Private placement market (ppm) blueprint

1 | Research conducted by Arthur Mboue

PRIVATE PLACEMENT ROUTE BLUEPRINT TO ACCESS CAPITAL FOR SEC

REPORTING PRACTITIONERS

STEPS EVENTS BASIC MAIN REQUIREMENTS

0 60 days before the filing of registration statement, a company must know what it is eligible for. Available options:

1. As a WKSI, they can file Form S- 3 ASR with a lot of privileges including automatic certification of effectiveness of its shelf registration and more

2. Settling for Form S-1 filing 3. Dormancy until re-eligibility (on time filing for

12 months). Here, the company is left with others options including private placement, offshore financing option and short term borrowing (mostly commercial paper and others)

It should be incorporated under the laws of the US or any US state or DC.

Required to file Exchange Act reports for preceding 12 calendar months

Current in its exchange Act reporting obligations and timely for preceding 12 calendar months

Form S-3 (or F-3) eligible 60 days prior the filing either has a least $700

Million of common equity market capitalization held by non-affiliates or has issued at least $1 Billion aggregate amount in registered debt offerings during past 3 years and registers only debt securities for cash

Is not an ineligible issuer 1 If the company wins the WKSI status. It must file Form

S-3 every 3 years (3 year ‘shelf’ life and 90 days grace periods, see also CD&I question 114.01) like any ‘driver license’ for financing it does not matter that it does not have any immediate need for liquid

Transaction requirements:

Primary offering of securities for cash (see question 116.04 CDI)

Primary offering for cash of non-convertible securities that meet these conditions:

o In addition, the issuer be a wholly-owned subsidiary of a WKSI

o The issuer be a majority owned operating partnership of a REIT that qualifies as a WKSI

Primary offering of securities for cash if issuer o Has a least one class of equity securities

listed o Limits the aggregate gross proceeds of its

sales of debt and equity securities during 12 month period to 1/3 of its public float

Any secondary offering of a listed security Dividend reinvestment plans, rights offerings and

securities offered and securities offered on conversion of outstanding warrants; or

Asset-backed securities (ABS) that are rated investment grade and that meet certain other conditions. ABS informational and computational material is filed under cover of Form 8-K (also FWP) and incorporated by reference into the registration statement.

PS: BoD must know that they must authorize and sign this form. This form signing does not expose them to liabilities since additional data can be provided when engaging in public offering. This form S-3 is not useful


for the private placement process. 2 Certification of Effectiveness is received from the SEC The effectiveness of a ‘shelf’ registration statement which

is interested to register securities that may be offered in the future by the registrant is not necessarily the commencement of an offering. The purpose of the review is to confirm the accuracy of the reference in the prospectus as well as to identify the document that must be filed as exhibits to the registration. Confidential treatment is allowed under special circumstances. Care should be taken that the due diligence record not leave any question unresolved.

3 Internal decision: company determines need for cash and opportunity to generate increased profits thereby. Management considers options

A- Sale of assets B- Short-term borrowing (including commercial

paper-quick and non SEC filing but be aware about its uses and Basel credit rating)

C- Issuance of securities and debts 1. Company considers the sale of

securities and debts to the SEC registered investing public (QIB and others)

2. Through private placement ( Regulation D and 144A)

3. Through offering of securities and debts in the offshore market (international financing-Regulation S)

Test of timing, audience and content

Public Offering o Customer: investing public o SEC certification o cash

Private Placement o Customer: pre-existing relationship (QIB) o No SEC certification o Cash and No cash

Offshore market (or International financing) o Customer: foreign (distribution

compliance period will keep it from coming quickly back to US, 3 categories, Substantial US market interest metrics)

o No SEC certification o Cash and non cash

PS: the BoD can authorize a concurrent strategy. They must review the brief from the secretary and ask a lot of questions; pros and cons

4 Company opts to raise funds through private placement of securities and debts to QIB (qualified institutional buyers), accredited investors and purchasers

QIB status are given when institutions pass the $100 Million plus test including:

Banks and Savings and loan associations

Investment advisers firm Broker and Dealers take only the $10 Million

plus test

Non SPE trust will take a test of $5 Million plus of total assets

Accredited investors status are given to:

Banks, insurance company, small business investment company, investment company, employee benefit plan, private business development company, corporation, partnership, business trust , director, executive, corporate officer, any natural person with net worth or joint net worth of $1 Million plus and any natural person with $200,000 plus income

5 Corporate Leaders meet and choose their investment banker team for this event

BoD of independent directors must exercise their fiduciary, due care and loyalty duties and make sure that


the choice of the investment banking team is based on its experience, tracked good record and excellent knowledge of the company. In addition, it must be an arm length contractual agreement between the company and the investment banking team. Since there is not SEC certificate of effectiveness process for this event, this team must be independent to give a second opinion of the company’s value and projection. It is not just to protect the team from potential lawsuits but also to create a market confidence into the adequacy of the data provided to market participants. To sign the contract, the team will receive a corporate resolution authorizing the private offering.

6 Managing investment banker chooses its legal representation (SEC reporting experts for valuation, contract and due diligence)

There is a lot of similarities between public offering and private placement, they use the same type of documents:

PPM-Offering Memorandum Purchase agreement between the company and

the initial purchasers

Registration rights agreement between the company and the initial purchasers

Legal opinions, and Comfort letters

A group of informed securities offering advisors must be able to analyze the client’s financial projections to ensure that they are reasonable in light of actual known facts, circumstances and ecosystems. They must be able to work with financiers and accountants and ask the company to adjust them (historical data, non- recurring items, expected returns, intangible assets -intellectual Property,…) because corporation tends to overstate this data for free cash flow valuation. In addition, they must be highly knowledgeable in this company and industry operations.

7 A syndicate/consortium of multiple investment bankers is formed and defined

1. Agreements among them (AAU) 2. Agreements between corporation and

investments bankers 3. Agreements between investment bankers and

dealers (or QIB)

Administrative Manager has the power of attorney to sign the deal on behalf of all investment banking firms involved in this event. (participation fee, restrictions, monitoring, metrics of syndications, etc), Securities are distribution through the syndicate/consortium, one or more firms will be designed by the company as managing administrative agent, syndicate agent, documents agent and lead arranger/bookrunner agent

8 Investment bank staff contact public and private pension funds and other institutions as possible purchasers

Reg D and Rule 144A give different interpretation of how to solicit privately participants to this event. But, you can focus on pre-existing investors, 35 is still somehow the limit despite JOBS tentative change of rule. Please avoid

Website posting (may be legal with password exclusively to prospective investors)

Circulated advertisements


Cold calls to prospective customers Using company’s pre-existing contacts database

without consulting them Prospective Investors must receive, read, sign and return

Investor qualification questionnaire Subscription agreement

Agreement to become a party to shareholders This investor documentation must be reviewed before the event by an attorney

9 Investors’ counsel is selected Required skills:

Counsel should read all relevant and available materials on the issuer

Counsel should agree with the issuer on the due diligence budget, scope of review, deadline of completion and potential outside consultants

Counsel should discuss with the company about any threshold issues that could affect the ability to complete the offering as scheduled

Private Offering compliance program

Timetables for the state and federal filings Monitoring of offers for purposes of additional

filings requirements and limits

Procedures for determination of which investors may be solicited

Monitoring of subscriptions for completeness and for suitability of investors

Listing of all offerees and receipts of prospective investor documentation

Offeree representative documents Basic due diligence

o The issuer and its management o Past securities offerings o Pending litigation or previous or potential

regulatory problems o The business prospects of the issuer, and o The assets held by or to be acquired by

the issuer Corporation liability

Broker-dealers and investment banking firms are required to exercise a ‘high degree of care’ in investigating and independently verifying an issuer’s representation and claims. Failure to comply with this duty can constitute a violation of the anti-fraud provision of the Federal Securities law (Section 17(a) of the SA, Section 10(b) of the SEA and Rule 10b-5). In absence of a Federal claim for negligent misrepresentation, a purchaser is entitled to seek redress for material misrepresentation or misleading omissions only


pursuant to the implied private right of action under Section 10(b) of the 1934 SEA.

Reg FD: Disclosure of non-public information by the company executives here is not exempted from Reg FD. The duty to disclose will require the company to file Form 8-K and/or post internet webcast or video of that roadshow. To prevent any violation of Reg FD, company leaders must avoid disclosing non-public data during roadshow and require their broker dealer to issue press releases disclosing their transactions

Personal liability for a counsel:

The duty of ‘special relationship’ with customer exposes counsel to legal malpractice (from a client or 3rd party) similar to the independent auditors because counsel prepares an offering memorandum and other documents (also adequacy of a due diligence investigation) for the company that are intended to be disclosed to third parties. (reference Enron case,2002 and Cowan Liebowitz & Latman v. Kaplan, 2005)

Also the conduct of secondary actor can satisfy elements or pre-conditions for liability under 10b

10 Corporate leaders, placement leaders and others involved in the offerings, after due diligence conducted by their researchers teams, securities lawyers and financiers decide to proceed with the scheduled event

Have your research conducted by a team with both highly informed securities and Wall Street oriented staff (accountants, financiers, etc.) and other independent experts. This group must be capable reviewing complex data and Rule 137, Rule 138 and Rule 139. When you are dealing with ‘red flags’ industry or company, increase your due diligence by

Requesting more confidential documents (board minutes,…)

List and secure all reviewed documents

Visit a least the corporate facilities of the company and take notes

Interviews top corporate officers and compare their answers

Verify, verify, independent verification and investigation is the entire purpose of due diligence

In short, time and effort are necessary if the quality of the instrument is to be verified (may be also by a certified third party) and the investors are to perceive that a serious effort to protect their interest did occur.

11 A note of purchase of agreement is drafted Index of stock purchase agreement:

Definition Sale and purchase of shares

Representation and warranties of seller

Representation and warranties of buyer


Certain covenants Conditions precedent

Termination

Indemnification Miscellaneous

12 8-K is filed by the SEC reporting company with term sheet as exhibit

NPO, Notice of Private Offering, 8-K, item 8.01, other events, must contain this legend ‘This announcement is not an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of the securities in any State would be lawful prior to registration or qualification under the securities laws of any such State’

13 A private placement Memorandum (PPM is not PPM with HMO, Tricare, Champ-va, Champ-us) is prepared by the company with the assistance of investment bank; at this step, the private placement is officially open to a selected group for the next 3 to 5 days

Index of the PPM:

Description of securities Terms of the Offering

Use of Proceeds

Descriptions of Business Risk Factors

Capitalization

Historical Financial Data Management’s Discussion and Analysis

Management

Principal Stockholders Financial Projections

Legal Matters

14 The company files 8K/A with the private placement memorandum (offering memorandum) as exhibit

8-K will file under items: 3.02-Unregistered sales of Equity Securities

3.03-Material modification of rights of securities holders

8.01-other events 15 The administrative agent, syndication agent and lead

arranger/bookrunner distribute profits and allocate losses. Bookrunner agent closes the offering book.

To close

Notify each investor in writing that the company did accept his/her offer

Attorney must review the subscription and closing documents before acceptance

A control sheet is drafted from the company database

Prepare stock certificate with this legend ‘The shares represented by this certificate are restricted securities and are subject to the restrictions set forth on the reverse side hereof’after releasing them from the escrow account to the company account

Each certificate must be signed, dated and certified mail to the new owners

Draft a control sheet of all copies of the signed stock certificate receipts from the computer database

Good luck


16 Resale time of restricted securities (securities issued and sold to purchasers) for new owners

6 ways for investors to resell in a single transactions the restricted securities received in a private offering:

Register the securities

Sell the securities in a ‘4(1-1/2)’ transaction refers to transaction in reliance of section 4(1) or section 4(3) depending on whether the seller is a securities dealer.

Sell the securities directly to QIB pursuant to Rule 144A

Sell the securities to the public in a transaction not involving a distribution as defined by Rule 144 (no re-marketing prospectus filing)

Resell the securities through an offshore transaction pursuant to the resale provisions of SEC Reg S

Sell the securities pursuant to the Rule 144(k) (fully available after 6 months for reporting company or 1 year for non-reporting company)

2 types of Rule 144A offering (Rule 144A only offerings and Rule 144 eligible offering), the difference lies in the permitted resales of securities

Law

Private placement market (ppm) blueprint