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SEC Updates May Benefit Equity Line Financing Providers and Issuers

On May 16, 2013, the SEC updated their Compliance and Disclosure Interpretations addressing the point at which an equity line agreement can be determined to be a completed transaction for purposes of filing a resale registration statement. 


Equity line financings are transactions where a company has a long-term contract to put shares to an investor (the equity line provider) at a price, generally determined by a formula based on a discount to market price.  That is, the Issuer has the right to tell the investor when to buy securities from the Issuer over a set period of time and the investor has no right to decline to purchase the securities (or a limited right to decline).  Generally, the dollar value of the equity line is set in the written agreement, but the number of securities varies based on a formula tied to the market price of the securities at the time of each “put.”

Most equity line financing arrangements are similar to a PIPE (private investment into public entity) transaction such that the Issuer relies on the private placement exemption from registration to sell the securities under the equity line and then files a registration statement for the resale of such securities by the investor.  However, whereas in a PIPE transaction the investor bears the risk, in an equity line transaction the investor often bears little risk due to the delayed nature of the puts coupled with the price of the securities being a formula tied to market price.  Accordingly, the SEC views equity line financing registrations as indirect primary offerings. 

The SEC Requirements

On May 16, 2013, the SEC added the following to its Compliance and Disclosure Interpretations:

Question: When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?

Answer: In many equity line financings, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then register the ‘resale’ of the securities sold in the equity line financing. In these types of equity line financings, the delayed nature of the puts and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings.

While we analyze private equity line financings as indirect primary offerings, we recognize that the ‘resale’ form of registration is sought in these financings. As such, we will permit the company to register the ‘resale’ of the securities prior to its exercise of the put if the transactions meet the following conditions:

  • the company must have ‘completed’ the private transaction of all of the securities it is registering for ‘resale’ prior to the filing of the registration statement;
  • the ‘resale’ registration statement must be on the form that the company is eligible to use for a primary offering; and
  • in the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s).

We will not object that a private transaction is not ‘completed’ based on the lack of a fixed price if the agreement provides for pricing based on a formula tied to market price and there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS.  [May 16, 2013]”

Importantly, the only change to the SEC’s prior standard is the final paragraph recognizing the OTCQX or OTCQB marketplaces.  However, this change is significant, which I will discuss in further detail below.

Discussion of the SEC requirement that the transaction be completed

Although the SEC views the equity line as an indirect primary offering, it allows the filing of resale type registrations if the following conditions are met:

  • The Issuer must have completed the private transaction prior to filing the registration statement (i.e., both parties must be fully contractually bound, with all material points agreed upon)
  • The “resale” registration statement must be on the form that the Issuer is eligible to use for a primary offering; and
  • In the prospectus, the investors must be identified as both underwriter(s) and selling shareholder(s).

In order for the first condition to be met, the Investor must be irrevocably bound to purchase all the securities.  That is, only the Issuer can have the right to exercise the put and, except for conditions outside the investor’s control, the investor must be irrevocably bound to purchase the securities once the Issuer exercises the put.  In addition, the obligations of the Investor must be non-assignable to meet the “irrevocably bound” condition. 

Moreover, if the Investor has the ability to make investment-related decisions under the terms of the contract, they will not be deemed to be irrevocably bound allowing for the filing of a resale registration statement.  Examples of investment decisions that would be viewed by the SEC as creating a continuing transaction (and not a completed transaction allowing for the filing of a registration statement) include:

  • Agreements that give the Investor the right to acquire additional securities (including through warrants) at the same time or after the Issuer exercises a put;
  • Agreements that permit the Investor to decide when or at what price to purchase the securities underlying the put;
  • Agreements with termination provisions that have the effect of causing the Investor to no longer be irrevocably bound to purchase the securities; and
  • Agreements that allow the Investor to exercise a “due diligence out.”

However, the agreements may allow for customary “bring-downs” as conditions to closing such as customary representations and warranties and customary clauses regarding no material adverse changes affecting the Issuer that would be within the Investor’s control. 

Significance of Recognizing the OTCQB and OTCQX as Markets

Over the past years, the historical “pinksheets” underwent major changes, including the creation of certain “tiers” of Issuers and a new name for the inter-dealer quotation system – the OTC Link.  The OTC Link divides Issuers into three (3) levels: OTCQX, OTCQB, and pinksheets.  Quotation on both the OTCQB and OTCQX requires that the Issuer be subject to and current with the reporting requirements of the Securities Exchange Act of 1934.  However, up until the May 16 change, the SEC viewed all three tiers of the otcmarkets.com as just the “pinksheets.”   As the OTC Link was not considered a market: (1) there could be no at-the-market pricing of securities registered for resale by an Issuer on behalf of its selling shareholders; and (2) there could be no equity lines or similar financing transactions and no registration of underlying convertible equities which are priced based on a formula tied to the trading price (usually a discount to market) for OTC Link quoted securities.

Accordingly, where OTCQB and OTCQX quoted securities could not avail themselves of equity line financings prior to May 16, 2013, they now can. 

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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