So how to do a primary offering and avoid 415?
As we have researched the matter further and consulted with experts, and while none of this constitutes legal advice (consult your lawyer, hopefully me!), here are some additional thoughts on turning secondary offerings into primary offerings so as to lawfully avoid the limitations on the number of shares to be registered under the SEC's new Rule 415 interpretation:
1. S-4 Probably Doesn't Work: It appears that S-4, while registering shares to be issued in a reverse merger and thus making their initial issuance valid, does not make the shares publicly tradeable in a resale. Thus a follow-on resale registration is required, and this is subject to all the 415 problems.
2. S-1 May Work: Two reverse merger scenarios are possible.
(a) In the first, a merger agreement is signed, the private company then completes a PIPE investment into it, then an S-1 is filed to register the shares to be issued in the merger pursuant to the merger agreement, including shares to be issued to the PIPE investor when he converts his shares of the private company in the merger. S-1 is permitted to be used in this way, and any company, even smaller public companies, may utilize this form. Then all shares, including shares held by affiliates and investors, become freely tradeable upon effectiveness of the S-1 and the completion of the merger. Since it's a primary offering document 415 analysis and limitations do not apply. The challenge here is whether the PIPE investor is willing to invest in the private company, even knowing that the S-1 will be filed immediately after the investment (more and more of our clients are willing to make this investment). If not...
(b) In the second approach, money will not be invested until the merger is completed. In this situation, the S-1 is used with a dual purpose. First, you register the shares to be issued in the merger to the holders of private company shares (excluding the investor for this purpose). Second, you register shares to be issued in a public offering of "pubco" securities which will close on the same day as the merger. It appears, subject to the investors possibly having to declare themselves subject to underwriter liability, these shares could then be issued in essentially a "public PIPE" and become immediately tradeable at the market. And the investor takes no risk of the registration not going through as he does not invest until it is effective. Of course here the company must wait until the registration is complete before raising money. A bridge financing prior to filing the S-1 might help tide the company over while it awaits approval of the S-1.
3. Neither of the scenarios has been tried to my knowledge in a reverse merger context, so it is now a question of time before someone files a registration using one of these approaches to see how the SEC reacts. In the end, however, the SEC hopefully can and should offer ways for practitioners to do exactly as they have asked - use a primary registration to allow a registrant to bypass the problems associated with a secondary registration and limits pursuant to Rule 415.
4. Does the suggested S-1 approach work any better than a self-filing? The big extra advantage appears to be the ability to register, without limitation, potentially all shares of the company at once. A self-filing, which is typically a resale or secondary offering, will be subject to 415 limitations. If the self-filing is pursuant to a Form 10-SB, any shareholder without an exemption from registration (such as Rule 144) will have to wait until an exemption is available. And almost certainly the new investor will not have such an exemption available.
Did I mention this does not constitute legal advice? Someone try this and let's see!
1. S-4 Probably Doesn't Work: It appears that S-4, while registering shares to be issued in a reverse merger and thus making their initial issuance valid, does not make the shares publicly tradeable in a resale. Thus a follow-on resale registration is required, and this is subject to all the 415 problems.
2. S-1 May Work: Two reverse merger scenarios are possible.
(a) In the first, a merger agreement is signed, the private company then completes a PIPE investment into it, then an S-1 is filed to register the shares to be issued in the merger pursuant to the merger agreement, including shares to be issued to the PIPE investor when he converts his shares of the private company in the merger. S-1 is permitted to be used in this way, and any company, even smaller public companies, may utilize this form. Then all shares, including shares held by affiliates and investors, become freely tradeable upon effectiveness of the S-1 and the completion of the merger. Since it's a primary offering document 415 analysis and limitations do not apply. The challenge here is whether the PIPE investor is willing to invest in the private company, even knowing that the S-1 will be filed immediately after the investment (more and more of our clients are willing to make this investment). If not...
(b) In the second approach, money will not be invested until the merger is completed. In this situation, the S-1 is used with a dual purpose. First, you register the shares to be issued in the merger to the holders of private company shares (excluding the investor for this purpose). Second, you register shares to be issued in a public offering of "pubco" securities which will close on the same day as the merger. It appears, subject to the investors possibly having to declare themselves subject to underwriter liability, these shares could then be issued in essentially a "public PIPE" and become immediately tradeable at the market. And the investor takes no risk of the registration not going through as he does not invest until it is effective. Of course here the company must wait until the registration is complete before raising money. A bridge financing prior to filing the S-1 might help tide the company over while it awaits approval of the S-1.
3. Neither of the scenarios has been tried to my knowledge in a reverse merger context, so it is now a question of time before someone files a registration using one of these approaches to see how the SEC reacts. In the end, however, the SEC hopefully can and should offer ways for practitioners to do exactly as they have asked - use a primary registration to allow a registrant to bypass the problems associated with a secondary registration and limits pursuant to Rule 415.
4. Does the suggested S-1 approach work any better than a self-filing? The big extra advantage appears to be the ability to register, without limitation, potentially all shares of the company at once. A self-filing, which is typically a resale or secondary offering, will be subject to 415 limitations. If the self-filing is pursuant to a Form 10-SB, any shareholder without an exemption from registration (such as Rule 144) will have to wait until an exemption is available. And almost certainly the new investor will not have such an exemption available.
Did I mention this does not constitute legal advice? Someone try this and let's see!
Labels: Rule 415
posted by David N. Feldman at
3/01/2007 05:42:00 AM
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