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When raising money, be direct

An overview of registered direct offerings

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The turmoil in today's capital markets has many public company issuers searching for viable capital-raising methods. For many such companies, registered direct securities offerings (RDOs) are a viable way to raise capital.

Compared to other capital-raising methods available to public company issuers, RDOs can be completed relatively quickly; are done confidentially, thus avoiding the downward pricing pressure associated with underwritten offerings; and are registered, and thus can be completed with a smaller discount than is typically found in private investments in public equity offerings (PIPEs).

RDOs are usually sold by a placement agent experienced in RDOs. These agents typically have relationships with institutional investors, along with knowledge of what such investors prefer to invest in and their investment criteria. Therefore, rather than marketing securities to a large group of potential investors, an experienced placement agent is able to target a small number of investors. By working with a placement agent, the identity of the issuer can be kept confidential until an investor is brought "over-the-wall" and informed that the offering is confidential, restricting the investor from trading in the issuer's securities until the offering is completed or terminated.

Michael Brown

Unlike PIPE offerings, the securities purchased in RDOs are registered. Registered securities provide greater liquidity than unregistered securities. The issuer benefits because it is able to offer its equity at less of a discount to market price than is often found in PIPE offerings.

RDOs typically are for common stock or common stock combined with warrants, although issuers may sell other types of securities (e.g., convertible notes or preferred stock). RDOs may be conducted by public companies of all sizes provided that the issuer is eligible to use Form S-3. Form S-3 is the most simplified registration form, and its use confers significant advantages over other registration forms.

For example, Form S-3 permits the registration of securities prior to planning any specific offering and, once the registration statement is effective, issuers utilizing Form S-3 may offer securities in one or more tranches without awaiting further SEC action. In addition, Form S-3 is an "evergreen" form of registration statement; that is, it permits an issuer to incorporate by reference its reports filed with the SEC subsequent to its initial filing. Without this ability, an issuer would have to file a new registration statement or post-effective amendment to its registration statement to prevent information contained therein from becoming outdated, each of which carries the potential for SEC review and the resulting delay.

Previously, issuers seeking to utilize Form S-3 were required to have a minimum non-affiliate public float of at least $75 million for primary offerings. However, the SEC amended the eligibility requirements for the use of Form S-3 as part of its initiatives to increase access to the capital markets by smaller public companies. The amended Form S-3 eligibility rules provide many smaller public companies increased flexibility to conduct limited public offerings of their securities at times and under conditions that are best suited for them, with fewer regulatory requirements. However, issuers with public floats under $75 million may not sell more than one-third of their public float in primary offerings over any 12-month period. The economy has and will continue to provide challenges to public company issuers. Capital is difficult and expensive to obtain. However, public company issuers should remember that RDOs may provide them with a fast, confidential and efficient financing option.

Submitted by Michael Brown for Stradling Yocca Carlson & Rauth

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