The Issuer's Guide to PIPEs E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg
• Sprache: Englisch

Seitenzahl: 644

Veröffentlichungsjahr: 2010

Beschreibung

Regulatory changes, market fluctuation, and new deal structureshave ushered in a new era for the PIPEs market. Companies mustunderstand the complexities of a market gone global, with privateinvestments in public equity expanding in the United States as wellas in Asia and Europe. Steven Dresner brings together an all-star cast of contributors inhis follow-up to PIPEs: A Guide to Private Investments in PublicEquity, focusing this new book on the most prescient topics forinformed readers. With chapters on international PIPEs, new dealstructures, the latest legal complications, and the most recentregulation, Dresner's new book details the changes in thePIPEs market, with an emphasis on the matters most closely tied toissuers. Steven Dresner is the founder of DealFlow Media, a publishing,database, and events company focused on analysis of emergingfinancial markets. He is also an active investor.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

ABOUT THE EDITOR

ABOUT THE CONTRIBUTING EDITORS

ABOUT THE CONTRIBUTORS

Acknowledgements

Introduction

Private Investments in Public Equity

PIPEs: A Quick and Quiet Deal Process

Using This Book

PART ONE - STATE OF THE MARKET

CHAPTER 1 - PIPEs and Registered Directs

Introduction to PIPEs and RDs

Evolution of the PIPE and RD Market

Current Market Dynamics

CHAPTER 2 - PIPE Market Statistics

Recent Deal Activity

Security Types

Conclusion

CHAPTER 3 - International PIPEs

The Australian Securities Exchange

Key Legal Issues

Why ASX Companies?

Placement Process

What Not to Do: Cultural and Industry Practice Differences

Conclusion

CHAPTER 4 - International PIPEs

The U.K. Capital Markets

Regulatory and Legal Framework

Specific Considerations for PIPE Transactions

Disclosure of Nonpublic Information to PIPE Investors

Summary

CHAPTER 5 - Developing Aftermarket Support and Liquidity

Investor Relations Introduced and Defined

The Evolution of IR

Common Mistakes and Frequent Disasters with Deal Structure

Step One: Building the Investment Thesis

Step Two: Packaging Your Story

Step Three: Hit the Road

Step Four: Broadening the Audience via the Media

Customer-Centric IR: The Future of Investor Relations

Conclusion

PART TWO - LEGAL AND ACCOUNTING ISSUES

CHAPTER 6 - Legal and Regulatory Overview

Private Placements

Resale of Privately Placed (Restricted) Securities

Section 13 and Section 16 Considerations for PIPE Investors

Hedging and Short Sales

Insider Trading, Confidentiality Agreements, and Regulation FD

Conclusion

CHAPTER 7 - Listing Considerations

Initial Listing Requirements

Continued Listing Requirements

Corporate Governance

Quotation Systems

Shareholder Approval under Nasdaq Rules

Shareholder Approval under Amex and NYSE Rules

Delisting Issues

Conclusion

CHAPTER 8 - Registration Issues

Requirements of Regulation D

Resale Registration and Associated Issues

Conclusion

CHAPTER 9 - Valuation of PIPEs

Fair Value and PIPE Securities

Restricted Stock and Illiquidity Discounts

Warrant Valuation

Convertibles Valuation

Conclusion

CHAPTER 10 - Placement Agent Agreements

Key Elements of a Placement Agent Agreement

Questions to Ask When Drafting Placement Agent Agreements

PART THREE - DEAL STRUCTURES AND TERM SHEETS

CHAPTER 11 - Registered Directs

Pricing Trends

A Spotlight on Biotech

Beyond Microcap Issuers

Conclusion

CHAPTER 12 - Common Stock Transactions

Forms of Common Stock PIPEs

Issuers and Investors

Recent Trends: Regulatory and Market Environment

Discussion of Terms

Pitfalls and Solutions

Conclusion

CHAPTER 13 - Structured PIPEs

Types of Structured PIPEs

Conversion Provisions

Other Key Provisions and Documents

Securities Law Issues: Issuance and Resale of PIPE Securities

Tax Matters

Accounting Issues

Appendix A

Appendix B

Appendix C

Appendix D

CHAPTER 14 - Equity Lines of Credit

Benefits and Limitations of Equity Lines

Equity Line Terms and Considerations

Regulatory Considerations: Rules and Regulations of the SEC

Public Equity Lines (Takedown off Effective Shelf Registration Statement)

Conclusion

PART FOUR - ALTERNATIVE DEAL STRUCTURES

CHAPTER 15 - Shell Mergers and SPACs

Shell Mergers

SPACs Reemerge

Conclusion

CHAPTER 16 - Reverse Mergers

Recent Developments

Basics of Reverse Mergers

Advantages and Disadvantages

Two Case Studies: Tricks and Traps

The Letter of Intent

A Few Other Simple Ways to Go Public

Conclusion

CHAPTER 17 - Anatomy of a Chinese APO

Transactional Components of an Alternative Public Offering

Restructuring Required Prior to Closing an APO

Deal Terms and Mechanics of a Chinese APO

Conclusion

Afterword

GLOSSARY

INDEX

ABOUT BLOOMBERG

Praise forThe Issuer’s Guide to PIPEs

New Markets, Deal Structures, and GlobalOpportunities for Private Investments in Public Equityedited by Steven Dresner

“This is a timely and useful compendium of insightful chapters written by expert practitioners. It has great value to market participants and for those seeking to learn how the PIPEs market works. Future editions will be helpful in keeping interested parties informed about market changes.”

—PROFESSOR DAVID BROPHY Director, Center for Venture Capital and Private Equity, Ross School of Business, University of Michigan

“Academics have been slow to respond to the innovations in the PIPE market. The Issuer’s Guide to PIPEs offers a timely overview of the institutional features and practices of this growing market that firms increasingly are using to raise equity and equity-linked capital. The information represented in the book is useful to anyone interested in issues of pricing, liquidity, risk sharing, and valuation in financial markets.”

—SUSAN CHAPLINSKY Tipton R. Snavely Professor of Business Administration, University of Virginia Darden Graduate School of Business

“This is the bible for PIPE financing, covering the latest trends, legal issues, structuring and valuation approaches. Each chapter is written by expert authors. Before your company thinks about raising capital with a PIPE, make sure you read this book.”

—TOM TAULLI Author of Investing in IPOs

“This book provides a solid look at PIPEs from all relevant angles. Because of the rapidly changing environment and the increasing relevancy of PIPEs as a source of corporate financing, I recommend this book to anyone interested in learning how this market works.”

—MARC MARTOS-VILA, PHD Professor of Finance, University of California, Los Angeles

“A comprehensive guide to PIPE markets, financing processes, and deal structures. Useful for PIPE issuers, investors, attorneys, placement agents, and others interested in this market.”

—CHANDRA S. MISHRA, PHD Eminent Scholar and Professor, Florida Atlantic University

ALSO AVAILABLE FROM Bloomberg Press

Reverse Mergers:And Other Alternatives to Traditional IPOsby David N. Feldman

Hedge Fund Risk Fundamentals:Solving the Risk Management and Transparency Challengeby Richard Horwitz

Hedge Fund of Funds Investing:An Investor’s Guideby Joseph G. Nicholas

Market-Neutral Investing:Long/Short Hedge Fund Strategiesby Joseph G. Nicholas

Due Diligence for Global Deal Making:The Definitive Guide to Cross-Border Mergers and Acquisitions,Joint Ventures, Financings, and Strategic AlliancesEdited by Arthur H. Rosenbloom

The Securitization Markets Handbook:Structures and Dynamics of Mortgage- and Asset-Backed Securitiesby 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, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2009 by Steven Dresner. All rights reserved. Protected under the Berne Convention. 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, or send an e-mail to [email protected].

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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.

Library of Congress Cataloging-in-Publication Data

Includes bibliographical references and index.

Summary: “In The Issuer’s Guide to PIPEs, Steven Dresner has brought together experts in the world of PIPEs to discuss the details and complexities of such investment vehicles. This is the most in-depth book available on PIPEs, and includes contributions by industry leaders. Dresner has produced an essential guide for investors, issuers, third-party valuation specialists, bankers, and executives alike”-Provided by publisher.

ISBN 978-1-57660-344-4 (alk. paper)

1. Private investments in public equity-United States. 2. Corporations-United States- Finance. I. Dresner, Steven.

HG4963.I87 2009

332.63’2044--dc22 2009042534

To my friends at DealFlow Media

—SD

ABOUT THE EDITOR

Steven Dresner is the founder of DealFlow Media, a financial publishing company that provides research, database services, and conferences on a variety of investment topics. DealFlow Media publishes The PIPEs Report, a periodical covering news of private investments in public equity. DealFlow Media also operates the PrivateRaise database service, which is the industry’s leading source for analysis of PIPE transactions. Prior to founding DealFlow Media in 2002, Dresner was an investment banker with Ladenburg Thalmann & Co. and chairman and chief executive officer of VCOM Corporation, a technology development firm that designed telecommunications software. His operating experience includes managing successful businesses in the areas of software development, data networking, and new media. Dresner has a BS in psychology from George Washington University and both an MBA in finance and a graduate degree in computer communications and networks from the Lubin School of Business at Pace University. He is coauthor and editor of several books on private placements, including PIPEs: a Guide to Private Investments in Public Equity, Revised and Updated Edition(Bloomberg Press 2006), and is a contributor to Reverse Mergers: Taking a Company Public Without an IPO(Bloomberg Press 2006). He is also a private airplane pilot, scuba diver, motorcyclist, and aspiring global adventurer who enjoys spending time with his three boys.

ABOUT THE CONTRIBUTING EDITORS

Brett Goetschius is the editor and publisher of DealFlow Media’s online newsletters and research products. He has covered the development of the U.S. public and private capital markets for twenty years as an editor and writer for several institutional investment periodicals. He has been cited as an expert on the private placement, venture capital, and commercial real estate finance markets by The Wall Street Journal, Barron’s, BusinessWeek, Institutional Investor, and The Washington Post. Prior to joining DealFlow Media, Goetschius led the publications division of VentureOne, the San Francisco-based venture capital research unit of Dow Jones. Before that, he spent several years developing commercial real estate finance newsletters at Crittenden Research in Novato, California. He began his journalism career working as a newspaper reporter in New Jersey. Goetschius holds a degree in political science from Drew University, Madison, New Jersey, with additional study in international law at the United Nations and in British political economy at the London School of Economics.

David D. Lee is a director of business development and operations at DealFlow Media, a financial publishing company that provides research, database services, and conferences on a variety of investment topics. At DealFlow, he is responsible for managing the operations of PrivateRaise, DealFlow’s data and research service focused on private investments in public equity, reverse mergers, and special purpose acquisition companies. Lee served in a similar role as managing director at PrivateRaise prior to its acquisition by DealFlow in July 2008. Since joining PrivateRaise in 2001 as one of the firm’s founding employees, Lee has taken on various positions. He started as a senior research associate responsible for analyzing deal structures and investment terms of PIPEs and 144A transactions. After three years of research, he stepped into the role of business development manager, managing sales activities at PrivateRaise. In 2007, he was promoted to managing director, becoming responsible for operations of the company. Lee began his career at Accenture (formerly Andersen Consulting) as a management consultant advising clients in the telecommunications and high-tech industries on complex corporate and strategic issues, including joint ventures and acquisitions. He holds an MBA in finance from Johns Hopkins University and a BS in engineering from the University of Maryland.

ABOUT THE CONTRIBUTORS

Bradley J. Ackerman is a director at Hull Capital. He graduated cum laude from the Wharton School of Business at the University of Pennsylvania in 1991 with a BS in economics and a concentration in finance. He began his career with Oppenheimer & Co., initially in the investment banking group, focusing on high-technology companies, and then at the equity capital markets desk. In 1994, he joined Shipley Raidy Capital, a boutique investment banking firm with a focus on PIPE transactions. Ackerman was one of three general partners responsible for sourcing, structuring, and closing PIPEs. From 1999 to 2004, he was a principal with Snider Capital, a family-office venture fund. At Snider, he was responsible for evaluating and structuring venture investments as well as carrying out specific operating responsibilities within the portfolio. Ackerman brings extensive PIPE experience and transactional experience to Hull Capital. At Hull, his responsibilities include portfolio management, research, and general management of the firm’s personnel. Ackerman has served as a board member and adviser to private technology companies.

Christopher S. Auguste is a partner in the corporate department of Kramer Levin Naftalis & Frankel, where he focuses his practice on corporate and securities law with a particular emphasis on private placement of debt and equity securities. Auguste represents private investment funds in their investment in public and private companies and investment banks in structuring PIPEs, shelf offerings, and equity line transactions. He represents private investment funds and funds of funds regarding their structure and formation, and provides advice and analysis in connection with their portfolio investments. Auguste represents underwriters and issuers in initial public offerings. He also represents financial institutions and corporate clients in secured loan transactions and acquisition financings, and has counseled corporate clients in debt restructuring. Auguste received his AB degree, magna cum laude, from Harvard College, and his JD degree from Harvard Law School.

Louis A. Bevilacqua is a partner at Pillsbury Winthrop Shaw Pittman LLP. He has broad experience in public offerings and private placements of securities; Exchange Act compliance; angel and venture capital financings; other types of equity and debt financing; and mergers, acquisitions, and other business combinations, including “roll-up” and “reverse” acquisition transactions. In addition to working with NYSE- and Nasdaq-listed companies, Bevilacqua has several years of experience working with microcap and nanocap public companies whose securities are quoted on the OTC Bulletin Board, and he understands the special needs of these companies. He also represents companies with international operations, including companies based in the People’s Republic of China; Taiwan, Republic of China; Latin America; Europe; and Australia. Bevilacqua has significant experience advising life sciences companies including vaccine and other pharmaceutical companies, medical device companies, and medical products and medical disposables manufacturers. He also advises emerging technology-driven companies on licensing and development transactions, joint ventures, technology transfers, and related intellectual property matters.

D. Reeves Carter is a senior associate in Guzov Ofsink’s commercial litigation department, and works with clients on a wide range of general litigation matters. Carter has specialized expertise in intellectual property law, where he oversees all aspects of trademark and brand clearance, including the detailed review and analysis of advertising derivative and promotional materials. In addition, he provides counsel and advice concerning best practices for enforcing trademark rights, avoiding litigation, and mitigating legal risks by evaluating and resolving obstacles to registration and use of trademarks. Carter has experience prosecuting copyright and trademark applications, responding to office actions, and bringing and defending opposition and cancellation proceedings before the U.S. Copyright Office and the Trademark Trial and Appeal Board. On behalf of clients, he reviews, negotiates, and drafts license agreements, consent agreements, and coexistence agreements, as well as distribution and franchise agreements, talent and sponsorship agreements, production and publication agreements, and security agreements. He also conducts due diligence for the acquisition of intellectual property rights. Before joining Guzov Ofsink, Carter was an intellectual property and litigation associate at several prominent New York law firms. He is also a regular lecturer and presenter for the Practising Law Institute’s Advanced Copyright Seminar.

Edmund P. Chiang is a senior adviser in capital markets and risk advisory at Moelis & Company and a senior managing director at CLG Investment Company. Prior to Moelis, he spent a total of seventeen years at Merrill Lynch and Bank of America, where he was most recently head of the private equity placements group, a member of the equity capital markets operating committee, and a managing director from 2002 to 2009. He has completed in excess of one hundred private financings in various structures including Reg D, Reg S, Rule 144A, and Black Box offerings of equity, debt, and limited partnership securities in his nineteen years of investment banking. During his ten-year tenure at Bank of America, his group executed over 140 placements for over $12.7 billion in proceeds, including eighty-six PIPEs for over $4.8 billion in proceeds. Starting at Merrill in 1990, Chiang worked on $17.1 billion of acquisitions, divestitures, proxy defenses, spinoffs, and tender offers, in addition to acquisition-related private placements and strategic PIPEs totaling $4.5 billion. He was also a vice president in international equity capital markets at Furman Selz. Chiang currently serves as a director and adviser to several foreign and domestic private investment and limited liability companies. He received an AB from Princeton University.

Crocker Coulson is responsible for the development of investor relations strategies for private and publicly held companies. As president of CCG Investor Relations, CCG Asia (China), and CCGK (Israel), he has been the primary driver of the firm’s expansion. He has overseen investor relations campaigns for more than one hundred public companies, including numerous initial public offerings (IPOs), secondary offerings, acquisitions, and proxy contests. Many of the campaigns he has overseen have won top industry awards. Coulson is a frequent speaker on investor relations strategy, IPOs, reverse mergers, investing in China, disclosure issues, and corporate governance. He is regularly quoted in publications on topics related to the capital markets. Coulson served for two years as the cochairman of the AeA’s Capital Sources conference, was for two years the chairman of the Investment Capital Conference, hosted by the Los Angeles Venture Association (LAVA), and founded the China Rising Investment Conference. Prior to joining CCG, Coulson served as a writer-researcher for the New Republic magazine in Washington, DC, and wrote for a number of leading publications, including the Los Angeles Times, the Pittsburgh Post-Gazette, and ARTNews. Coulson graduated summa cum laude from Yale College, where he was editor-in-chief of the Yale Daily News. As a Fulbright Scholar, he studied philosophy at the Freie Universität in Berlin.

David N. Feldman is the founder and managing partner of Feldman LLP. His practice focuses on corporate and securities matters and general representation of public and private companies, investment banks, private equity firms, and high-net-worth individuals. Feldman is considered one of the country’s leading experts on alternatives to traditional initial public offerings, including reverse mergers, in which a private company becomes publicly traded through a merger with a publicly held “shell” company. His book on the subject, Reverse Mergers: Taking a Company Public Without an IPO(Bloomberg Press), was published in 2006, and has since entered its third printing. A second edition will be published in late 2009. Feldman blogs at www.reversemergerblog.com and also writes on entrepreneurship for Slate.com. He received a BS from the Wharton School of Business at the University of Pennsylvania and his JD from the University of Pennsylvania Law School. Feldman is the former chairman of Wharton’s worldwide alumni association.

David J. Fine is senior legal counsel at Yorkville Advisors, where he focuses on developing and structuring the firm’s investments. Fine has structured equity lines for the firm in the United States as well as internationally including Israel, the United Kingdom, and Switzerland. In addition, he has structured and closed numerous convertible debt, convertible preferred, and common stock transactions for the firm. Prior to joining Yorkville Fine served as senior legal counsel in the Division of Enforcement of the Securities and Exchange Commission in New York. While at the SEC, he participated in numerous investigations involving a range of securities law issues including insider trading, Regulation FD, financial fraud, and the practices of PIPE investors, issuers, and placement agents. Fine earned a BBA in Finance and Accounting from the University of Michigan and a JD degree from Fordham Law School.

Alexander J. Freedman is an associate in the corporate department of Kramer Levin Naftalis & Frankel, where he represents public, private, and international clients in the full spectrum of securities, mergers and acquisitions, financing, and corporate advisory matters. Freedman represents issuers and investment banks in private placements and public offerings, including initial public offerings and secondary offerings. He represents clients in various types of mergers and acquisitions, including asset and stock transactions. Freedman also provides ongoing advice to individuals and companies on day-to-day corporate matters, legal compliance, and corporate governance. He received his BA degree, cum laude, from the University of Rochester, and his JD degree from Northwestern University School of Law.

Richard E. Gormley is a managing director and head of the alternative capital finance group at Lazard Frères & Co. Gormley’s responsibilities include the origination and execution of PIPEs, registered direct offerings (RDs), and private placements; Lazard enjoys a leading market share in PIPEs and RDs. He joined Lazard in 2006 from Cowen and Company where he was a managing director and co-head of the private equity group. While at Cowen, Gormley started and built the firm’s PIPE and RD investment banking franchise, and completed more than one hundred transactions during his six-year tenure at the firm. During his twenty-five-year investment banking career, Gormley structured, marketed, and closed private placement transactions approximating $10 billion for public and private companies across a variety of sectors. Prior to joining Cowen, Gormley was a managing director and global head of equity and debt private placements and high-yield origination at Rabobank International. Before that, he was a director at Nesbitt Burns Securities (and its predecessor companies, including Security Pacific/Burns Fry), where he started and managed the firm’s private equity investment banking effort. He began his career at Citibank’s North American investment bank. Gormley is a frequent speaker on the PIPEs and RDs market. Gormley’s education includes Cathedral College, BA (magna cum laude), and Seminary of the Immaculate Conception, MA.

Kristin M. Hespos is senior legal counsel at Yorkville Advisors and represents Yorkville through all stages of its investments. Among other things, Hespos represents Yorkville in entering into equity lines (including through Yorkville’s Standby Equity Distribution Agreement or SEDA) and purchasing convertible debt and equity securities. Prior to joining Yorkville, Hespos was an associate at Baker Botts, where she counseled private and public clients on a wide range of corporate and securities matters including mergers and acquisitions, corporate governance, and a variety of debt and equity offerings. Hespos graduated from the University of Notre Dame with a BS in the Science-Business Pre-Professional Program and a concentration in the Hesburgh Program in Public Policy, and received her JD from the Georgetown University Law Center.

John D. Hogoboom is a founding member of the Lowenstein Sandler Specialty Finance Group. He has over twenty years of experience in securities and mergers and acquisitions, representing issuers, underwriters, and investors in a myriad of capital-raising transactions including initial and secondary public offerings, PIPEs, private placements, secured and mezzanine debt, and strategic investments. To date, Hogoboom has participated in over one hundred PIPE transactions. Hogoboom also represents buyers and sellers in all types of acquisition and disposition transactions, both domestically and abroad. Hogoboom is listed among The Best Lawyers in America, in both the corporate law and securities law categories. His education includes the University of Pennsylvania School of Law (JD, 1985), cum laude, where he was an editor of the University of Pennsylvania Law Review, and the Wharton School of the University of Pennsylvania (BS, 1982), magna cum laude. His affiliations include the New Jersey State Bar Association and the American Bar Association. Bar admissions include New York and New Jersey.

Sarah Hooker is an associate in the European corporate department of Reed Smith in London. She specializes in corporate finance, including flotations (IPOs), initial and secondary offerings of securities, public takeovers, and other transactions involving companies listed on the markets of the London Stock Exchange. She has assisted with a number of PIPE transactions, particularly for U.S. clients listed on AIM. Hooker graduated in 2002 from Cambridge University with a degree in geography and then attended BPP Law School in London, where she obtained her legal qualifications. She joined Reed Smith as a trainee in 2005 and qualified in 2007.

Eleazer N. Klein is a partner in the corporate department of Schulte Roth & Zabel, where he practices in the areas of securities law and mergers and acquisitions with a concentration in developing and implementing alternative investment structures for private equity investments. Klein has been actively involved in structuring and negotiating PIPEs for more than a decade and works on over one hundred PIPE and PIPE market-related transactions every year. He has worked with some of the major investment groups and investment banks in developing PIPE, SPAC, 144A, reverse merger, and equity line products. Klein other areas of practice include activist investing, indenture defaults and interpretation, and regulatory issues such as ownership reporting requirements under Sections 13 and 16 and insider trading, as well as reverse mergers; SPACs; Reg D, Reg S, and Rule 144A offerings; initial public offerings and secondary offerings; mergers and acquisitions; and venture capital financing. Prior to joining the firm, Klein worked at Davis Polk & Wardwell. He received his law degree from Yale Law School, where he was senior editor of The Yale Law Journal.

Antonia Lee is an associate in the corporate department of Kramer Levin Naftalis & Frankel, where she focuses primarily on general corporate and transactional matters. She received her BA degree from Johns Hopkins University, and her JD degree from Georgetown University Law Center.

Meghan Leerskov is presently the assistant managing editor of DealFlow Media, publisher of The Reverse Merger Report, The SPAC Report, and The PIPEs Report. She was previously the managing editor of Buyside, a monthly publication for institutional investors. She has been working in financial journalism for fifteen years. Leerskov has a degree in political science and a BS in sociology and law from the University of California at Davis.

Susanne S. Mulligan is a director of equity capital markets in health care origination and co-head of the private equity placement and PIPEs group at Deutsche Bank (DB). Mulligan joined DB in March 2005 as a founding member of the private equity placement and PIPEs group. She joined DB from Thomas Weisel Partners (TWP) where she was a vice president in that firm’s private equity placement and PIPEs group. Prior to TWP, she was in corporate finance at Montgomery Securities. Mulligan has over twelve years of experience structuring and executing minority stake, pre-IPO, PIPE, registered direct, and private convertible financings. Over the course of her career, she has been involved with raising over $7.5 billion in equity and equity-linked capital for private and public companies. Mulligan received a BA from Amherst College with a double major in economics and English.

Darren L. Ofsink is a co-founder of Guzov Ofsink LLC, head of the firm’s corporate transactions and securities practice, and co-head of the firm’s international practice. Ofsink is a specialist in complex securities and corporate transactions and compliance as well as international transactions and offerings. He provides strategic counsel for clients and ongoing assistance with all compliance requirements. His clients include a wide spectrum of companies and industries, including software, auto parts, pharmaceuticals, broker-dealers, investment advisers, hedge funds, mining, advertising, and technology. Ofsink broad range of corporate and securities experience includes public and private financing transactions, reverse mergers, Exchange Act compliance and filings, resales of restricted securities, mergers and acquisitions, formation and representation of hedge funds, and preparation of opinion letters concerning various corporate, securities, and state corporation law issues. He also provides a range of legal services for not-for-profit charitable organizations. In addition, Ofsink works closely with Chinese and other foreign companies, assisting them to go public in the United States, and developing solutions to the many business and cultural challenges faced by such companies.

Matthew A. Pek is an associate in Guzov Ofsink’s litigation, arbitration, and mediation group. While his primary practice centers on complex commercial litigation, Pek has represented clients in a variety of general litigation matters ranging from estate proceedings to intellectual property and free speech litigation. Pek has successfully appeared in both state and federal court on a diversity of litigation matters, in which his victories include a federal trademark and domain name infringement prosecution in the Eastern District of New York, securing the deletion of infringing Web sites within twenty-four hours of demanding emergency injunctive relief; defending Manhattan condominium owners against a mechanic’s lien action, securing their dismissal based upon an issue of first impression; and an emergency application to the New York County Supreme Court, Commercial Division, to freeze shares of stock held by a transfer agent in a successful effort to thwart suspected fraudulent activity. Pek has second-chaired a federal trial in the U.S. District Court in Connecticut and has assisted in defending a preliminary injunction action before the Southern District of New York. He has demonstrated his ability to finish what he starts, successfully executing upon multiple judgments within the State of New York. A relentless advocate, Pek remains an active pro bono practitioner in addition to his private practice.

Espen Robak, CFA, president of Pluris Valuation Advisors, is a nationally recognized expert on private warrants and illiquid debt instruments, including auction-rate securities, FAS 157, valuations for alternative investment managers, and discounts for lack of liquidity, and is a prolific author on valuation, accounting, and taxation topics. Recent article topics include fair value of illiquid securities, auction-rate securities valuation, PIPE valuations, amendments to Rule 144, illiquidity discounts, valuation of stock options, merger and acquisition arbitrage data, and restricted stock marketability discounts. Robak’s expert commentary has been featured in the Wall Street Journal, Financial Times, Forbes, CFO Magazine, Bloomberg, Absolute Return, American Banker, The Deal, Compliance Week, Inside Market Data, Opalesque, Accredited Investor, and Hedge Fund Manager Week. He is a columnist for Wealth Strategies Journal. Robak has MBA and BS degrees from the University of Oregon. He has also earned the Chartered Financial Analyst designation. Prior to forming Pluris, Robak was senior vice president of FMV Opinions, a specialty valuation firm, and directed the firm’s intellectual property and intangible asset valuation practices.

Douglas Rofé is a partner in the European corporate department of Reed Smith in London. His practice covers a wide range of international corporate finance transactions. He has advised over many years on a large number of PIPE transactions, including standard equity distribution agreements, and a variety of secured and unsecured equity-based loan arrangements. He has lectured and had articles published in the United States and the United Kingdom on PIPEs as well as other subjects. Rofé graduated with a law degree from Cambridge University in 1989 and during his time there was awarded the University Constitutional Law Prize. He joined Reed Smith in 1997, having previously been at Linklaters.

Todd M. Scherrer is partner of the assurance and advisory practice at Szymkowiak & Associates CPAs, PC (szycpa.com). In this capacity, he is responsible for client management, employee relations, risk management, training, and process improvement. Scherrer specializes in the implementation of technical accounting standards, registration of SEC filing documents, buy- and sell-side due diligence, international accounting standards, and corporate governance services. Since graduating magna cum laude from St. Bonaventure University with a BS in Accounting in 1993, Scherrer professional experience has included providing consulting, audit, and accounting services to middle-market and multinational public companies across a wide range of industries. He is currently licensed as a CPA in six states and is a member of both the New York State Society of CPAs and the American Institute of Certified Public Accountants. He is also treasurer of the Park Country Club in Williamsville, New York.

Thomas M. Shoesmith is the leader of Pillsbury Winthrop Shaw Pittman’s China practice, and is a partner in the firm’s corporate and securities practice group. He has more than twenty-five years of experience in international business transactions, representing large multinational corporations and financial institutions as well as smaller companies, private venture capital firms, and private equity funds. His practice concentrates on international corporate transactions, including corporate finance transactions such as reverse mergers, PIPEs, and cross-border IPOs; mergers and acquisitions; joint ventures and strategic alliances; venture capital and private equity matters; and counseling clients on the expansion of their international operations. He also has considerable experience in international securities, corporate reorganizations, inversion transactions, foreign direct investment and commercial transactions, intellectual property counseling and contentious matters, and cross-border labor and employment. Shoesmith’s clients have invested or engaged in transactions for clients in countries and regions throughout the world, including Asia (Hong Kong, India, Japan, Korea, and the People’s Republic of China); the Middle East (Israel, Kuwait, and the United Arab Emirates); Europe (Belgium, France, Germany, Italy, the Netherlands, Switzerland, Russia, and the United Kingdom); North America (Bermuda, British Virgin Islands, Canada, Mexico, and the United States); South America (Argentina, Brazil, Chile, and Peru); Central America (Costa Rica and Panama); Australia; and Africa (Mauritius).

Ziemowit T. Smulkowski is a partner at Katten Muchin Rosenman LLP and concentrates his practice in federal income tax issues related to mergers and acquisitions, private equity, venture capital, real estate investments, and management compensation. Smulkowski works extensively with the firm’s corporate, commercial finance, and real estate practices. His representative transactions include acquisitions and dispositions of businesses for financial and strategic investors, cross-border investments, debt and equity investments in real estate joint ventures, representing senior and mezzanine lenders, representing sellers of closely held businesses, and representing management teams in connection with the acquisition or disposition of their employers. Smulkowski also works with the firm’s litigation and dispute resolution practice on various tax controversy matters and is the co-head of the firm’s Tax Controversy practice group. He is a member of the Chicago Bar Association. Prior to joining the firm, Smulkowski worked in the Chicago office of Coopers and Lybrand (now known as PricewaterhouseCoopers). Smulkowski graduated from Loyola University Chicago in 1993 with a BA degree in political science. He received his JD degree from Northwestern University School of Law in 1996.

Eugene Tablis is the chief executive officer of KTA Capital LLC, a New York-based registered broker-dealer that focuses on advising non-U.S., and in particular Australian, publicly traded companies on institutional PIPEs and M&A transactions. Prior to joining the firm, Tablis was in the senior position of M&A and Securities of Counsel at Moses & Singer. LLP, a prominent New York corporate law firm. Tablis previously worked as an attorney at Fried Frank Harris Shriver & Jacobson, LLP, a bulge-bracket Wall Street law firm, and as a solicitor at Chapman Tripp Sheffield Young, the largest New Zealand law firm, representing a number of publicly traded Australian clients. Tablis is registered with FINRA as a Limited Representative Private Securities Offerings (Series 82) and General Securities Principal (Series 24). He is a member of the bar in the State of New York.

Joseph R. Tiano Jr. is a partner at Pillsbury Winthrop Shaw Pittman, where he concentrates his practice on public and private securities offerings, mergers and acquisitions, recapitalizations, and private equity and venture capital investments in a wide variety of industries including technology, education, financial services, manufacturing, biotech and pharmaceuticals, and consumer goods. Tiano also represents underwriters, investors, venture capital firms, and financial intermediaries in their underwriting, investment, and advisory activities. Tiano has been involved in all phases of complex transactions, including initial planning, structuring, negotiation, and implementation. He also advises clients in day-to-day corporate governance and securities law compliance issues and has significant experience with technology transfer and licensing agreements and related intellectual property transactions. As a member of the firm’s China practice group, Tiano regularly advises Chinese companies seeking to access the U.S. capital markets. He frequently travels to China to advise his clients and spends a portion of his time working out of the firm’s Shanghai office.

Michael Vasinkevich is the vice chairman and a member of the board of directors of Rodman & Renshaw Capital Group. He joined Rodman & Renshaw in July 2002 as a senior managing director of Rodman & Renshaw LLC, Rodman & Renshaw Capital Group’s broker-dealer affiliate. From August 1999 through May 2002, Vasinkevich was a managing director at Ladenburg Thalmann & Co., where for the last eleven months of his tenure he was president of capital markets. From November 1998 through July 1999, he was the founder and managing director of Tandem Venture Partners, a specialized financial advisory firm focusing on growth companies in the United States and Asia. From June 1997 to November 1998, he was the managing director of the structured finance group at Jesup & Lamont Securities.

Mark Wood is a partner and cochair of the securities practice of Katten Muchin Rosenman, concentrating his practice in corporate and securities law. Wood represents issuers and investment banks in public offerings and private placements of equity and debt securities and in other securities matters. He also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, joint ventures, strategic alliances, and private equity investments, and is a leading practitioner in representing investors, public companies, and placement agents in PIPE transactions. In addition, he counsels public companies on securities law compliance, disclosure, corporate governance, and compensation-related issues. Wood is a frequent speaker and writer on PIPEs and other securities and corporate law topics. Wood is an active member of the Committee on Federal Regulation of Securities of the Business Law Section of the American Bar Association and is also a member of the Chicago Bar Association, where he previously was the chairman of the 1934 Act Reporting Subcommittee of the Securities Law Committee. Wood earned a BS degree in accountancy, with high honors, from the University of Illinois in 1987 and graduated cum laude from the University of Michigan Law School in 1990. Wood is a registered certified public accountant.

ACKNOWLEDGMENTS

This book would not have been possible without the support and contributions of my coauthors and coeditors. In every way, this was a true collaboration: from the chapter submissions to the fact checking, this text represents a year’s worth of work by over thirty people.

At the top of the list of people whom I relied on during this project are Brett Goetschius and David Lee, my contributing editors. Dave’s attention to detail and knowledge of deal structure made this the finest PIPEs book yet. I thank Dave for stepping in to fill the shoes of his brother-in-law Kurt Kim, who assisted on prior books I’ve edited. As always, special thanks go to Brett. Thanks for helping out with the book, and also helping to teach me the publishing business through your unwavering commitment to editorial integrity.

Other guys at DealFlow Media also deserve recognition. From our events group, to the editorial and production group, to the research staff at Private Raise, the DealFlow team is the best in the business. These people have proven it time and again: DealFlow is “The Little Engine That Could.” It’s been an honor to work with everyone on such a wide array of products. And while I’m amazed by what we’ve done, I’m certain that our best work is still ahead of us.

Also worthy of acknowledgment is Evan Burton. Evan and the team at Bloomberg Press have continued the tradition of producing great books, and in doing so, have contributed to ongoing transparency in the business of PIPEs.

A special thanks to my father, Arthur Dresner, who has stuck with me every step of the way. It’s not an exaggeration to say that most of my accomplishments would not have been possible without his guidance. I hope that one day, I’ll learn the patience to treat my children the way he’s treated me. Thanks to Mom as well, for all the obvious reasons.

On the home front, I would like to thank my wonderful wife of ten years, Erica, and my children, Max (The Gentle Giant), Josh (Big-J), and Harry (The H-Man). Thank you all for putting up with me while I worked on this book, and while I’m at it, thanks for putting up with me, in general.

Introduction

STEVEN DRESNER, DealFlow Media BRADLEY J. ACKERMAN, Hull Capital

As this book was going to print in mid-2009, the recent financial crisis was fresh in everyone’s mind. During this time of crisis, private placements of public equity (PIPEs) took a prominent role in helping to bail out troubled companies such as Goldman Sachs, General Electric, Morgan Stanley, Dow Chemical, and Citigroup, to name just a few. These high-profile companies used PIPEs to raise much-needed capital and, in doing so, marked the point where PIPE financing went from a little-understood acronym to a key component of what is hoped will be a broad recovery of the U.S. economy.

In many ways, this book captures a moment in time by looking at the business of PIPEs with the recent economic downturn as backdrop. The “PIPEs book,” as most in the industry call it, has been an evolving and collaborative effort in which our coauthors have provided a fresh perspective on the business of PIPEs. This book takes a completely new look at private investments in public equity with a view toward what public companies would want to know in order to decide if PIPE financing is right for them.

In addition to serving as a handbook for companies, The Issuer’s Guide to PIPEs is also a useful reference tool for investors, placement agents, attorneys, and other practitioners who are active in the capital markets. Finance professionals will find a wealth of new information in the detailed discussions of geographical opportunities, changing deal structures, investor relations tactics, legal agreements, valuations, and business terminology specific to PIPEs.

Private Investments in Public Equity

While the business of PIPEs has changed dramatically since the printing of the second edition of PIPEs: A Guide to Private Investments in Public Equity in 2006, the definition of what a PIPE is has not. The intricacies of deals and the various transaction structures form the subject matter of this book. However, a basic understanding of the acronym is useful as an introduction. With this in mind, we define each component of PIPEs in the paragraphs that follow.

Private

A PIPE is a private transaction between a limited group of investors and a public company. The private placement of securities is made possible by certain regulatory exemptions that have been defined by the Securities and Exchange Commission (SEC). This notion of a PIPE as a privately negotiated transaction involving a limited distribution of securities is a key differentiator from public financings such as follow-on offerings, frequently referred to as “secondaries.”

Investment

A PIPE is a direct investment in a company. Unlike a purchase of securities from other investors in a public market or trading exchange, a PIPE involves the purchase of securities in a primary market, where new securities are offered to investors for the first time. In a PIPE, securities are issued directly by a company, and the proceeds from investment benefit that company. For this reason, we refer to the company as an “issuer.”

Public

A PIPE is used by a public company to raise capital. There are, in fact, similarities between private investments in public companies and private investments in private companies. However, investments in public companies are governed by many unique securities regulations and laws. The ways in which these regulations and laws are interpreted make PIPEs a discrete financing alternative, distinct from other forms of private and public investments.

Equity

A PIPE is an equity or equity-linked investment. Equity can simply be defined as ownership in a company. Companies obtain capital through the issuance of equity, debt, or some combination of the two. In this book, we are concerned with equity securities, securities that involve an equity component, and securities that are convertible or exchangeable into equity.

PIPEs: A Quick and Quiet Deal Process

What makes a PIPE different from other types of financing—and is of particular interest to company management teams—is the process whereby capital is raised. Private placements are marketed on a confidential basis, and only to institutional or qualified individual investors. This quick-and-quiet process is in contrast to the marketing of a public offering, where prospectuses are distributed to the universe of potential investors. Speed and confidentiality are key reasons why an increasing number of companies have been attracted to private placements. Let’s take a quick look at some of the differences between private and public offerings.

The process of conducting a public offering is lengthy and fraught with regulatory filings, expenses, and disclosure. A company seeking capital through a public offering must hire an investment bank that will serve as underwriter, and must file a registration statement with the SEC. The selection of an underwriter and the preparation of the filing require a fair amount of time and expense. The issuer will then need to have a prospectus printed and distributed. Once the prospectus is distributed, the management team embarks on a road show that typically includes many cities and frequently involves international travel. During the road show, company management will conduct meetings with institutional and retail investors, and the lead manager of the offering will “build a book” of interest from potential investors. All the while, the company and its underwriter broadcast their intention to raise capital.

At the conclusion of the road show, the lead manager analyzes investor interest to determine where to set the price of the shares to be sold in the offering. Typically, the transaction is priced at a level where the company’s stock closed on the day of pricing. This is one of the purported benefits of a public offering: pricing is usually “at the market” and not set at a discount to the price of the company’s traded shares (as is typically the case with PIPEs). Although many practitioners in the PIPE business would submit that the marketing of a transaction weakens a company’s stock price, the argument often made in favor of a public offering is that this at-the-market pricing limits dilution to existing shareholders.

While data could probably be put forth to support an argument for either public or private pricing (depending on the issuer’s size, date range of the offering, etc.), there is little debate that in contrast to a lengthy and expensive public offering process, the process for raising capital privately through a PIPE is much abbreviated and, while time frames vary, usually does not take more than two to four weeks. Instead of hiring an underwriter who commits to purchasing and reselling securities, the company will generally hire a registered broker-dealer as “placement agent” to run the process. The agent will gauge interest by contacting selected institutional investors believed to be good candidates to participate in the financing.

Because a PIPE is not a public offering, the disclosure of any information that may be considered material and nonpublic needs to be handled with caution. The agent will have a prospective investor sign a nondisclosure agreement acknowledging receipt of nonpublic information, and the investor will agree not to trade in the stock. Once the nondisclosure agreement is signed, the investor is given details on the company and the proposed financing.

Instead of organizing a lengthy road show, the agent typically sets up one-on-one meetings with institutional investors in several cities or, depending on the level of interest and time sensitivity, conducts conference calls. The marketing effort usually lasts no more than one or two weeks. During this period, the agent attempts to secure a lead investor who will set the terms of the transaction including the price and other characteristics of the security (or securities) to be issued. Again, depending on interest and timing considerations, multiple investors may present term sheets to the agent that outline the terms under which that investor is willing to finance the company. The placement agent then works with the issuer on selecting the lead investor they feel best meets the company’s profile. The criteria for that decision—price, security type, any strategic arrangement, or a combination of factors—are all subject to private negotiation, which is conducted between the company and the investor.

Once the terms are agreed upon, other investors are brought into the transaction as necessitated by the situation. A group of investors may be required because of the amount of capital being raised, or other factors that favor a syndicate as opposed to a single investor.

Up until this point in the PIPE deal process, there is no SEC intervention and no disclosure to the market; the process moves quickly and quietly until a transaction is consummated. Once the deal is agreed to by the involved parties, the company typically issues a press release and files a Form 8-K with the SEC to provide the public with disclosure regarding the terms of the transaction. It is important to note, however, that none of this disclosure occurs until after the deal process is completed and the transaction has been consummated.

An obvious advantage here is speed. Company management teams view capital raising as a distraction and want to be finished with it in a short period of time so they can focus on running their business. A deal process that takes several weeks is clearly better than a deal process that takes several months. A shorter process also means reduced expenses associated with the financing. Legal expenses are lower, as are travel expenses related to marketing. Even small expenses such as printing and mailing prospectuses are eliminated.

While time and expense are certainly valid advantages when considering a PIPE, arguably the most important advantage is stealth. Because a public offering requires SEC filings and disclosure ahead of a deal, the entire investing public becomes aware of the fact that there will be an increase in the supply of shares to the market. For that reason, when the public disclosure is made, the company’s stock price generally declines. The amount of the decline varies, but it is quite common for buyers to stay on the sidelines during the road show process. Why would investors buy shares on the open market when they know there are going to be new shares issued in the near term at an undetermined price? Ultimately, when the public offering is priced at the closing bid on the pricing day, it might appear that there is minimal dilution because there is no discount in the offering. This, however, doesn’t reflect the reality of the company’s share price decline between the time the deal was announced and the time it was priced. There are exceptions to this, such as when a company’s share price rises because the investing public believes the use of proceeds will ultimately be accretive to existing shareholders. However, the great majority of public follow-on transactions include share price atrophy ahead of the deal.

Using This Book

An evaluation of the cost of capital is more complicated than a simple assessment of deal pricing. The decision to pursue a PIPE instead of a public offering involves a thorough analysis of many factors, such as commissions paid to investment bankers, legal considerations, other securities or “sweeteners” included in the transaction, the potential for research coverage, and many issuer-specific circumstances such as a preference for how widely (or narrowly) securities are distributed to investors. These topics, and many others, form the subject matter of this book. The discussion here serves only as a prelude to pique some interest in private investments in public equity, and to hint at the answer to the question, “Why do a PIPE?”

PIPEs: A Guide to Private Investments in Public Equity, now in its second edition, has found its way onto the bookshelves of many bankers, investors, and attorneys working within the equity capital markets. Along the way, PIPEs have continued to grow in both size and popularity. As the market has grown, so have the number of public companies who need information about using private placements to raise capital. The Issuer’s Guide to PIPEs is intended to satisfy this growing need by exploring the more complex and technical aspects of PIPE securities. We hope this book delivers on its promise as a comprehensive reference and indispensable guide for finance professionals and the companies they serve.

PART ONE

STATE OF THE MARKET

CHAPTER 1

PIPEs and Registered Directs

A Market Overview

RICHARD E. GORMLEY

Lazard Frères & Co. LLC

The equity private placement market for public companies has come of age. Historically, this market was limited to issuance by small- and micro-capitalization growth companies in capital-intensive sectors such as biotechnology and information technology. More recently, the market has expanded to include larger-capitalization companies in a multitude of traditional sectors such as energy, financials, and industrials. In 2008, the private investment in public equity (PIPE) and registered direct offering (RD) market (referred to here collectively as the “private placement market”) exceeded $120 billion in capital raised,1 which represents more than half the size of the public follow-on market and dwarfs amounts raised in the initial public offering, high-yield, and convertible bond markets.2 Private placements today are considered a mainstream financing technique that offers specific benefits to sellers and buyers, as well as a viable alternative to a traditional public financing. An important distinction between private placements and public offerings is the confidential nature of PIPE and RD marketing prior to completion. Most private transactions are executed through placement agents who act as intermediaries and bankers in deal facilitation. Both primary and secondary sales of securities are executed in the private placement market. PIPEs and RDs provide a flexible, reliable source of competitively priced capital for issuers while offering investors an attractive investment asset class. This chapter provides an overview of this increasingly important area of corporate finance.

Introduction to PIPEs and RDs

A PIPE transaction is the privately negotiated sale (i.e., private placement) of a public issuer’s unregistered equity or equity-linked securities to investors, where the sale is conditioned upon a subsequent resale registration statement being filed with, and declared effective by, the U.S. Securities and Exchange Commission (SEC). Prior to effectiveness, these securities are deemed “restricted” and cannot be resold for a six-month period, and thereafter they may only be sold in accordance with the restrictions set forth in Rule 144 under the Securities Act of 1933, as amended (the “Act”). Upon effectiveness of the registration statement, an investor may freely resell the privately placed securities into the public market. Because PIPEs are private placements, they are governed by the guidelines found in Section 4(2) of the Act, which provides an exemption from registration for transactions by an issuer not involving any public offering. Furthermore, SEC Regulation D (Reg D) establishes a “safe harbor” exemption applicable to private offers and sales of securities satisfying the specific requirements of the rules contained therein. PIPEs are generally conducted in accordance with Reg D.

In addition to the sale of unregistered securities, the private placement market includes the sale of registered securities (RDs). Similar to a PIPE, an RD is the direct, negotiated sale of a public issuer’s equity or equity-linked securities to a small group of investors through a limited distribution. Unlike PIPEs, the securities offered through RDs have already been registered by the issuer through a shelf registration on Form S-3, and the SEC has declared their registration effective prior to commencement of the transaction. However, if the issuer is deemed a Well-Known Seasoned Issuer (WKSI) as defined by Rule 405 under the Act, the shelf registration can be declared effective coincident with the transaction’s announcement. As such, RDs are technically public offerings; however, in contrast to a traditional firm commitment underwriting, an RD (like a PIPE) is marketed by a placement agent on a “best efforts” basis and is generally not “underwritten.”3 RDs account for approximately 15 percent of the overall private placement market (PIPEs represent approximately 85 percent) and nearly 25 percent of all common stock placements.4 RDs are expected to constitute an increasingly larger share of private placements in the future, as more companies utilize shelf registrations to issue securities.

The PIPE and RD market has experienced dramatic growth in recent years; 2008 was a record year in terms of deal volume (see FIGURE 1.1). PIPEs and RDs range from plain-vanilla common stock offerings to structured equity-linked offerings (convertible preferred stock, convertible debt, warrants, equity lines, etc.). Deal sizes range from a few million dollars to more than a billion dollars, with average transaction amounts approximating $65 million (average based on deal sizes of $10 million and greater).5 Issuers at all stages of the business cycle participate in the market, from early-stage, young companies to mature, established companies. Both listed (NYSE, Amex) and over-the-counter (Nasdaq Global and Capital Markets, OTC Bulletin Board) issuers utilize PIPEs and RDs. While the market is well established in the United States, it also operates throughout Western Europe, Asia, Australia, and Canada. Private placements outside the United States involve local rules, regulations, and practices that differ in each jurisdiction and from those in the United States. For purposes of this chapter, we will focus on the U.S. market, which generates the largest proportion of private placement activity in the world.

FIGURE 1.12004-2008 Nasdaq/S&P 500 and PIPE/RD Markets

Source: FactSet and PrivateRaise. Data exclude prepaid warrant and unidentifiable security structure transactions.* Indexed at 100 from 1/1/2004 throught 12/13/2008.-

Private placements provide funding solutions for growth capital, working capital, acquisition capital, and de-leveraging capital in circumstances where traditional public follow-on offerings or equity-linked offerings are not possible, advisable, or desirable. They are also used to facilitate company/balance sheet restructurings and recapitalizations. Additional reasons for issuances may include

• expeditious and reliable access to equity or to equity-linked capital

• confidential, targeted marketing that optimizes funding objectives

• flexible, customized deal structures and terms

• avoidance of share price erosion, which is often associated with publicly marketed offerings

• expansion of shareholder base through targeted investor marketing

• execution of small transactions (less than $50 million)

• capital markets dislocation; as when a sector is out of favor in the broader public markets

• avoidance of the up-front SEC registration process because of timing-related reasons or lack of access to a shelf registration

Market Participants

PIPE and RD market participants include public company issuers, institutional investors, investment bankers (placement agents), and other professionals, such as legal counsel and company auditors. The universe of PIPE and RD issuers includes high-growth companies (technology, tele-communications, health care, media); consumer companies (retail, hard goods, restaurants, food); energy and natural resource companies (midstream, exploration and production, services, mining, alternative energy); financial companies (banks, investment banks, insurance, services); industrial companies (basic materials, building products, aerospace/ defense, transportation, logistics); and real estate-related companies (REITs, hotels). In the past, growth companies were the dominant issuers in terms of number of completed deals. Today, growth companies still comprise half the market, but other sectors, such as energy and financials, are responsible for an increasingly large proportion of completed offerings. In terms of deal volume, energy and financials account for a large majority of the current market’s volume.6FIGURE 1.2 provides an industry breakout of PIPE and RD issuers for 2007 and 2008.