts typically reset or adjust downward (to protect
the investor) not upward (to protect the company).
Death spirals or toxic converts typically are priced at
some discount to the company’s closing bid price over a
period of days preceding the pricing date. This price
can be manipulated easily. Generally, the securities are
placed by a hedge fund, instead of a broker-dealer.
These securities may have very dilutive effects on the
company’s stock.
_____________________
By Anna T. Pinedo, Partner, and James R. Tanenbaum,
Partner, Morrison & Foerster LLP
© Morrison & Foerster LLP, 2013
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