· When an issuer may register the resale of securities sold in private equity line financings
· The applicability of Rule 144 requirements to shares held by a non-affiliate acquired by gift from an affiliate
· The applicability of Rule 144 requirements to shares held by a pledgee acquired upon default by an affiliate
· How to apply the volume limitation requirements of Rule 144 to shares sold by an affiliate to the issuer
· The ability of an issuer to add additional shares to an automatic shelf S-3 by means of a post-effective amendment
· The requirement to state prior to effectiveness the aggregate number of shares being offered in a non-automatic shelf S-3 prospectus
· When financial statements and other information must be provided to non-accredited investors in acquisitions made under Reg D
· How to calculate the one-third cap requirement of General Instruction I.B.6(a) of Form S-3 when registering warrants that are not exercisable within a year
· The ability to incorporate by reference into an S-4 certain risk factors from the most recent 10-K
· The requirement to provide certain information regarding non-GAAP financial measures used as targets in the executive compensation context
· The limitations on the difference between the low and the high estimated maximum offering price for IPOs
Question: When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?
Answer: In many equity line financings, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then register the “resale” of the securities sold in the equity line financing. In these types of equity line financings, the delayed nature of the puts and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings.
While we analyze private equity line financings as indirect primary offerings, we recognize that the “resale” form of registration is sought in these financings. As such, we will permit the company to register the “resale” of the securities prior to its exercise of the put if the transactions meet the following conditions:
· the company must have “completed” the private transaction of all of the securities it is registering for “resale” prior to the filing of the registration statement;
· the “resale” registration statement must be on the form that the company is eligible to use for a primary offering; and
· in the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s).
We will not object that a private transaction is not “completed” based on the lack of a fixed price if the agreement provides for pricing based on a formula tied to market price and there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS. [May 16, 2013]
1933 ACT RULES
Rule 144(a) — Definitions
Question: An affiliate donor transfers, by bona fide gift, company stock acquired in the open market (i.e., the securities are not “restricted securities” in the affiliate’s hands) to a donee in a non-public transaction. What is the status of these securities in the donee’s hands, and what requirements in Rule 144 are applicable to a donee who is a non-affiliate when he or she resells these securities?
Answer: In the donee’s hands, these securities are “restricted securities” because they have been “acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering.” As these securities were not subject to any holding period requirement in the affiliate donor’s hands, however, the donee need not comply with the holding period requirement in Rule 144(d) for subsequent sales. If the donee is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1), as applicable. [May 16, 2013]
Rule 144(d) — Holding Period for Restricted Securities
A pledgor who is an affiliate defaults on a loan that is secured, either with or without recourse, by a bona fide pledge of company stock acquired in the open market (i.e., these securities are not “restricted securities” in the pledgor’s hands). In the pledgee’s hands, these securities are “restricted securities” because they have been “acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering.” If the pledgee is a non-affiliate and has not been an affiliate during the preceding three months, the pledgee may resell such securities pursuant to Rule 144(b)(1) without regard to the holding period requirement in Rule 144(d) but subject to the current public information requirement in Rule 144(c)(1), as applicable. No other requirements in Rule 144 are applicable to the pledgee’s resale. [May 16, 2013]
Rule 144(e) — Limitation on Amount of Securities Sold
Question: Are an affiliate’s sales of securities back to the issuer in a non-public transaction excludable when calculating the amount of securities that may be sold by the affiliate under Rule 144?
Answer: Yes. Under Rule 144(e)(3)(vii)(C), securities sold in a transaction that is exempt pursuant to Securities Act Section 4 and does not involve any public offering need not be included in determining the amount of securities that may be sold under Rule 144. This would include an affiliate’s non-public sales of securities back to the issuer. [May 16, 2013]
Rule 413 — Registration of Additional Securities and Additional Classes of Securities
Question: An issuer files an automatic shelf registration statement on Form S-3 to register the offer and sale of a specified number of securities of a specified class of securities. May the issuer post-effectively amend this Form S-3 to add more securities of the same class already registered?
Answer: Yes. An issuer may add to the automatic shelf registration statement on Form S-3, by post-effective amendment, more securities of the same class already registered. [May 16, 2013]
Rule 430B — Prospectus in a Registration Statement After Effective Date
Question: If an issuer files a non-automatic shelf registration statement and is entitled to rely on Rule 430B(b) to omit from the prospectus “the identities of selling security holders and amounts of securities to be registered on their behalf” until after effectiveness of the registration statement, may the issuer also omit from the prospectus, until after effectiveness, the aggregate number of shares being registered for resale?
Answer: No. The prospectus for the non-automatic shelf registration statement must disclose the aggregate number of shares being registered for resale before effectiveness, even if the issuer is entitled to rely on Rule 430B(b) to omit information required by Item 507 of Regulation S-K regarding specific selling security holders until after effectiveness. [May 16, 2013]
Rule 502 — General Conditions to be Met
Question: If an acquiror seeks written consents from the target’s shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506 of Regulation D, when must the financial statement and other information specified in Rule 502(b)(2) be provided to those target shareholders that are non-accredited investors?
Answer: Rule 502(b)(1) requires such information to be delivered to non-accredited investors in “a reasonable amount of time prior to sale.” The delivery of a written consent constitutes the “sale” of securities in an offer conducted in reliance on Rule 505 or 506. Accordingly, to comply with the timing requirement set forth in Rule 502(b)(1), an acquiror issuing securities in a Rule 505 or Rule 506 offering must provide the disclosure required by Rule 502(b)(2) to non-accredited investors in a reasonable amount of time prior to obtaining any written consents from them. [May 16, 2013]
General Instructions I.B.1 to I.B.6 — Transaction Requirements
Question: In calculating whether the size of an offering consisting of common stock and warrants exceeds the one-third cap in General Instruction I.B.6(a) of Form S-3, is an issuer required to follow Instruction 2 to General Instruction I.B.6 when the warrants are not exercisable for common stock within 12 calendar months?
Answer: Yes. Instruction 2 to General Instruction I.B.6 applies to calculating the market value of warrants for purposes of the one-third cap, even when the warrants are not exercisable for common stock within 12 months. [May 16, 2013]
Question: If a registrant “meets the requirements for use of Form S-3,” as set forth in General Instruction B of Form S-4, and incorporates by reference registrant information into the Form S-4 pursuant to General Instruction B and either Item 11 or 13 of Form S-4, may the registrant incorporate the risk factors from its latest Form 10-K in response to Item 3 of Form S-4?
Answer: Yes. Although Item 3 does not expressly contemplate incorporation by reference, a registrant may incorporate by reference into the Form S-4 the risk factors that it disclosed in its most recent Form 10-K. The offering-specific risks, however, would be required to be disclosed in the Form S-4 itself. [May 16, 2013]
Item 402(b) — Executive Compensation; Compensation Discussion and Analysis
Question: Instruction 5 to Item 402(b) provides that “[d]isclosure of target levels that are non-GAAP financial measures will not be subject to Regulation G and Item 10(e) of Regulation S-K; however, disclosure must be provided as to how the number is calculated from the registrant’s audited financial statements.” Does this instruction extend to the disclosure of the actual results of the non-GAAP financial measure that is used as a target?
Answer: Yes, provided that this disclosure is made in the context of a discussion about target levels. [May 16, 2013]
Item 501 — Forepart of Registration Statement and Outside Front Cover Page of Prospectus
Question: Instruction 1 to Item 501(b)(3) requires a preliminary prospectus for an initial public offering of securities, other than debt securities, to include a bona fide estimate of the range of the maximum offering price. Are there constraints on how wide the disclosed price range may be?
Answer: Yes. For initial public offerings, a price range in excess of $2, for offerings up to $10 per share, or in excess of 20% of the high end of the range, for offerings over $10 per share, will not be considered bona fide. For example, if the high end of the range is $20, then the price range may be as wide as $16 to $20. If an auction clearing price will be used as the primary factor in establishing the final offering price, a price range in excess of $4, for offerings up to $20 per share, or in excess of 20% of the high end of the range, for offerings over $20 per share, will not be considered bona fide. [May 16, 2013]
Item 601 — Exhibits
Question: A reporting issuer plans to rely on Securities Act Rule 430A to omit pricing information from its prospectus until after effectiveness of the registration statement. Unlike a non-reporting issuer, it is not required to disclose, pursuant to Item 501(b)(3) of Regulation S-K, a bona fide estimate of the range of the maximum offering price. As Item 601(b)(101)(i) provides that an interactive data file is “required for a registration statement under the Securities Act only if the registration statement contains a price or price range,” must the issuer provide an interactive data file as an exhibit to the registration statement?
Answer: Yes. Item 601(b)(101)(i) does not provide an exemption from the interactive data requirements for reporting issuers that plan to rely on Rule 430A. In general, disclosure that satisfies the requirements in Item 501(b)(3) of Regulation S-K to state the “offering price” will be considered a “price or price range” for purposes of the interactive data rules, and thus trigger the requirement to submit interactive data. Accordingly, registration statements for shelf offerings, at-the-market offerings, exchange offers and secondary offerings must comply with the interactive data filing requirement even though they generally do not include a specific offering price at the time of effectiveness, unless the financial statements are incorporated by reference into the registration statement. [May 16, 2013]