We are accustomed to getting unusual questions concerning PIPEs, since just about every form of financing is now described as a PIPE. Most of the questions we receive are thought provoking and a few of them are actually bizarre. Last month, a client called asking if we might assist in structuring a publicly offered PIPE. We took a deep breath and pointed out that a PIPE is understood to be a private investment in public equity. Undaunted, our client explained that its goal was to offer securities publicly in a way that replicated as closely as possible the marketing dynamics and procedures of a tradition- al PIPE. Happily, we were able to advise that we did not need to create such a structure, since one already exists. It’s called a registered direct financing. We designed this approach about a decade ago, have used it widely, and it remains a very useful offering methodology.
registered direct offering is a targeted agency transaction. An investment bank is engaged to act as a placement agent and commits to introduce a company to potential investors. The offering may be completed using a single-purpose registration statement if a company does not have a universal shelf registra- tion statement on file with the SEC. Alternatively, a registered direct offering may be a means of structuring a shelf takedown if the company already has a universal or equity shelf registra- tion statement on file with the SEC. In either case, the prospec- tus (or prospectus supplement, for a shelf take-down) describes on the cover page and in the Plan of Distribution section an offering made on an agency basis principally to institutional investors. The Plan of Distribution describes that the closing process involves settling through DTC on a regular T + 3 or T + 4 basis through an escrow account.
If a company does not have a universal shelf registration state- ment on file, it may file a registration statement with the SEC on the appropriate form. The registration statement describes the offering process. Since the offering process involves a more limited distribution methodology when compared to an under- written follow-on offering, the company’s stock generally is subject to a reduced risk of shorting upon filing of the registra- tion statement. Hedge funds are not encouraged to short stock in anticipation of receiving deal stock since the distribution is limited and there is no assurance that they actually will be allo- cated any deal stock. Since registered direct offerings are tar- geted to institutional investors, these offerings may be less like-ly to a SEC Review
A company with an effective universal or equity shelf registra- tion is even better situated to benefit from this type of offering. A placement agent may conduct a shelf take-down as a regis- tered direct offering overnight or over the course of a few days. Depending on marketing needs, the placement agent and the company may choose to produce a preliminary prospectus sup- plement. Alternatively, given the availability of an effective shelf registration statement, the placement agent may choose to market the transaction without a preliminary prospectus supple- ment. These conditions bear a striking similarity to a fixed price traditional PIPE transaction. Investors participating in a regis- tered direct offering may receive a preliminary prospectus (or preliminary prospectus supplement, in the case of a shelf take- down) if one is used. Otherwise, investors will receive a final prospectus (or a final prospectus supplement, in the case of a shelf take-down) together with a confirmation after pricing. Like an underwritten follow-on offering, investors are not required to negotiate or sign any purchase agreement; conse- quently, there is no documentation to be negotiated with pur- chasers. This reduces legal and administrative expenses and shortens the marketing period. Investors have immediate liq- uidity. In fact, the securities will be freely transferable securi- ties that will trade on a “when issued” basis. Since there is no illiquidity risk being borne by investors, a registered direct offering will price at a lower discount-to-market than a conven- tional private transaction or a PIPE.
Founded over 125 years ago in New York, Stroock & Stroock & Lavan LLP is a law firm with market leadership in financial services, providing transac- tional and litigation expertise to leading investment banks, venture capital firms, multinational corporations, and entre- preneurial businesses in the U.S. and abroad. Stroock is known for creating new financial products that have become part of the securities main- stream, including the registered direct offering format and the forward recapi- talization transaction. However, the best-known Stroock invention remains the PIPE transaction structure.