“A complete guide designed by qualified professionals to help companies, investment professionals, and investors better understand PIPEs as a financial tool.” – Mitch Hull President, Hull Capital Management, LLC Private investments in public equity (PIPEs) offer a practical financing alternative for companies seeking capital and a unique asset class for investors For practitioners who know how to identify and execute transactions, PIPEs present a growing opportunity This revised and updated guide presents the views, voices, and invaluable expertise of leading practitioners from all specialties in the field The book is divided into three parts: “The Business of PIPEs,” which provides a historical backdrop and overview; “Regulatory Landscape and Structural Alternatives,” which details the legal framework and transaction structures; and “Deal Flow,” which offers the investor’s perspective on negotiating deals With detailed discussions, ranging from the origins of the marketplace and deal structures to legal considerations and due diligence, and from finding new opportunities to trading strategies, this book provides a clear window to the inner workings of this active area of the small-cap market Investors, financial analysts, investment bankers, corporate and securities attorneys, and executives of public companies will find substantial value in the pages of this book Praise for PIPEs: A Guide to Private Investments in Public Equity Revised and Updated Edition Edited by Steven Dresner with E Kurt Kim “A valuable and comprehensive update on the PIPEs market, with insights from the bankers, lawyers, and buyers This is an important reference for anyone working with PIPEs.” Paul Roth Partner, Schulte Roth & Zabel LLP “A complete guide designed by qualified professionals to help companies, investment professionals, and investors better understand PIPEs as a financial tool.” Mitch Hull President, Hull Capital Management, LLC “The PIPE space is made up of so many moving parts, but this book turns it all into a smooth-running machine Everyone in this business has learned to rely on Steven and Kurt for clarity and understanding.” Mitch Levine Founder and Managing Partner, Enable Capital Management “Steve Dresner is the most knowledgeable person in the world of PIPEs This PIPEs book is the bible of the industry and the source for anyone seeking straight answers regarding this otherwise complicated subject.” Dian Griesel, PhD Founder and Chairman, The Investor Relations Group “The first book to explain the trends in the PIPE industry, this revised and updated edition is essential reading to keep up with the changes and make the best use of this important financing vehicle.” Ramnarain Joseph Jaigobind Managing Director, Global Equity Capital Markets, Maxim Group, LLC “ The PIPEs market is one of the most dynamic areas of investment banking today Whether you are an investor or an issuer, banker, or student, this book is a must-read for understanding this increasingly important area of the equity and equity-linked capital markets I strongly recommend this publication to both market professionals and laypersons interested in the PIPEs market.” Kim S Fennebresque Chairman and CEO, Cowen and Company, LLC “This is a must-read for attorneys, hedge funds, investment bankers, traders, and all companies looking to raise capital This book will become a handy reference to the investment community.” Ron Nash Past president and founder, Nash Weiss & Co Praise for the First Edition “This book is a great reference that all PIPE investors should have in their offices.” Barry Kurokawa Cofounder and Managing Director, ProMed Management “This collection of essays sheds light on the historical, regulatory, and transactional aspects of these often mysterious securities Both practitioners and students of the private equity industry should find this book valuable.” Josh Lerner Jacob H Schiff Professor of Investment Banking Harvard Business School “An impressive array of banking, venture capital, and legal professionals share their insights into this poorly understood but increasingly important financing alternative for smaller to midsize companies Firms and investment bankers looking to raise capital and investors looking for alternative investment approaches will find this authoritative reference of great value.” Ted Barnhill Professor of Finance and Chairman, Department of Finance The George Washington University “This book provides an excellent analysis for issuers, legal advisers, and investors It is a valuable resource for anyone involved in or considering involvement with PIPEs, or considering issuing or investing in PIPEs.” Michael B Pollack Partner, Reed Smith LLP “The first truly comprehensive book on PIPEs … as an active participant in the sector, I was impressed by their ability to bring in the best minds in the business for their detailed thoughts on structuring, strategy, and pitfalls for the issuers, advisers, and investors Great job.” Jonathan Silverstein General Partner, OrbiMed Advisors LLC “How does one learn to utilize the most popular financial tool for raising equity capital in the next decade? It is by reading PIPEs, the leading guide with the combined expertise of more than a dozen thought leaders, sharing their cumulative knowledge in this field.” P Morgan Kash Cofounder and Chairman, Two River Group Holdings “A highly useful treatise in an emerging area of the law.” Joseph W Bartlett Of Counsel, Fish & Richardson P.C Founder and Chairman, VC Experts “In recent years, the importance of PIPEs has grown considerably, but reference material has lagged far behind This excellent book fills the gap with a comprehensive treatment by highly qualified contributors.” Andrew Metrick Associate Professor of Finance The Wharton School of the University of Pennsylvania PIPEs Also by Steven Dresner Reverse Mergers: Taking a Company Public Without an IPO by David N Feldman with contributions by Steven Dresner Also available from Bloomberg Press The New Investor Relations: Expert Perspectives on the State of the Art Edited by Benjamin Mark Cole Hedge Fund of Funds Investing: An Investor’s Guide by Joseph G Nicholas Market-Neutral Investing: Long/Short Hedge Fund Strategies by Joseph G Nicholas Due Diligence for Global Deal Making: The Definitive Guide to Cross-Border Mergers and Acquisitions, Joint Ventures, Financings, and Strategic Alliances Edited by Arthur H Rosenbloom The Securitization Markets Handbook: Structures and Dynamics of Mortgage- and Asset-Backed Securities by Charles Austin Stone and Anne Zissu ——— A complete list of our titles is available at www.bloomberg.com/books Attention Corporations This book is available for bulk purchase at special discount Special editions or chapter reprints can also be customized to specifications For information, please e-mail Bloomberg Press, press@bloomberg.com, Attention: Director of Special Markets, or phone 212-617-7966 PIPEs A Guide to Private Investments in Public Equity R E V I S E D A N D U P D AT E D E D I T I O N edited by Steven Dresner with E Kurt Kim Bloomberg Press New York © 2003, 2006 by Steven Dresner Chapters 1–11 and Afterword © 2003, 2006 by Bloomberg L.P All rights reserved Protected under the Berne Convention Printed in the United States of America No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022, U.S.A or send an e-mail to press@bloomberg.com BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG.COM, BLOOMBERG MARKET ESSENTIALS, Bloomberg Markets, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg Finance L.P (“BFLP”), a Delaware limited partnership, or its subsidiaries The BLOOMBERG PROFESSIONAL service (the “BPS”) is owned and distributed locally by BFLP and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan, and Korea (the “BLP Countries”) BFLP is a wholly-owned subsidiary of Bloomberg L.P (“BLP”) BLP provides BFLP with all global marketing and operational support and service for these products and distributes the BPS either directly or through a non-BFLP subsidiary in the BLP Countries All rights reserved PrivateRaise, PrivateRaise.com, and Equity Private Placement (EPP) Database are trademarks of PrivateRaise, L.L.C This publication contains the authors’ opinions and is designed to provide accurate and authoritative information It is sold with the understanding that the authors, publisher, and Bloomberg L.P are not engaged in rendering legal, accounting, investment-planning, or other professional advice The reader should seek the services of a qualified professional for such advice; the authors, publisher, and Bloomberg L.P cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader This book does not constitute or contain advice to enter into any transaction All legal and regulatory information is provided for informational purposes only and does not constitute advice on these matters Investments in PIPE securities involve significant risks and are suitable for only certain institutional “accredited investors,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended Prospective issuers of and investors in PIPE securities should consult with their own legal and financial advisors before engaging in any transaction involving the issuance or purchase of a PIPE security First edition published 2003 Revised and updated edition published 2006 10 ISBN-13: 978-1-57660-194-5 The Library of Congress has cataloged the earlier printing as follows: PIPEs : a guide to private investments in public equity / edited by Steven Dresner with E Kurt Kim Rev and updated ed p cm Includes bibliographical references and index ISBN 1-57660-194-3 (alk paper) Private investments in public equity United States Corporations United States Finance I Title: Guide to private investments in public equity II Dresner, Steven III Kim, E Kurt HG4963.P57 2005 332.6 dc22 Acquired by Jared Kieling Edited by Tracy Tait 2005023535 Glossary 279 terial events (e.g., equity private placements, changes in control, material acquisitions) that might affect its financial situation or the value of its assets or shares SEC Form S-1 This is the basic registration form that issuers can use to register securities Form S-1 requires that the issuer file post-effective amendments to keep such registration statements current See also post-effective amendment SEC Form S-3 Issuers who have been timely in their periodic reporting for the last twelve months, have not defaulted on any senior debt or preferred stock, and have a public float value of at least $75 million on any one day within sixty calendar days prior to filing the registration statement are eligible to file a Form S-3 for the purpose of selling new securities The filing of Form S-3 is frequently referred to as a shelf registration Every report subsequently filed with the SEC is automatically incorporated, by reference, into the shelf registration, thereby keeping the document up-to-date without any special effort or additional filings SEC Regulation D Regulation D, promulgated by the SEC in 1982, is comprised of eight rules, rules 501–508, which provide issuers with a safe harbor from the registration requirements of the Securities Act of 1933, as amended Regulation D is intended to provide issuers with greater certainty than reliance on interpretations of the Section 4(2) exemption An issuer that fails to satisfy the objective criteria of Regulation D still may rely on Section 4(2) of the Securities Act of 1933, as amended Regulation D is often referred to as Reg D See also Section 4(2) of the Securities Act of 1933, as amended; Securities Act of 1933, as amended SEC Regulation FD Regulation “Fair Disclosure,” commonly shortened to Reg FD in informal communications, addresses the selective disclosure of information by issuers Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities such as securities professionals or stock analysts, the issuer must make public disclosure of that information Regulation FD introduces a cautionary element into the marketing of a PIPE because the issuer is sharing nonpublic information (namely, that it is considering a financing transaction) with a limited number of investors SEC Regulation S Regulation S provides for an exemption from the registration requirements under the Securities Act of 1933, as amended, for offshore sales of securities by United States–based issuers These securities are treated as restricted under SEC Rule 144 with respect to the resale of securities to the public See also restricted securities; SEC Rule 144 SEC Rule 144 Rule 144 permits investors to sell, over a specified period of time, limited quantities of securities acquired in private placement transactions Under Rule 144, restricted securities may be sold to the public by buyers of private placements, prior to the expiration of a two-year holding period, without full registration of the securities, pursuant to specific conditions and limitations After a two-year holding period, resale of such securi- 280 Glossary ties to the public are unrestricted See also restricted securities SEC Rule 144A Rule 144A provides investors with a methodology for reselling certain securities without registration Rule 144A provides a limited exemption from registration requirements that permits entities other than the issuer to resell, in a transaction not involving a public offering, restricted securities acquired from the issuer Rule 144A requires that the restricted securities be sold to entities the seller reasonably believes to be a qualified institutional buyer; that the securities were not, when issued, of the same class as securities listed on a national securities exchange or quoted on an automated interdealer quotation system; that the investor is aware that the seller is relying on Rule 144A for its resale; and that the issuer either is a reporting company (a public company that is in compliance with the SEC’s reporting/disclosure practices; some public companies are not) or specifically makes available certain information to holders See also qualified institutional buyer (QIB); restricted securities Section 4(2) of the Securities Act of 1933, as amended Section 4(2) provides a statutory private placement exemption Specifically, Section 4(2) provides that the registration requirements of Section of the Securities Act of 1933, as amended, not apply to financings executed by an issuer that not involve a public offering Section of the Securities Act of 1933 Section of the Securities Act of 1933 generally requires that securities be registered and prohibits the sale of unregistered securities See also Securities Act of 1933 Securities Act of 1933, as amended An act of Congress that governs the issuance of new securities It requires the registration of securities and disclosure of pertinent information relating to new issues so that investors may make informed decisions The oversight of this function is the responsibility of the Securities and Exchange Commission Securities and Exchange Commission (SEC) The federal agency that regulates United States financial markets The SEC also oversees the securities industry and promotes full disclosure in order to protect the investing public against misconduct in the securities markets securities purchase agreement An agreement in which investors agree to purchase and the issuer agrees to sell securities to be issued in a PIPE transaction Terms generally include the purchase price and terms of the closing; the amount of securities purchased; representations, warranties, and covenants; and indemnification by the issuer for breaches of the representations, warranties, and covenants shelf equity line See public equity line shelf registration See SEC Form S-3 shelf takedown Issuers that utilize a shelf registration on SEC Form S-3 will engage in a shelf takedown, or issuance “off of the shelf,” when it issues securities See also Rule 415 of the Securities Act of 1933, as amended; SEC Form S-3 Glossary 281 Specified Purpose Acquisition Company (SPAC) Utilizing the $5 million exemption from Rule 419, SPACs raise over $5 million and avoid Rule 419 restrictions However, they generally follow most of the 419 proscriptions in order to entice investors, but the shares issued in the SPAC IPO not go into escrow, they generally trade while awaiting a merger See also Rule 419 of the Securities Act of 1933 straight equity See plain-vanilla threshold-based redemption rights Threshold-based redemption rights let investors require the issuer to redeem an investment if certain thresholds are not achieved or maintained (e.g., financial covenants, or a specified minimum for the market price of the issuer’s common stock) See also investor redemption rights threshold securities The term threshold securities generally refers to securities with substantial failures to deliver Under Regulation SHO, equity securities for which there is an aggregate failure to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more that is equal to at least 0.5 percent of the issue’s total shares outstanding are threshold securities so long as they are included on a threshold security list published by an exchange or other self-regulatory organization See also Regulation SHO time-based redemption rights Time-based redemption rights let investors require the issuer to redeem the investment based merely on the passage of a specified time period or periods (e.g., weekly, monthly, quarterly, or annually) following the closing date but prior to the maturity date of the investment See also investor redemption rights underwriter An investment bank that buys an issue of securities from a company and resells it to investors An underwriter is commonly associated with the public offering of securities such as initial public offerings (IPOs) and follow-on offerings See also follow-on offering underwriting syndicate A group of investment banks that work together to sell new securities to public investors The underwriting syndicate is led by a lead underwriter See also underwriter unregistered securities See restricted securities value-based antidilution rights Any of three types of antidilution protection triggered by a corporation’s issuing additional equity or equity-linked securities at a purchase or conversion or exercise price below a specified threshold price: full-ratchet The purchase or conversion or exercise price is lowered to equal the purchase or conversion or exercise price of a subsequent offering by the issuer most-favored nation The investor has the option to substitute the purchase or conversion or exercise terms of a subsequent offering by the issuer for the then current purchase or conversion or exercise terms weighted-average The purchase or conversion or exercise price is adjust- 282 Glossary ed lower based on a weighted-average calculation of the dilution impact of a subsequent offering by the issuer Although the calculation can be formulated in several different ways, the following is an example of a typical weighted-average adjustment: For example, assume a company has 100 shares of common stock outstanding and that an investor has purchased a convertible security with a conversion price equal to $2 per share If the company subsequently sells an additional 20 shares of common stock at $1 per share, then the conversion price of the convertible securities will be reduced to $1.83 per share based on the formula below: $2 × [($2 × 100) + ($1 × 20)] Divided By [$2 × 120] = $1.83 per share See also antidilution protection; basic antidilution rights variable pricing In a variable-priced transaction, the purchase price of common stock or conversion price of a convertible security fluctuates in relation to the stock price of the issuer after closing (usually subject to a maximum purchase or conversion price) The effective price will ultimately depend on the direction of the issuer’s stock price venture capitalist Venture capitalists or “VCs” traditionally invest in privately held companies VCs frequently look for situations where a company might benefit not only from an influx of capital but also from value-added services such as management capabilities or domain experience Depressed market prices of public companies make PIPEs an attractive alternative for VCs who are already accustomed to making private equity investments volume-weighted average price (VWAP) Pricing in a PIPE transaction is frequently determined by the volume-weighted average price (VWAP) of the issuer’s publicly traded stock during a specified pricing period The VWAP takes into account every trade in the stock over the course of each trading day, weighted by volume, during a specified pricing period, making it perhaps the most accurate representation of the value of a company’s stock See also pricing period warrant agreement A warrant agreement sets forth the terms under which an investor will have the right to purchase additional securities of the issuer Terms typically contained in the warrant agreement include exercise terms, covenants, representations of the holders, and transferability See also warrant coverage; warrants warrant coverage If warrants are included with other securities issued in a PIPE, the deal is commonly referred to as having “warrant coverage.” Warrant coverage is typically calculated as the total number of additional common shares that may be purchased via the exercise of warrants divided by the total number of common shares purchased (or convertible or exchangeable into) in a transaction warrants A security that entitles the holder to purchase another security (typically common stock) at a specified price during a specified time period A warrant may be issued separately or together with other equity private placement securities See also warrant agreement; warrant coverage INDEX accredited investors, 67, 81–82 additional investment rights (AIRs), 134, 150 advertising, 119–120 affiliates, sales by, 92 agents, 39–42, 70–74 Amazon.com, Inc., 33 American Arbitration Association, 196 American Stock Exchange, 146 AMEX Biotech Index, 214 Amex Company Guide, 114 amortizing convertible securities, risk and, 210–211 announcements, 119–120, 147 antidilution protection, 49, 51, 135–138, 215–217 arbitrage, convertible, 56–58 Arch Capital Group Ltd., 33 background checks, 224 balance sheet, 226 Berkshire Hathaway, 205 Black Box Inc., 101, 111 blackout periods, 140–141 blank check companies, 245 Blockbuster Entertainment, 243 bonds, convertible, 56–58 bought deals, 126–127 Buffett, Warren, 205 Bush, George, 253 call option, 143, 213 capital structure examination, 225–226 cash flow, 230–231 ceiling limitations, 135 certificate of designation (CD), 215 China, 258 CNA Financial Corp., 33 common stock, 13–16, 22, 131, 173–174 investment agreement, 215 risk and, 206–207 confidentiality agreement, 116– 117 consultants, use of outside, 227–228 conversion prices, 134 antidilution protection, 135– 138 limitations on, 138–139 types of, 135 conversion ratio, 207–209 convertible debt structures, 13–16, 22, 132–133, 174 convertible notes or debentures, 283 284 Index 132–133, 150, 242 convertible preferred stock, 13–16, 22, 131–132, 174, 242 convertibles, 55 bonds, 56–58 debt securities, 56 increased demand, 59 private placements and, 111– 112 risk, 58 structures, 59–61 convertible securities risk and amortizing and variable price, 210–211 risk and fixed-price, 207–209 Corixa Corp., 33 corporate insiders, 69 covenants, 144–145 Current Issues and Rulemaking Projects, 73, 101 CV Therapeutics, Inc., 33 death spiral, 72, 188–190 debentures, 132–133, 150, 215 debt securities, 56 demand registration rights, 140 dilution, 71–72 disclosure issues, 116–120 Discovery Laboratories, Inc., 33 dividend payments, 242 documentation certificate of designation of preferred stock, 150 closing, 150–151 convertible debenture, 150 escrow agreement, 18 place agent agreement, 17–18 prospectus supplement, 18 registration rights agreement, 16, 17, 149–150, 215, 217–218 securities purchase agreement, 16–17, 149, 215 subscription agreement, 18 term sheets, 148–149, 151– 168, 180–185, 227 warrants, 16, 17, 112, 133– 134, 150, 185 downside protection versus price protection, 47–50 drawdowns, 175, 182–185 dribble-out rule, 91–92 DTC, 126 due diligence background checks, 224 capital structure examination, 225–226 checklist, 223–224 consultants, use of outside, 227–228 criteria for, 240 intellectual property, 234–237 investment of own capital, 228 management, handling, 238 on-site trips, 226 of other firms, problems with using, 229 purpose of, 218–219, 221–222 reverse mergers and, 254–255 skepticism, use of, 230–237 specialists, use of, 229–230 steps for, 222–223 term sheets, 227 truths for, 238–240 use of funds statement, 226– 227 eligibility issues, 88 Employee Retirement Income Security Act (ERISA) (1974), 81 engagement letters, 98–99 for traditional PIPE, 104–105 Enron, 252, 253 Index enterprise value, 231, 234 equity, defined, equity lines of credit, 123–124 investors as underwriters, 178–179 private (resale shelf ), 175, 178 public (primary shelf ), 174–178 term sheet example, 180–185 Equity Private Placement (EPP) database, 28 equity rights, 144–145 escrow agreement, 18 exchange-traded funds (ETFs), 214 exemptions for offerings, 85 exercise price, 134 expenses, who pays, 145 285 Form 8-K, 24, 66, 118, 119, 147, 256 Form 10-K, 66, 170 Form 10-KSB, 256 Form 10-Q, 66 Form 10-SB, 249–250, 259–260 Form 144, 92 forward-looking averages, 209 full-ratchet antidilution protec tion, 49, 51, 137–138, 216 grace periods, 140–141 gun-jumping, 111 Hambrecht & Quist, 54 hard floor, 135 hedge funds, 68 hedging, private placements and structured PIPEs and, fair disclosure, 24–25, 117–118 121–123 Fairfax Financial Holdings Ltd., 33 holding period, 91–92 five-factor test, 110, 115 fixed conversion prices, 135 indentures, 133 fixed prices, 43, 44, 46 industry sectors, 19–20, 41–42, risk and convertible securities, 44–45 207–209 information floaters, 208, 210–211 material nonpublic, 145 floating/variable conversion prices, requirements for issuers, 83–84, 135 88 floor limitations, 135 institutional investors, 69 Forbes, 253 integration issues, 23–24, 83, forced conversions, 143–144 110–113 foreign investors, 110, 119, 120, intellectual property, 234–235 170 interest payments, 242 Form D, 85 Investment Advisers Act (1940), Form F-3, 170, 176 72, 80 Form S-1, 141 Form S-3, 97–98, 124–125, 141, Investment Company Act (1940), 80 170, 176 investors Form S-8, 256–257 accredited, 67, 81–82 Form SB-2, 259–260 banks and agents, 39–42 Form 1-A, 198 corporate insiders, 69 Form 6-K, 119 286 foreign, 110 hedge fund, 68 institutional, 69 managers and funds, 34–39 nonaccredited individual, 69–70 profile of, 20, 21 qualified institutional buyers, 68–69, 87–88 script, 117 venture capitalists, 69 IPOs, reverse mergers versus, 251–254 issuers, 19–20, 31–33, 66–67 safe harbor, 89–90 Index mandatory repayment of principal rights, 47–48, 50 mandatory registration rights, 140 Manual of Publicly Available Telephone Interpretations, The (SEC), 73, 101–102, 110, 124, 130 marketing issues, 24 market price, 16, 22 market size, 12, 27–31 Montgomery Securities, 54 most-favored nation antidilution protection, 49, 51, 138 Muriel Siebert, 243 naked shorting, 72, 188–190 Nasdaq, 146, 173–174 Marketplace Rules, 114 Small Cap Market, 245 legal issues 20 Percent Rule, 23 covenants, 144–145 NASDR, 176–177, 178 overview of, 77–92 profit recapture and Section 16, National Association of Securities Dealers (NASD), 72, 73–74 147–148 National Securities Market Im- public announcement, 147 provement Act (NSMIA) reverse mergers and, 254–257 (1996), 86 stockholder approval, 146–147 Navistar International Corp., 33 Level Comm., Inc., 33 New York Stock Exchange, limitations on conversion prices, 113–114, 146 138–139 no-action letters, 111 litigation nonaccredited individual investors, evidence, retaining, 191 69–70 history of, 188–190 reducing the chance of, 193–195 nonaffiliates, sales by, 92 non-fixed price, 45–47 SEC implications, 197–199 non-Rule 144A transactions, strategies, 190–193 nontraditional PIPEs See struc- successful, increasing the prob tured/standard PIPEs ability of, 195–197 notice of sale, 85, 89 tendering claims, 190–191 venue for, selecting, 191–192 Occidental Petroleum, 243 offerings, 78–80 managers, investment, 34–39 exemptions for, 85 how to handle, 238 J.P Morgan Chase & Co., 209 Index manner of, 84–85 offshore transactions, 90 options, 213, 225–226 Orchid Biosciences, 214 over the counter, use of term, 247 Pacific Health Systems, Inc., 33 penalties, 142–143 penny stock market, 247 Penny Stock Reform Act (1990), 247 piggyback registration rights, 140 PIPEs (private investment public equities) defined, 1–4, 53–54 development of, 54–64 documentation for, 16–17 future of, 25, 52 history of, 11–12 investors, examples of, 34–39 investors, profile of, 20, 21 issuers, 19–20, 31–33 marketing, 24 overview of, 9–11 pricing of, 22 reasons for, 10–11, 21 regulatory issues, 23–25 size and shape of, 28–31 structural issues, 13–16 structured/standard, 61, 105–109, 117, 129–131 terminology, 16 venture-style, 109 PIPEs (private investment public equities), traditional advantages of, 100, 130 basic terms, 100–101 defined, 99–100, 129–130 disclosure issues, 116–120 engagement letters, 104–105 investor representations, 102 SEC guidelines, 101–102 287 settlement and transfers, 102–103 shelf registration statement, 103, 124–125 place agent agreement, 17–18 placement agents, 39–42, 70–74 PlacementTracker.com, 12, 13, 19 plain vanilla PIPEs, 13 PORTAL, 133 price protection, 45, 106–107 downside protection versus, 47–50 prices, 22 conversion, 134–139 exercise, 134 fixed, 43, 44, 46 fixed conversion, 135 floating/variable conversion, 135 market, 16, 22 non-fixed, 45–47 reset, 43, 46 types, 43, 45–47 variable, 43, 46 private equity line, 175, 178 private equity market, changes in, 261–266 private placements, 93 advertising/announcements, 119–120 convertible securities and war rants and, 111–112 disclosure issues, 116–120 financing alternatives, 94 integration issues, 110–111 pros and cons of, 54–55, 94 representations and hedging, 121–123 with trailing registration rights, 94–99 PrivateRaise, LLC, 28, 29, 45 private sale of secondary stock, 109–110 288 Index profit recapture, 147–148 prospectus supplement, 18 public announcements, 147 public equity line, 174–179 public offerings, pros and cons of, 55 public shells, 245 public venture capital, 244 purchase rights, 144–145 put option, 143, 175, 213 qualified institutional buyers (QIBs), 2–3, 11, 68–69, 87–88 Ralston test, 79–81 redemption, 51, 143–144 Registered Direct (RD) offerings, 9, 10, 15–16 documentation for, 17–18 future of, 25 marketing, 24 prices, 22 registered direct transactions, 3–4, 125–126 defined, 169–170 equity lines of credit, 123–124, 174–185 shelf registration statements, 103, 124–125, 140, 170– 174 registration requirements, 78 private placements with trailing registration rights, 94–99 registration rights, 139 Form S-3, 97–98, 124–125, 141 length of effectiveness, 140–141 number of shares for, 141–142 SEC scrutiny of, 142 timing of, 141 types of, 140 registration rights agreement (RRA), 16, 17, 149–150, 217 Regulation A, 87 Regulation D, 9–10, 69, 72, 80, 111 Rule 501, 81–83 Rule 502, 81, 83–85 Rule 503, 81, 85 Rule 504, 81, 85 Rule 505, 81, 85 Rule 506, 81, 86 Rule 508, 81, 86–87 Regulation FD (fair disclosure), 24–25, 117–118 Regulation M, 120–121 Rule 105, 198–199 Regulation S, 11, 72, 83, 89–90 Regulation SHO, 72, 123, 197– 198 regulators, SEC, 72–74 regulatory issues, 23–25 overview of, 77–92 private placements and PIPEs and, 23–24, 93–99 repayment schedule, 225 representations, 102, 121–123 repurchase, 143–144 resale of securities, 80, 85, 87–89 limitations, 90 private placements with trailing registration rights, 97–98 restricted, 90–91 safe harbor, 89–90, 91 resale shelf registration statement, 140 research reports, 120 reset price, 43, 46 restricted securities, resale of, 90–91 reverse mergers advantages and disadvantages of, 250–254 Index due diligence and, 254–255 examples of, 243 getting started in, 257–260 history of, 246–247 post Rule 419 and SPACs, 248–250 reasons for, 243–244 Rule 419, 247–248 Sarbanes-Oxley Act and, 256 SEC and, 256–257 trends in, 258 triangular, 245–246 reverse triangular mergers, 245– 246 Rhino Advisors, Inc., 190 rights equity, 144–145 of first offer, 144 of first refusal, 144 of participation, 144 purchase, 144–145 risk, 205 assessment, 61–64 collaterals and convertible, 58 common stock and, 206–207 convertible securities (amortiz ing and variable price) and, 210–211 convertible securities (fixedprice) and, 207–209 documentation and, 215–218 due diligence, 218–219 options and, 22 short sales and, 212–213 summary, 219–220 trading strategies, 212–215 Robertson Stephens, 54 Rule 15c2-11, 91 Rule 105, 198–199 Rule 135c, 84–85, 118–119 Rule 137, 120 Rule 138, 120 289 Rule 139, 120 Rule 144, 91–92 Rule 144A, 2–3, 47, 69, 87–89, 111, 133 Rule 152, 101, 111 Rule 155, 111, 112–113 Rule 203, 197–198 Rule 203(b)(3)-2, 72–73, 197–198 Rule 312.03(c), 113–114 Rule 415, 140, 170 Rule 419, 247–250 Rule 501, 81–83 Rule 502, 81, 83–85 Rule 503, 81, 85 Rule 504, 81, 85 Rule 505, 81, 85 Rule 506, 81, 86 Rule 508, 81, 86–87 Rule 701, 87 Rule 901, 90 Rule 903, 89, 90 Rule 904, 89, 90 Rule 1001, 87 Rule 2710, 176 Rule 3370, 74 Rule 4350, 114, 174 Rule 11830, 74 safe harbor exemption, 10, 83, 87–89 integration issues, 110–111 issuer, 89–90 resale, 89–90, 91 Rule 135c, 84–85, 118–119 sales by affiliates and nonaffiliates, 92 Sangamo Biosciences, 214 Sarbanes-Oxley Act (2002), 74, 252–253, 256 Schedule 13D or 13G, 138–139 secondary stock, private sale of, 109–110 290 Index Section 4(2), 78–80 Section 5, 78, 89, 199 Section 16, 147–148 securities threshold, 197–198 types of, 42–45, 131–134 Securities Act (1933), 9, 69, 72 Section 4(2), 78–80 Section 5, 78, 89, 199 Section 16, 147–148 Securities and Exchange Commission (SEC) Division of Corporation Finance, 73, 101 registration rights and, 142 Regulation D, 9–10, 69, 72, 80–87, 111 Regulation S, 11, 72, 83, 89–90 regulators, 72–74 reverse mergers and, 244, 256–257 securities purchase agreement, 16–17, 149, 215 SEC v Ralston Purina Co., 79 self-regulatory organizations (SROs), 72–74 shareholder approval, 114 shares outstanding, 225 shelf registration statements, 103, 124–125, 140 common stock sales, 173–174 convertible instruments, 174 disclosures, required, 171–172 eligibility, 170–171 pros and cons of, 172–174 purpose of, 170 shells, 245 short sales, 208–209, 212–213 naked, 72, 188–190 Regulation SHO, 72, 123, 197–198 Rule 105 of Regulation M, 198–199 skepticism, use of, 230–237 soft floor, 135 specialists, use of, 229–230 specified purpose acquisition companies (SPACs), 248– 250 Squadron, Ellenoff, Pleasant & Leher, 101, 111 state securities laws, 86–87 stockholder approval, 146–147 straight equity PIPEs, 13 structured equity lines, 13, 14 structured/standard PIPEs, 61, 105–109, 117, 129–131 subscription agreement, 18 tacking, 91 Tandy Corp., 243 term sheets, 148–149, 227 example of, 151–168 example of, for equity line, 180–185 Thomson, 33 threshold-based redemption rights, 51 threshold securities, 197–198 time-based redemption rights, 51 trading patterns, 212–215 traditional PIPEs See PIPEs (private investment public equities), traditional trailing averages, 209 trailing registration rights, private placements with, 94–99 transaction sizes, 11, 27–28 transfers, 102–103 triggering events, 143 Turner Broadcasting, 243 Index underwriters, 178–179, 252 U.S Atomic Energy Commission, 247 use of funds statement, 226–227 valuation policy, 241–242 value-based antidilution, 136 variable price, 43, 46 risk and convertible securities, 210–211 venture capitalists, 69, 244 venture-style PIPEs, 109 volume-weighted average prices (VWAP), 22 Warrant Agreement, 16, 17 warrants, 112, 133–134, 150, 185, 225–226, 241 Waste Management, 243 weighted-average antidilution protection, 49, 51, 136–138, 215–216 Weiss, Mel, 253 XM Satellite Radio Holdings, Inc., 33 291 ABOUT BLOOMBERG Bloomberg L.P., founded in 1981, is a global information services, news, and media company Headquartered in New York, the company has sales and news operations worldwide Serving customers on six continents, Bloomberg, through its whollyowned subsidiary Bloomberg Finance L.P., holds a unique position within the financial services industry by providing an unparalleled range of features in a single package known as the Bloomberg Professional® service By addressing the demand for investment performance and efficiency through an exceptional combination of information, analytic, electronic trading, and straight-through-processing tools, Bloomberg has built a worldwide customer base of corporations, issuers, financial intermediaries, and institutional investors Bloomberg News, founded in 1990, provides stories and columns on business, general news, politics, and sports to leading newspapers and magazines throughout the world Bloomberg Television, a 24-hour business and financial news network, is produced and distributed globally in seven languages Bloomberg Radio is an international radio network anchored by flagship station Bloomberg 1130 (WBBR-AM) in New York In addition to the Bloomberg Press line of books, Bloomberg publishes Bloomberg Markets magazine To learn more about Bloomberg, call a sales representative at: London: New York: Tokyo: +44-20-7330-7500 +1-212-318-2000 +81-3-3201-8900 SUBSCRIBE TO BLOOMBERG MARKETS & GET A FREE ISSUE The magazine for and about people who move markets • Free issue plus 12 more for $19.95 • Save more with two years for $29.95 To subscribe to Bloomberg Markets, go to: www.bloomberg.com/news/marketsmag/ T H E PIPEs R E P O RT ® NEWS, INFORMATION, AND ANALYSIS OF PRIVATE INVESTMENTS IN PUBLIC EQUITY A DealFlow Media, Inc Publication The PIPEs Report is the first publication dedicated to the business of private investments in public equity Published twice monthly, The PIPEs Report provides regulatory updates, commentary by market leaders, and timely information on deal flow and investment strategies Subscribers to the report benefit from a regular flow of news and analysis including: • The Top Deals and Dealmakers • Legal and Regulatory Updates • Innovative Deal Structures and Trading Strategies • Investment and Issuance Trends • Targets for Private Investment • New Fund Launches and Closings • Focused Capital Markets Research • Industry League Tables and Deal Flow Data Fund managers, venture capitalists, investment bankers, financial analysts, company executives, and corporate attorneys are all benefiting from The PIPEs Report Whether you are looking for direct investment opportunities or gathering competitive intelligence, you won’t want to miss a single issue! • FREE TRIAL OFFER • Readers of this book are eligible to receive a free trial subscription to the publication Just e-mail circulation@dealflowmedia.com or call (516) 876-8006 to get your first copy of The PIPEs Report today The PIPEs Report ® is a publication of DealFlow Media, Inc P.O Box 122, Syosset, NY 11791-0122 Telephone (516) 876 - 8006 Fax (516) 876 - 8010 www.dealflowmedia.com ... capital continues to grow as those in the financial markets and managers of public companies gain increasing access to information on the topic of private investments in public equity Kurt Kim and. .. Hull Capital Management, LLC Private investments in public equity (PIPEs) offer a practical financing alternative for companies seeking capital and a unique asset class for investors For practitioners... PIPE and RD market as an efficient way to establish a meaningful investment in a company without greatly affecting its stock price, and as a way to complement existing investment strategies and take