Private Placements

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Tuesday, February 26, 2019
Registration: 8:30a.m. – 9:00 a.m.
Program: 9:00a.m. – 10:00 a.m.

Location
Mayer Brown LLP
1221 Avenue of the Americas,
New York, NY 10020

Successful privately held companies considering their liquidity opportunities or eyeing an IPO often turn to late stage private placements. Late stage private placements with institutional investors, cross-over investors and strategic investors raise a number of considerations distinct from those arising in earlier stage and venture financing transactions. Privately held companies also have become more comfortable sponsoring liquidity programs for early investors, employees and consultants, as well as allowing these holders to sell to cross-over investors in late stage investment rounds.

During our session, we will discuss:

  • Timing and process for late stage private placements;
  • Terms of late stage private placements;
  • Principal concerns for cross-over funds;
  • Diligence, projections and information sharing;
  • IPO and acquisition ratchets;
  • Participation by strategic investors;
  • Issuers and third-party tender offerings; and
  • Private secondary market opportunities

For more information or to register, please click here.

FINRA today published its Report on FINRA Examination Findings and highlights private placement related concerns.  In its examinations of the practices of many broker-dealers, the report notes FINRA found instances where the diligence review undertaken in connection with private placements was not sufficient in scope or depth to be considered a “reasonable investigation of the issuer and the securities.”  In its Regulatory Notice 10-22 issued several years ago, FINRA noted that FINRA member firms have a suitability obligation under FINRA Rule 2111, including in connection with recommending an investment in a private placement.  The notice describes the type of investigation that broker-dealers ought to conduct with respect to a private placement.

In its examinations, FINRA noted that member firms that had performed reasonable diligence “conducted meaningful, independent research on material aspects of the offering; identified any red flags with the offering or the issuer; and addressed and resolved concerns that would be relevant to a potential investor.  Depending on their size, firms’ diligence processes included creating a due diligence committee (at larger firms) or otherwise formally designating one or more qualified persons (at smaller firms), and charging them with investigating and determining whether to approve the offering for sale to investors. As part of their process, firms independently verified information that was key to the performance of the offering, and some received support from due diligence firms, experts and third-party vendors.  Further, in offerings involving issuers that were affiliates of the firm or whose control persons were also employed by the firm, firms used the reasonable diligence process to mitigate conflicts of interest, ensured that the offerings were suitable for investors in spite of such conflicts of interest, and developed comprehensive disclosures. Firms also used insights from the diligence analysis to establish post-approval processes and investment limits based on the complexity or risk level of the offering. After the offering, firms conducted ongoing diligence to ascertain whether offering proceeds were used in a manner consistent with the offering memorandum, particularly when the firms engaged in ongoing sales of an offering after initial closing.”

The report cites examples of other problematic practices, including reliance on the firm’s prior experience with the same issuer without refreshing their diligence, reviewing the offering memorandum without more in-depth diligence, failing to verify independently material aspects of the offerings, and failing to investigate red flags identified during the reasonable diligence process, placing undue reliance on due diligence consultants, experts or other third-party vendors.

Wednesday, August 15, 2018
1:00 p.m. – 2:00 p.m. EDT

PIPE transactions remain an important capital-raising alternative. Whether a public company is seeking to finance an acquisition, effect a recapitalization or restructuring, or facilitate a liquidity opportunity for an existing stockholder, a PIPE transaction may be the most efficient approach.

During this session, Partner Anna Pinedo will discuss:

  • Recent market trends;
  • PIPE documentation and the principal negotiating issues;
  • The securities exchange shareholder approval rules and proposed changes to such rules;
  • Using warrants and structuring approaches;
  • Acquisition-related PIPE transactions; and
  • Selling stockholder PIPE transactions.

For more information, or to register for this complimentary session, please visit the event website.

Large, late stage private capital raises for privately held companies continue to be the preferred method of financing growth for many new companies, particularly those in the tech sector.  A recent analysis conducted by data provider CB Insights examined what the industry calls “mega-deals” or “private-IPOs,” which are private placements raising over $100 million in proceeds.  These deals, which have a median deal size of $160 million, have largely contributed to the emergence of unicorns, or private companies valued at over $1 billion.  This trend in private capital raising has become more prevalent since the enactment of the JOBS Act in 2012, which has made it easier for companies to remain private longer.

A closer look at the data compiled by CB Insights shows that, over the last five years in the United States, over 90% of capital raises for private companies were later stage or mezzanine investments.  These deals have raised over $300 billion in capital for companies, with $151.7 billion of these deals fitting into the rubric of “private-IPOs.”  Based on the CB Insights analysis, it would appear that transaction volumes for 2018 are on pass to surpass those in 2017.  While legislators contemplate the capital formation-focused package of legislation that has been dubbed “JOBS Act 3.0,” and consider measures to make going public more compelling, it’s clear that there is no shortage of private capital to finance promising companies.

July 19 – 20, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act, related SEC regulations and significant legislative and regulatory changes and proposals.

Partner Anna Pinedo will lead a session titled “Securities Act Exemptions” on Day One of the program. Topics will include:

  • Exempt securities versus exempt transactions;
  • Private placements, including offerings under Rules 504 and 506 of Regulation D;
  • Regulation A+ offerings;
  • “Intrastate” offerings, including new Rule 147A;
  • Crowdfunding;
  • Employee equity awards;
  • Rule 144A offerings;
  • Regulation S offerings to “non-U.S. persons”; and
  • Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).

PLI will provide CLE credit.

For more information, or to register, please visit the event website.

At the Wall Street Journal’s CFO Network annual meeting held in Washington DC on June 11, 2018, Securities and Exchange Commission Chair Jay Clayton provided some insights on areas of focus for the Commission.  Chair Clayton noted that the Commission remains focused on measures designed to promote capital formation without sacrificing investor protection.  Chair Clayton noted that the Commission continues to work on disclosure effectiveness reforms.  He also noted that the Commission is working on amendments to the definition of “smaller reporting company,” and anticipates that the amendments will be released before October.  The moderator asked Chair Clayton to comment on the increasing significance of private capital.  Chair Clayton noted that the Commission is focused on the decline in the number of U.S. public companies and on the state of the U.S. initial public offering market.  He noted that retail investors are being shut out of investment opportunities given that most private placements are available only to accredited investors.  He noted that the Commission is looking at the private placement framework, and noted that, at present, the private placement is quite binary—if you are an accredited investor, you are able to participate in a private placement and potentially face significant losses, and if you are not an accredited investor, you are largely foreclosed from participating in the private placement market.  Chair Clayton also discussed proposed Regulation Best Interest as well as a number of other priorities.

Early in 2018, the Nasdaq filed with the SEC an amendment that would update certain aspects of the Nasdaq shareholder approval rules, Rule 5635. The proposal would:

  • amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
  • refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
  • eliminate the references to “book value” for purposes of the shareholder vote requirement.

The full text of the amendments is available here. The SEC has requested further comment (see the SEC notice here) on two aspects of the amendment:

  1. Is the five-day average closing price a reasonable alternative to determining market value for purposes of shareholder approval requirements under Nasdaq Rule 5635(d)? If so, what are the benefits and/or risks to companies and their shareholders? Do the benefits and risks to companies and shareholders change under certain market conditions, such as rising markets, and if so how?
  2. Are there benefits and/or risks to listed companies and shareholders by permitting sales in private placements that are above market value but below book value? Could there be any potential impact on share price? Would the assessment of any potential impact, if any, change depending on the reason why a stock is trading above market price but below book value (i.e., market conditions, accounting issues)?

Given the importance of the application of these rules to many private placements and PIPE transactions, capital markets participants are urged to provide comments.

The recently updated Securities and Exchange Commission agenda (see here and here) provides some insight on what to expect in upcoming months.  The amendments to the smaller reporting company definition, which were widely supported when proposed, remain in the “final rule stage.”  Likewise, the amendments to implement the FAST Act report and disclosure update and simplification (to eliminate outdated, redundant and otherwise repetitive requirements) remain in the final rule stage.  It will be interesting to see whether the Commission takes action on these measures before Commissioner Piwowar’s departure.  Consistent with Corporation Finance Division Director Hinman’s recent Congressional testimony about which we previously blogged, the agenda now includes in the “proposed rule stage” extending the test-the-waters provision to non-EGCs.  Also in the proposed rule stage are changes to Industry Guide 3 (disclosures for banks and other financial institutions), disclosure of payments by resource extraction issuers, and additional changes to the Regulation S-K disclosure requirements.  A new item was added that is referenced as “amendments to financial disclosures for registered debt security offerings.”  It is not clear to what this relates.  Sadly, the changes to various communications safe harbors and other Securities Act rules for business development companies are in the “long-term actions” category.  The long-term actions category also includes a number of measures that have been the subject of recommendations by the Commission’s Investor Advisory Committee, such as disclosures regarding board diversity and changes to the accredited investor definition.  Consistent with recent comments by representatives of the Commission, a measure relating to harmonizing private placement rules is added to the long-term actions list.

May 21 – 22, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

Join PLI’s expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will begin by addressing the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. Speakers will also address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. Panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will also address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital-raising alternatives.

Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on day one of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on day two. Partner Michael Hermsen will speak on the “Regulation A Offerings” panel on day one.

To register for this conference, or for more information, please click here.