Special Purpose Acquisition Companies (SPACs)
A SPAC is a company organized to purchase one or more operating businesses and which generally intends to raise capital through an initial public offering (IPO), direct public offering (DPO) or private offering.
IPO’s, DPO’s and Rule 419
SPAC’s that engage in either an IPO or DPO are subject to Rule 419 of the Securities Act of 1933, as amended. The provisions of Rule 419 apply to every registration statement filed under the Securities Act of 1933, by a blank check company. Rule 419 requires that the blank check company filing such registration statement deposit the securities being offered and proceeds of the offering, less reasonable offering expenses, into an escrow or trust account pending the execution of an agreement for an acquisition or merger. In addition, the registrant is required to file a post effective amendment to the registration statement containing the same information as found in a Form 10 registration statement, upon the execution of an agreement for
Subsidiary Spin-Offs
A subsidiary spin-off is a transaction where a parent corporation’s stock ownership of a subsidiary is distributed to the parent corporation’s shareholders giving the shareholders direct ownership of the former subsidiary. Typically, the subsidiary shares are distributed to the shareholders pro rata as a dividend. In fact, two of the requirements for an unregistered spin-off, as set forth in Staff Legal Bulletin No. 4 issued by the Securities and Exchange Commission, are that the distribution be pro rata and that no consideration be paid by the shareholders (i.e. a dividend).
A more complex form of a spin-off is commonly referred to as a Reorganized (“D”/355) which is where the parent corporation forms a shell subsidiary, transfers the stock to the shell subsidiary, which in turn distributes the stock to the parent shareholders.
Reasons for Spin-Offs
There are many reasons a company may choose to complete a spin-off, however, the most common reasons include: (i) to separate profit centers to increase
PIPE Transactions, Terms and Requirements
A PIPE (Private Investment in Public Equity) transaction is typically a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the SEC. Generally the securities are sold at a discount to market price. A traditional PIPE generally involves a fixed number of securities at a fixed price, with the closing conditioned only on the effectiveness of a resale registration statement. Any transaction that does not fall within this parameter is considered non-traditional and the structure can vary widely, including for example price variables (such as a death spiral), warrants and options, convertible securities and equity line transactions.
Traditional PIPE Transactions
In particular, a traditional PIPE is generally a set number of securities at a set price (which may be a discount to market at the time of close) and is conditioned only upon the effectiveness of a re-sale registration statement. A traditional
Direct Public Offerings And The Internet
In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.
To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:
- An electronic prospectus must provide the same information as a paper written prospectus;
- The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
- The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
- The Investor must be immediately notified of any amendments or changes in the offering documents; and
- The Issuer must
Regulation A – An Exemption By Any Other Name Is A Short Form Registration
Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than any other exemption. In particular, Regulation A provides for the filing of an offering prospectus which closely resembles a registration statement, with the Securities and Exchange Commission (“SEC”). The SEC then can, and often does, comment on the filing. Practitioners often refer to Regulation A as a short form registration.
Moreover, although the Regulation A offering prospectus does not go “effective” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement. For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus much the same as Section 8(a) for registration statements. Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified” much
Form 10 Registration Statements
A Form 10 Registration Statement is a registration statement used to register a class of securities pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). To explain a Form 10 registration statement, let’s start with what it isn’t. It is not used to register specific securities for sale or re-sale and does not change the transferability of any securities. That is, a Form 10 registration statement does not register a security for the purposes of Section 5[1] of the Securities Act of 1933 (“Securities Act”) . Following the effectiveness of a Form 10 registration statement, restricted securities remain restricted and free trading securities remain free trading.
The Purpose of Form 10 Registration Statements
Now onto what a Form 10 registration is. As indicated above a Form 10 registration statement is used to register a class of securities. Any Company with in excess of $10,000,000 in total assets and 750 or more record shareholders
An In-Depth Review of Private Placements Under Section 4(2)
Section 4(2) of the Securities Act of 1933 provides that the registration requirements of Section 5 do not apply to “transactions by an issuer not involving any public offering.” The definition of an “issuer” is pretty straightforward as found in Section 2(a)(4) and includes, “the person who issues or proposes to issue” a security and is understood to mean the entity that originally sells the securities. However, not so straightforward is what constitutes a “public offering,” which term is not defined in the Securities Act. In reliance on Section 4(2) the SEC enacted Rule 506 as part of Regulation D.
Rule 506 as a Safe Harbor Provision
Rule 506 is a Safe Harbor. In other words, if all the conditions of Rule 506 are met, you can rest assured that the conditions of Section 4(2) have been satisfied. However, Section 4(2) can be satisfied as a standalone exemption separate from Rule 506. The importance of the distinction between Section 4(2)
Rule 144 and the Evergreen Requirement Examined
Technically Rule 144 provides a safe harbor from the definition of the term “underwriter” such that a selling shareholder may utilize the exemption contained in Section 4(1) of the Securities Act of 1933, as amended, to sell their restricted securities. In addition, Rule 144 is used to remove the restrictive legend from securities in advance of a sale. In layman terms, Rule 144, allows shareholders to either remove the restrictive legend or sell their unregistered shares.
Rule 144(i), as amended, provides in pertinent part that the Rule is unavailable to issuers with no or nominal operations or no or nominal non-cash assets. That is the rule is unavailable for the use by shareholders of any company that is or was at any time previously, a shell company. A shell company is one with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and
Compliance When Conducting Concurrent Private and Public Offerings
The Securities and Exchange Commission’s (SEC) integration guidance in Securities Act Release No. 8828 (August 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Rule 4(2) or the Securities Act Rule 506 safe harbor, with a registered public offering.
Qualified Institutional Investors
Previously it was thought that a private offering could only take place concurrently with a public offering if limited to qualified institutional investors (must have at least $100 million under management) and two or three additional large institutional accredited investors as set forth in the Black Box no action letter (June 26, 1990), or to an Issuer’s key officers and directors. In addition, many practitioners previously utilized the integration rule set forth in Securities Act Rule 502 in determining whether a private and public offering should be integrated. In
Equity Line Financing Examined
In a typical “equity line” financing arrangement, an investor and an Issuer enter into a written agreement whereby the Issuer has the right to “put” its securities to the investor. 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”.
Similar to PIPE Transactions
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 re-sale of
