Number 1305 March 15, 2012

Client Alert

Latham & Watkins Capital Markets Group

The Bought Deal Bible: A User’s Guide to Bought Deals and Block Trades

It’s Monday morning and you’ve been • Will the underwriter need to promise told that your favorite seasoned issuer is wall-crossed accounts a “free-to- planning a bought deal that is scheduled trade” date that might require to launch after the close of trading on issuer disclosure if the deal does not Wednesday. What do you do? Well, you proceed? don’t need to panic — we have you • Will the underwriter need a covered. All you need to do is answer preliminary prospectus supplement at the following simple questions: the time of launch? • Will it be a ? • Will there also be a press release at “This Client • Is the issuer a well-known seasoned the time of launch? issuer? Alert provides a • Will the sale by the underwriter be comprehensive • Is there available room under an in a fixed price offering or a variable effective shelf? price reoffering? review of all of the legal and practical • Does the issuer’s disclosure need • Will there be a “pricing” press release topping up in light of recent or after pricing? issues you will pending events or announcements? • Will there be any selling stockholders? face in executing • Does the issuer need to file a Form • Do the selling stockholders (or their a bought deal. In 8-K with any necessary topping board designees) have any material up disclosure or will a prospectus Annex A, we have non-public information? supplement or press release be included a sample sufficient? • Are there any timeline for a agreement issues to be negotiated? • Is the fact that a deal is pending registered bought material? • What lock-ups will be required from existing stockholders, if any? deal that will help • Will the underwriter be pre- you get control of marketing the deal prior to public • Are there any NYSE or issues the process.” announcement? to consider? • Will the underwriter be wall- • Will a FINRA filing be required? crossing potential prior to • Are there any “blue sky” issues? announcement? • Are there any difficult comfort or due diligence issues?

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This Client Alert provides a SIFMA Guidelines comprehensive review of all of the legal In March 2008, the Securities Industry and practical issues you will face in and Financial Markets Association executing a bought deal. In Annex A, published a set of guidelines for we have included a sample timeline for bought deals entitled “Block Trade a registered bought deal that will help Guidelines.”1 The SIFMA guidelines you get control of the process. You now emphasize the importance of having all have the tools you need to answer all of documentation ready prior to launch to these questions. enable the underwriter to confirm trades For simplicity’s sake, we will start by as soon as a deal is struck between the discussing bought deals as if they are issuer and the underwriter. always for the account of the issuer. Preparedness is everything in the In practice, however, this is often context of a bought deal. Delay can not the case. There are a number of result in major financial losses — special issues that apply to bought minutes can mean millions of dollars. deals involving resales of outstanding securities by selling stockholders. Shelf Registration We review those issues below under “Special Issues in Secondary Trades.” The first question to ask when contemplating a registered bought deal What’s a Bought Deal or a is whether the issuer has an effective shelf registration statement with Block Trade Anyway? sufficient available capacity. If so, you’re In this Client Alert, when we refer to off to the races.2 a “bought deal,” we mean a securities Even if not, you’re still good to go if offering in which an underwriter agrees the issuer qualifies as a well-known to purchase an issuer’s securities at an seasoned issuer, since WKSIs can file agreed price (or pricing formula) without an immediately effective automatic a prior marketing process. The term shelf registration statement on Form “block trade” means a sale of a block S-3 without SEC Staff review.3 Non- of securities (typically 10,000 or more WKSI issuers without an effective shelf shares of or $200,000 or more in registration statement, by contrast, principal amount of bonds) and is often will not be in a to consider a used interchangeably with the term registered bought deal, because they bought deal, particularly where the will not typically have the time to wait seller is an existing stockholder rather for a new Form S-3 to become effective. than the issuer. As a result, bought deals for non-WKSI A bought deal decreases execution risk issuers are sometimes accomplished for the issuer or selling stockholder and through an exempt offering. Bought shifts market risk to the underwriter deals involving newly issued common earlier in the transaction by allowing stock are usually done on a registered sellers of securities to lock in the seller’s basis, however, because the Rule 144A price before launch and without an exemption from registration is generally extensive issuer marketing process. Of not available for securities that are course, there is no such thing as a free fungible with a class of securities listed lunch. Bought deals demand execution on a US national securities exchange, within a very quick timeframe, e.g., listed on the NYSE while at the same time requiring the or the Nasdaq. maintenance of customarily strict due If the issuer has an effective shelf, the diligence and documentation standards. question becomes whether there is They are not for the faint of heart. sufficient capacity under the shelf to do the bought deal. Once again, it’s good

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to be a WKSI. In the first place, a WKSI obstacle for WKSIs than for non-WKSIs, shelf can be filed without specifying a given that a WKSI can simply put up deal size or a number of securities under a new automatic shelf registration Securities Act Rule 430B(a). Instead, statement. You should be aware of a WKSI can rely on the “pay-as-you- the possibility that a particular bought go” provisions of Securities Act Rules deal may not be successfully resold 456(b) and 457(r) to pay fees at the immediately, in which case an expiring time the final pro supp for the offering underlying shelf can be problematic. is filed under Rule 424(b). Even if the Note also that the expiration date WKSI shelf specifies a maximum deal issue does not apply to resale shelf size and there is insufficient remaining registration statements covering resales capacity, a WKSI can simply file a new, by selling stockholders. immediately effective automatic shelf. Issuers that are Form S-3 eligible Assessing Your Disclosure but are not WKSIs don’t enjoy the Package: The Section 11 and luxuries of an automatically effective Section 12 Files registration statement or the pay- as-you-go fee system. Their options The Section 11 File are much more limited if they have Section 11(a) of the Securities Act insufficient shelf capacity remaining imposes liability if any part of a for the proposed bought deal. One registration statement, at effectiveness, possibility is to upsize an existing shelf contained a material misstatement or by filing an immediately effective omission. Section 11 liability covers -form registration statement under only the registration statement and Securities Act Rule 462(b). However, information included in the registration the Rule 462(b) option can only be statement (and accordingly, would not used once per shelf and is limited to typically cover free writing prospectuses 20 percent of the remaining unused or road show slides). capacity of the original shelf.4 The issuer For the purposes of this Client Alert, we could, of course, file a new Form S-3 use the term “Section 11 file” to cover registration statement, but that would all of the information deemed to be introduce timing uncertainties. Even part of the registration statement at the if the SEC Staff chooses not to review relevant moment of effectiveness. the new registration statement, that determination itself takes a few days, A shelf registration statement can have and the shelf filing may send signals multiple effective times: to the market and generate downward • the time of original effectiveness; selling pressure that the issuer would prefer to avoid. Given these limitations, • the time a post-effective amendment a non-WKSI issuer should file a shelf became effective; registration statement well in advance • the time of filing an annual report of an anticipated bought deal and pay that is incorporated by reference in the requisite filing fees for any and all the shelf and acts as an update under securities anticipated to be sold in the Securities Act Section 10(a)(3); and offering.5 • at each takedown off the shelf.6 When considering whether a currently effective Form S-3 shelf is suitable for a As a result, the Section 11 file changes planned bought deal, keep in mind that over time. In a bought deal, the original a shelf for a primary offering (WKSI or effective date of a shelf registration non-WKSI) has a three-year life after statement is usually the least interesting its initial effective date by virtue of moment because subsequent Exchange Securities Act Rule 415(a)(5). Obviously, Act reports and pro supp filings will, this time limit poses a less significant over time, supersede or modify the

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information in the shelf registration shortly after the offering, the deal team statement’s base prospectus. The deal will want to consider whether additional team will instead want to focus on disclosure is required before launch. whether the Section 11 file is accurate For just this reason, many bought deals and complete at the time of launch. are timed to follow promptly after an earnings release or the filing of a If the deal team determines that the periodic report. Section 11 file needs to be updated before launch, one option is to add any missing information by means of a final Regulation FD pro supp filed under Rule 424(b). That Regulation FD requires an issuer to pro supp is typically filed at the very publicly disclose any material, non- end of the second business day after public information simultaneously with pricing, and the information it contains its intentional disclosure to members is retroactively deemed part of the of the financial community. The plan Section 11 file at the time of the first to launch a bought deal can itself be a contract of sale by virtue of the magic material fact in some cases. To comply of Rule 430B(f). The other way to “top with Regulation FD, the issuer will need up” the Section 11 file is to make a pre- to publicly announce the launch of any launch Exchange Act filing (such as a bought deal that is material to the issuer press release filed on Form 8-K) that will prior to approaching potential investors. be incorporated by reference into the shelf registration statement. Determining whether the coming launch of a particular bought deal is material to The Section 12 File the issuer will always depend on all of the facts and circumstances. Consider By contrast to Section 11, Section 12 of the following presumptions as helpful the Securities Act imposes liability on rules of thumb: any person who offers or sells a in a registered offering by means of a • an issuance of common equity, prospectus, or any oral communication, convertible notes or high bonds which contains a material misstatement is presumptively material; or omission. Section 12 looks to the • an issuance of investment grade sum of what investors have been told bonds is presumptively not material; up to the time the underwriter confirms and orders. In the context of a bought deal, Section 12’s focus is the base prospectus • a resale of outstanding shares (together with any incorporated of common stock by an existing Exchange Act filings), any preliminary stockholder is sometimes material and pro supp sent to investors and any sometimes not material. additional information that may have Like all rules of thumb, these three are been conveyed to investors (orally or only the starting point in an analysis that in writing) on or before the time orders must take into account all relevant facts are confirmed. For the purposes of this and circumstances, including disclosures Client Alert, we refer to this collection of in previously filed Exchange Act information as the “Section 12 file.” documents about the issuer’s financing To determine what additional plans and the importance of a particular information needs to be communicated transaction to the issuer’s business. to investors in connection with a bought deal, the issuer will need to focus on the Testing the Waters adequacy of each of the Section 11 file and the Section 12 file at launch. If an Regardless of whether a particular important event in the issuer’s business bought deal is initiated by the has occurred or is pending, or if the underwriter or the issuer, the issuer expects to announce earnings underwriter may want to engage in a

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limited pre-marketing process before offers simply by filing an automatic submitting its bid to the issuer. This is shelf, but some WKSIs are hesitant to do only natural, since the underwriter will so because a shelf filing will signal to want to avoid a scenario in which it is the market the likelihood of an offering unable to sell the “bought” securities and thereby create execution and at or above the agreed-upon price paid market risk and, possibly, downward to the issuer. When pre-marketing a pressure on its stock price. bought deal to potential investors, the underwriter will need to be cognizant Wall-Crossing and Testing the of both the SEC’s restrictions on offers Waters and Regulation FD’s prohibition on An underwriter desiring to determine selective disclosure. The issuer will want market demand for securities that may to review and discuss the underwriter’s shortly be offered in a bought deal also pre-marketing plans in order to satisfy needs to be concerned about Regulation itself that Regulation FD will be FD if the fact that the issuer is planning complied with and that the underwriter an offering is itself material non-public is communicating appropriately with information. There are at least two ways potential buyers. Many issuers like that the underwriter might “test the to keep tight control over these pre- waters” with the particular accounts marketing efforts to avoid the risk of it expects to participate in an offering. market movement prior to the official Each of these techniques has different launch of the deal. consequences under Regulation FD. If the underwriter wants to gauge The Restrictions on Offers interest without restricting If an underwriter inquires of individual the investors with whom it speaks, the investors as to their appetite for a underwriter may make “no names” particular security of a particular issuer, inquiries about investor appetite for the question arises as to whether that specific securities of a broad range of inquiry amounts to an “offer” of the issuers in a particular industry sector. In security being discussed.7 Oral offers that case, especially if the underwriter to sell securities are permissible if the has not yet been approached by the securities are covered by a previously issuer about a possible offering, the filed registration statement. If a underwriter may be able to conclude registration statement has not already there is no Regulation FD or selective been filed, then all offers are prohibited disclosure issue and, hence, no need unless the issuer is a WKSI offering its to restrict the investors with whom it own securities directly to investors or speaks. the offering is exempt from registration under Rule 144A, Regulation S or In order to test the waters about another exemption. a particular bought deal that is material to the issuer prior to the Securities Act Rule 163 allows WKSIs public announcement of the deal, to make unrestricted oral and written the underwriter may want to “name offers of their own securities prior to names” and get a more concrete the filing of a registration statement. estimate of investor interest. To do that, However, this WKSI exception applies the underwriter will ask the potential only to offers made by the WKSI itself, investor if it is willing to be “wall- and does not allow the underwriter crossed” (i.e., moved to the restricted to make pre-filing offers on a WKSI’s side of the firm’s trading wall) as to an behalf.8 As a result of the limitations unnamed issuer in a particular industry. of Rule 163, an underwriter is able to make pre-marketing offers in registered If the investor agrees to be restricted, offerings only after the issuer has filed the underwriter may send the investor a registration statement. WKSIs can an email confirming its willingness to enable an underwriter to make such keep confidential whatever it is about

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to learn, although some underwriters The form of the announcement that take the view that the investor’s verbal is appropriate for a given bought acknowledgement of the confidentiality deal depends upon the adequacy of arrangement is sufficient to establish issuer information already available to the existence of an express agreement investors by way of prior Exchange Act for Regulation FD purposes.9 Some filings, the nature of the security being underwriters also ask for a return email offered and the proposed manner of from the investor acknowledging the resale by the underwriter. confidentiality arrangement. Prior to agreeing to be wall-crossed, Getting the Word Out most investors will want to agree on a There are a number of ways to future date (often not more than a few announce a bought deal, including a days out) when the wall-cross trading Rule 134-compliant press release filed restrictions will lapse. The issuer will or furnished on Form 8-K, a preliminary ordinarily participate in determining pro supp filed under Rule 424(b) or, the free-to-trade date, since the issuer preferably, both.10 A bought deal can may have a part to play in publicly also be launched using an issuer FWP disseminating the information necessary under Rule 433. Whichever approach to ensure free tradability by a date is chosen, the issuer must carefully certain. consider whether the announcement, when taken together with all other Once the investor has agreed to be wall- information made available to investors crossed, the underwriter can name the in the registration statement and issuer and have an explicit discussion incorporated Exchange Act filings, with the investor about its interest in conveys all the information required to participating in the upcoming offering, be disclosed under the federal securities subject only to the restrictions on offers laws. described above. • Rule 134 Press Release. Rule 134 Launching the Deal and Post- enables an issuer with an effective registration statement to issue a Launch Communications press release that includes certain The underwriter will want to publicly limited information related to an announce the deal and begin allocating offering without the communication securities to buy-side accounts as soon being deemed to be a prospectus or as the issuer accepts its bid. The public an issuer FWP.11 The use of a Rule announcement of launch serves as a “for 134-compliant press release is the sale” sign to the market and satisfies most common way to announce the any Regulation FD concerns about launch of a bought deal because it selective disclosure. In most cases, the can be prepared and disseminated issuer and the underwriter will agree quickly. A press release has the added on a price immediately after the close benefit of satisfying the requirements of trading (4:00 p.m., New York City of Regulation FD, particularly if it time). The underwriter will expect to is concurrently filed on Form 8-K.12 begin reselling the bought securities Although a press release is an immediately and will hope to have the effective way to announce a bought entire deal sold prior to the open of deal, the issuance of the release alone trading on the next day (9:30 a.m., New will not serve to update the Section 11 York City time). Because this time period file — it will need to be filed on Form is critical to the underwriter’s marketing 8-K to achieve that goal. The SIFMA efforts, it is essential that all documents Block Trade Guidelines include be finalized ahead of time so that the a recommended form of launch deal can be publicly announced as soon press release for both primary and as the issuer accepts the underwriter’s secondary sales of common stock. bid.

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• Preliminary Pro Supp. For an issuer Variable Price Reoffering desiring to top up the Section 12 In a variable price reoffering, the file at the moment of launch, a underwriter resells the purchased preliminary pro supp is a good way securities at variable prices as to go. The use of a preliminary determined by market conditions and pro supp filed under Rule 424(b) subsequent negotiations with buy-side immediately prior to the launch of accounts. the offering provides the underwriter Since the issuer cannot know at the with a comprehensive method of time its shelf registration statement announcing the offering and the terms is initially filed with the SEC what of the securities as well as any other method(s) of distribution will be used by information the deal team determines its underwriters in future takedowns, the is appropriate to add to the Section 12 issuer should include broad language file. A publicly filed preliminary pro in the base prospectus so there will supp also constitutes public disclosure be no need for an update at the time of the deal that satisfies Regulation of a takedown. We suggest including FD (although many issuers choose language in the plan of distribution to issue a press release and file it section of the base prospectus to the on Form 8-K concurrently with the effect that: Rule 424(b) filing immediately prior to launch). For these reasons, some “We may sell the securities covered underwriters opt to use a preliminary by this prospectus in any of three pro supp in every deal, whether it is ways (or in any combination): (i) to strictly necessary or not. On the other or through underwriters or dealers; hand, some underwriters will agree to (ii) directly to one or more purchasers; dispense with a preliminary pro supp or (iii) through agents. where there is no need to convey We may distribute the securities additional information to accounts covered by this prospectus from time prior to confirming orders. to time in one or more transactions: (i) at a fixed price or prices, which Post-Launch Communication may be changed from time to time; The customary practice for issuer (ii) at market prices prevailing at the communications after a bought deal time of sale; (iii) at prices related to has been launched is directly related the prevailing market prices; or (iv) at to the manner of distribution by the negotiated prices. participating underwriter. Let’s review Each time we offer and sell securities the two methods of resale used by covered by this prospectus, we underwriters to distribute a bought deal. will make available a prospectus supplement or supplements that will Fixed Price Offering describe the method of distribution In a fixed price offering, the underwriter and set forth the terms of the purchases the shares from the issuer offering, including: (i) the name or the selling stockholders and reoffers or names of any underwriters, the shares to the public at a fixed price, dealers or agents and the amounts often called the “clearing price.” In of securities underwritten or these transactions, the underwriter purchased by each of them; (ii) if expects to sell all of the shares on offer a fixed price offering, the public at the clearing price, although the plan offering price of the securities and of distribution language in the base the proceeds to us; (iii) any options prospectus normally includes language under which underwriters may allowing the underwriter to change the purchase additional securities from pricing at any time without notice (in us; (iv) any underwriting discounts or case it turns out to be a “sticky” deal). commissions or agency fees and other

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items constituting underwriters’ or to see that happen. For this reason, agents’ compensation; (v) terms and even where the deal team determines conditions of the offering; (vi) any that neither the clearing price nor the discounts, commissions or concessions underwriting discount is material, it is allowed or reallowed or paid to prudent to have a pricing press release dealers; and (vii) any securities drafted and ready to go in case the exchange or market on which the NYSE sees it differently. In fact, some securities may be listed.” underwriters advise their clients to issue a pricing press release in every fixed However, even if the issuer omits this price deal as a preemptive measure. broad description of offering methods in the plan of distribution section of the In practice, the NYSE will often base prospectus, a WKSI can add this seek the views of the issuer and its disclosure by means of a pro supp under counsel on the question of whether the Rule 430B(a).13 underwriting discount or the clearing price for a particular bought deal is There are generally two types of post- material. Materiality in this context, launch communications associated as always, depends on all of the facts with bought deals: (i) a “pricing” press and circumstances. The NYSE does release issued as soon as the clearing not apply any bright-line tests, but price in a fixed price offering has been our experience suggests that, if the established and (ii) the required final underwriter purchases shares for less pro supp filed pursuant to Rule 424(b). than 85-90 percent of the last closing price, you should expect to have a The Pricing Press Release conversation with the NYSE about There is no specific SEC rule requiring disclosure before the start of trading.15 the issuer to publicly announce the Even where the underwriter’s purchase results of its offering prior to filing the price is more than 90 percent of the final pro supp pursuant to Rule 424(b) last closing price, the NYSE may want (which can be as late as 5:30 p.m. on to have a discussion with the issuer the second business day after pricing). or the underwriter about the size However, if the offering is a primary of the underwriting discount or the offering, the issuer will have two reasons clearing price before acquiescing to the to consider issuing a pricing press materiality judgment of the deal team, release once the deal has been sold and which can have the effect of slowing the clearing price has been established. down the transaction and possibly First, there may be a Regulation FD even delaying the opening of the stock. concern in some cases if the clearing Remember that the NYSE expects a price is known to some market phone call at least 10 minutes before participants and not others. A pricing any material news is released during the press release that discloses the trading day or shortly prior to open so clearing price and is filed on Form 8-K it can make a determination of whether completely eliminates any Regulation to halt trading while the market absorbs FD concern. the new information. Nasdaq does not currently expect its listed companies Second, the NYSE takes the position to issue a press release following the that a pricing press release is necessary pricing of a bought deal. if either the underwriting discount or the clearing price is itself material Filing the Final Pro Supp information.14 If the NYSE determines The final pro supp is a particularly that these pricing terms are material, it interesting document in a bought may refuse to open the issuer’s stock for deal. The pricing information that first trading following an overnight bought appears in the final pro supp is the focus deal until a pricing press release has of extra attention in the bought deal been issued. Obviously, no one wants world. The price per share paid by the

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underwriter in a bought deal is typically issuer. Non-affiliates holding restricted determined based on a discount to the common stock can usually resell closing price per share of the issuer’s under Rule 144 without much (or any) stock on the day prior to launch. In underwriter assistance, but affiliates some cases, the agreed-upon price who want to reduce or exit their is based on a formula that takes into investment in a particular issuer are account the clearing price, once known. subject to Rule 144’s rather significant Underwriters generally prefer to utilize volume limitations. the entire two business day-period A number of important issues arise in contemplated by Rule 424(b) before the context of resale bought deals that filing the final pro supp. do not exist in bought deals for the Disclosing the pricing information, account of the issuer. Let’s examine the including the underwriter’s discount, three most important issues. in the final pro supp has the effect of including the information in the Section Special Due Diligence Concerns 11 file (by virtue of the magic of Rule Sections 11 and 12 of the Securities 430B), but it does nothing for the Section Act provide underwriters with a due 12 file. Most issuers and underwriters diligence defense to liability. Therefore, conclude that an underwriting discount the underwriter in a bought deal that is within a customary range is not will want to conduct a reasonable material and, therefore, need not be investigation to get comfortable that included in the Section 12 file (i.e., can the issuer’s disclosures (including, be omitted from the launch press release if applicable, the disclosure in the and the preliminary pro supp). However, preliminary pro supp) are accurate each deal team should consider the and complete in all material respects. facts and circumstances surrounding its The added challenge in the context of particular offering before determining a secondary trade is that the selling that omitting the underwriter’s discount stockholder will likely not have (and hence the net proceeds to the unlimited attention from the issuer’s issuer) from the Section 12 file at the management. Even though registered time of sale is acceptable. Some of the resale transactions almost always factors a deal team may wish to consider involve resales by controlling affiliates in this regard include the size of the of the issuer, “control” for purposes of discount as compared to the closing determining affiliate status is not always price of the security on the day prior the same as control for purposes of a due to launch, whether the bought deal is diligence effort. The deal team will need a primary or secondary offering, the to construct a reasonable investigation intended use of proceeds from the that suits the circumstances of the offering and whether the security in particular transaction. One size does not question has a high trading volume. fit all. Hard and fast rules are rarely useful in the context of an offering, but it’s worth noting that public disclosure of The “Clean Hands” Representation underwriter discounts and issuer net Whenever an affiliate is selling proceeds prior to the filing of the final securities, the question arises whether pro supp is quite rare in the context of the affiliate has had access to material bought deals. information that is not in the public domain — for example, knowledge of Special Issues in early-stage acquisition or divestiture discussions. In most circumstances, the Secondary Trades selling affiliate provides the underwriter Sales of securities in bought deals by with a “clean hands” representation existing securityholders typically involve to the effect that the affiliate is not sales of common stock by affiliates of the in possession of (or making its “sell”

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decision on the basis of) any material seasoned issuers in FINRA’s world. non-public information. If the selling FINRA will expedite the review of a affiliate is in possession of material primary offering for an unseasoned non-public information, it is always WKSI or non-WKSI issuer under possible to level the playing field by certain circumstances, but it will not disclosing that information to the public currently promise expedited or same- in a preliminary pro supp prepared day clearance for a secondary offering specifically for the offering or by filing of securities of an unseasoned WKSI or a Form 8-K prior to launch, but the non-WKSI issuer. If this is your scenario, issuer may not be prepared to make early communication and coordination public disclosures about future plans with FINRA may become central to your that are not yet finalized. Many issuers deal timing. are reluctant to make special out-of- cycle disclosures to facilitate resales by Exempt Bought Deals affiliates. And most issuers have insider trading policies that limit affiliate resales So far in this Client Alert, we have to trading windows following Exchange discussed bought deals in the context Act filings. In many cases, the right of a registered offering only.17 However, decision is for the affiliate to keep out of executing a bought deal on an exempt the market until a pending transaction basis is a viable option for US issuers has been publicly announced or formally offering straight debt or convertible abandoned. securities when an effective registration statement is not available.18 The private These selective disclosure concerns market for debt and convertible debt are often addressed by timing a resale securities of issuers that are seasoned bought deal to follow promptly on the enough to be considering a bought heels of the filing of a periodic report deal is deep and wide. Limiting the by the issuer. The various disclosure universe of available purchasers to requirements applicable to Exchange qualified institutional buyers and non- Act reports, particularly annual US investors doesn’t typically affect the reports on Form 10-K and quarterly execution of such an offering, or the reports on Form 10-Q, are sufficiently price at which underwriters are willing comprehensive that the deal team to purchase the securities, because can usually conclude that the public institutional investors are the accounts disclosure file is complete following targeted in offerings of straight debt a periodic report filing. The same and convertible debt securities. Of conclusion may be possible following course, privately placed securities are the filing of an earnings release in some “restricted securities” subject to Rule cases. Note, however, that an earnings 144’s restrictions on trading, which may release that is merely “furnished” on necessitate a modest liquidity discount. Form 8-K will not be considered to be part of the Section 11 file, which may There are a few additional benefits of an indicate the need for a final pro supp exempt bought deal worth noting. that includes a “recent developments” 16 section. Disclosure and Other Regulatory Obligations Special FINRA Issues Exempt offerings generally are not Bought deals involving securities of subject to FINRA’s seasoned issuers do not, as a general filing requirement and related review rule, require a filing with, or review by, process, which can require significant FINRA, as we will discuss in greater lead time.19 The underwriter also has detail below. However, FINRA uses a additional flexibility to pre-market different standard from that used by an exempt offering as compared to a the SEC for determining “seasoned” registered offering because none of the status. As a result, not all WKSIs are restrictions on offers under Section 5 of

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the Securities Act apply in the context only to qualified institution buyers). of an exempt offering, other than the Accordingly, in a Rule 144A exempt prohibition on general solicitation. offering, distribution participants, The underwriter may also prefer an issuers and selling stockholders can exempt offering because Sections 11 bid for or purchase the securities being and 12 of the Securities Act do not distributed, even during the offering. apply to unregistered transactions.20 In addition, there may also be deal- Lock-Up and Clear Market specific issues that prevent an issuer from consummating a registered offering Considerations that can be avoided through an exempt To facilitate a successful distribution of offering. For example, if an issuer the securities the underwriter commits does not have the necessary financial to purchase in a bought deal, the information available to satisfy all of the underwriter will typically require that applicable requirements of Regulation the issuer, certain company insiders and S-X, the issuer and the deal team may any selling stockholders contractually be able to conclude that satisfaction of agree not to sell any of the covered some of the more technical Regulation securities into the market for a period of S-X requirements is not required by time after the offering. To the extent that sophisticated institutional investors. the applicable sellers are party to the In those cases, a private offering may underwriting agreement, this covenant be a viable option even if a registered can be included in the underwriting offering is not. agreement itself. Otherwise, the restrictions are set forth in a separate Regulation M lock-up agreement. If your deal has Regulation M is designed to prohibit a lock-up provision (in either the manipulation of the price of a security underwriting agreement or in a separate (or certain related securities) during a lock-up agreement), consider whether “distribution” of the security. Rule 101 the terms of the lock-up, including any of Regulation M covers distribution negotiated carveouts, should make their participants (including any underwriter, way into the Section 12 file. If so, a prospective underwriter, broker, dealer preliminary pro supp or an issuer FWP or any other person who has agreed may be necessary.22 to participate or is participating in a While the lock-up period is often a distribution), while Rule 102 covers the heavily negotiated offering-specific issuer and any selling securityholder. term, in the context of a bought deal, Regulation M broadly prohibits covered the restricted period typically ranges persons from directly or indirectly from 30 to 90 days. Bear in mind that bidding for, purchasing, or inducing many bought deals are timed to follow others to bid for or purchase, covered promptly on the heels of an earnings securities until a specified restricted release or the filing of a quarterly or period for the distribution has ended. annual report to coincide with a trading Although Rule 101 of Regulation M window in the issuer’s insider trading includes an exemption for trading policy (in the case of a secondary trade) by distribution participants during a and to avoid the need for topping-up distribution by an issuer with “actively disclosure prior to launch. Accordingly, traded securities,”21 no such exemption selling stockholders may look to exists under Rule 102 for the issuer itself negotiate a lock-up period that ends or for a selling securityholder. However, prior to the anticipated date of the next there is a broad exception from the quarterly earnings release, which will restrictions of Regulation M for a “pure” likely be their next opportunity to access Rule 144A exempt offering (meaning an the market. offering and sale in the United States

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Even if the negotiated lock-up period otherwise be prohibited under Rule expires before the next earnings 2711.23 Accordingly, sellers may choose release, the deal team will need to to structure the lock-up agreement take into account the prohibitions of such that the related booster falls away FINRA’s equity research rule, NASD to the extent that the issuer qualifies Rule 2711. Absent an exemption, Rule for Rule 2711’s actively traded security 2711 prohibits a FINRA member that exemption and the underwriter can acted as a manager or co-manager of issue Rule 139-compliant research on a public offering from publishing a the issuer at the time the lock-up would research report on, or making a public otherwise expire. appearance regarding, the applicable issuer during the 15 days prior to Other Required Filings and after the expiration, waiver or termination of a lock-up agreement. To To avoid speed bumps, the deal team the extent that a lock-up expires or is should plan ahead with respect to all waived in close proximity to the end of aspects of the required documentation, an issuer’s fiscal period, Rule 2711 can including any required FINRA, stock prove problematic because research exchange or state blue sky law filings. analysts often publish reports on or make appearances regarding an issuer FINRA Filings shortly following an issuer’s earnings FINRA reviews, among other things, announcement. In order to protect the the underwriting and other terms and research analysts’ ability to publish arrangements relating to the distribution reports or make appearances following of securities by its members (e.g., a US an earnings release or similar event underwriter in a bought deal) to ensure affecting an issuer, lock-up agreements that such terms and arrangements are typically include a “booster shot” not “unfair or unreasonable.” Pursuant provision that automatically extends to FINRA Rule 5110 (also known as the term of the lock-up for up to an the “Corporate Financing Rule”), all additional 34 days if the expiration US public debt and equity offerings or termination of the lock-up would must be filed with FINRA for review otherwise trigger Rule 2711’s research and approval prior to making any quiet provisions. sales, unless an express exemption is However, the booster shot can also serve available. as an impediment to an issuer or selling stockholder looking to launch a bought The Seasoned Issuer Exemption deal shortly after the publication of There are several filing exemptions the next earnings release. Fortunately, under Rule 5110,24 however, in the Rule 2711 provides FINRA members context of a bought deal the most some relief from the restrictions to relevant exemption is commonly the extent the company in question referred to as the “seasoned issuer is (i) an issuer with “actively traded exemption.” securities” as defined in Regulation M and (ii) the member seeking to publish The seasoned issuer exemption is or make a public appearance could issue available for offerings “registered with research reports in accordance with the the SEC on registration statement Forms requirements of Securities Act Rule 139. S-3 or F-3 pursuant to the standards for If these conditions are met, the FINRA those Forms prior to October 21, 1992 member may make a public appearance and offered pursuant to Rule 415 of SEC or issue a Rule 139-compliant research Regulation C.”25 The pre-October 1992 report during the 15-day period prior to, Form S-3 eligibility criteria required and during the 15-day period following, an issuer to have at least 36 months an earnings release or other issuer of Exchange Act reporting history and announcement — activities that would either a $150 million or at

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least a $100 million public float coupled bought deal, the deal team should first with an annual trading volume of at assess whether the seasoned issuer, least three million shares. Note the or any other exemption, applies to the importance of this exemption in the offering. context of a bought deal — no FINRA In addition, the seasoned issuer filing will be required if the issuer exemption does not necessarily apply met the pre-October 1992 Form S-3 to offerings that fall within the “conflict eligibility criteria at the time the shelf of interest” provisions of FINRA Rule was filed and continues to meet such 5121. Even if the issuer would otherwise criteria at the time of the shelf takedown be exempted from a FINRA filing, the for the bought deal. presence of a conflict of interest may If this is not the case, however, the deal trigger the need for a FINRA filing. The team will need to review the particular most common situations that give rise to facts and circumstances to determine a conflict of interest are an underwriter whether a filing is needed for the being deemed to be under common takedown. For example, a FINRA filing control with an issuer or where more could be required if the issuer met the than 5 percent of the net proceeds from pre-October 1992 Form S-3 eligibility the offering will be used to repay certain citeria at the time of the original shelf indebtedness owed to the underwriter filing but no longer meets such criteria or its affiliates or is otherwise intended at the time of the takedown. A filing to be directed to the underwriter or its could also be required if the issuer affiliates.27 meets the pre-October 1992 Form S-3 Conflicts of interest must always be eligibility criteria at the time of the disclosed in the offering materials takedown but did not meet such criteria and, under certain circumstances, a at the time the shelf was filed.26 qualified independent underwriter, or Unfortunately, the definition of a “QIU,” must be engaged to participate WKSI in Rule 405 does not track the in the preparation of the registration pre-October 1992 Form S-3 eligibility statement and the prospectus or other criteria, in particular with respect to offering document and exercise the the three-year Exchange Act reporting usual standards of due diligence history. As a result, even though a in connection therewith. If QIU WKSI can file an automatically effective participation is required, the seasoned shelf registration statement, a FINRA issuer and other filing exemptions will filing may nonetheless be required not be available and FINRA approval in connection with an underwritten must be obtained prior to making any offering of a WKSI’s securities. The sales of the offered securities. Given FINRA staff, however, has indicated the tight timing of bought deals, an that they will expedite the review and analysis of potential conflicts of interest approval process for WKSIs that are not (including those arising as a result of yet considered seasoned issuers and will concurrent or pending transactions) endeavor to complete the review process should be performed at the outset and within 24 hours (and typically will taken into consideration when selecting complete the process in a much shorter underwriters. period if alerted in advance and if there are no difficult compensation issues that Preparing for FINRA in Advance require a more extensive discussion If a determination has been made that with senior staff). Nonetheless, failure a FINRA filing will be necessary, there to recognize early in the process the are a few steps that an issuer can take requirement to effect a FINRA filing in in advance to help facilitate a smooth connection with a bought deal can cause FINRA process on the day the bought additional delay. Accordingly, before deal is launched. finalizing the timeline for a proposed

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Although the underwriter of a future the FINRA staff to discuss expediting bought deal will almost certainly the review process. not have been identified at the time In order to take advantage of the same- the shelf registration statement of a day clearance option, issuers must agree non-WKSI is first filed with the SEC, to file the final pro supp and executed FINRA will accept a filing by issuer’s underwriting agreement with FINRA (or designated underwriter’s) counsel within one business day of filing the that requests conditional clearance final pro supp with the SEC and must on the base prospectus concurrently also make the following representations: with or following the time the shelf registration statement is filed with the • the terms with the underwriter do not SEC. Another filing is required when include any prohibited arrangements the underwriter for a particular bought (as described in Rule 5110(f)); deal is selected (in order for FINRA • the aggregate amount (including to assess any conflicts of interest and underwriting discounts and underwriter compensation issues), but commissions and all other “items of obtaining conditional clearance speeds value”) received by the underwriter the subsequent review process because does not exceed 8 percent of future takedowns should not require the offering proceeds, and all individual approval (or additional filing underwriting compensation will be fees) unless there are material changes disclosed in the offering document; to the original shelf filing.28 • the underwriter has not acquired To the extent a filing exemption isn’t unregistered securities that would be available, FINRA members and non- deemed compensation during the 180- WKSI issuers can also take advantage day period preceding the filing (note of FINRA’s “same-day clearance” option that, because of this requirement, with respect to shelf offerings. Same-day the same-day clearance option may clearance filers will typically receive a not technically be available if the no objections letter within minutes of underwriter or related persons have making certain required representations entered into a derivative transaction through FINRA’s COBRADesk filing with the issuer in connection with the system. FINRA does, however, reserve offering (even if such instrument is the right to review a transaction post deemed to have “zero compensation filing. The same-day clearance option value” under the rule)); is available in connection with initial shelf filings, takedowns from previously • in the event of a Rule 5121 conflict of approved shelf filings and initial shelf interest that requires the appointment filings with concurrent takedowns (but, of a QIU, the QIU meets all the in each case, not if the final pro supp necessary standards to act as a QIU has been filed with the SEC). The same- in the subject offering (taking into day clearance option is a highly useful account the type and size of the tool in the context of a bought deal, offering); and with one glaring limitation. The same- • final offering documents will be day clearance option is not currently submitted to FINRA. available for secondary offerings. This means that even if an issuer has Since non-WKSIs can avail themselves obtained conditional clearance on the of the same-day clearance option in most base prospectus, FINRA does not have instances and WKSIs have their own a process specifically established for expedited review process, some forward obtaining same-day clearance for a thinking by the deal team with respect secondary bought deal. If the deal team to the Corporate Financing Rule’s review is faced with this situation, counsel and approval requirements can help for the selling stockholder and the minimize FINRA as a gating item at underwriter are advised to reach out to the time of the bought deal. However,

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because the same-day clearance option investors who may participate in the is not currently available in connection offering in each state. with a secondary offering, the deal team • Rule 144A/Regulation S Offerings. If will need to engage in communications the offering is to be conducted under with FINRA in advance to discuss how Rule 144A to qualified institutional the related review will impact timing. buyers located in the United States, Additionally, regardless of whether an exemption from registration is same-day clearance is an option, certain available in every state if the offer representations and other information and sale is made by a registered will always be required by FINRA, so broker-dealer. State securities laws the deal team will want to gather the likewise do not apply to the sale of information necessary to make the securities outside the United States required representations as early in the under Regulation S. process as possible.

Blue Sky Filings Form 8-K Filings in Addition to the Launch Press Release It’s easy to overlook the need for state Generally, a Form 8-K must be filed with securities law clearance in a bought the SEC within four business days of the deal. In most cases, the analysis breaks underlying event that triggers the need down as follows: for disclosure. In the context of a bought • The Listed or “Senior to a Listed” deal, the deal team should consider the Exemption. Securities listed on a following potential triggering events national securities exchange or (in addition to the launch press release securities of the same issuer that discussed above): are equivalent or senior in rank to a • Material Definitive Agreement. Item listed security qualify as a so-called 1.01 of Form 8-K requires a reporting “covered security” under Section 18 company to file a Form 8-K describing of the Securities Act and have the the terms of any material definitive benefit of federal preemption of any agreement it has entered into outside applicable filing or fee required under of the ordinary course of business. state securities laws. Accordingly, for Practitioners have differing opinions bought deals that involve securities as to whether the underwriting of a listed company, offers and sales agreement associated with a bought can be made to all types of investors deal is material, given the paucity of in the United States by broker-dealers ongoing obligations post-closing.29 If registered in each applicable state the underwriting agreement is filed, without any other sort of qualification the underwriter will likely request under the various states’ securities that it be filed after the final pro supp laws. is filed. • Other Public Offerings. If the bought • Unregistered Sales of Equity deal is for securities of an issuer that Securities. A company must file a does not have any securities listed Form 8-K if it sells equity securities on an exchange, blue sky filings will in a or other be required to sell to retail investors. transaction not registered under the Generally, if offers and sales are Securities Act and the amount of limited to institutional investors, securities sold since the last time the an exemption from state securities company made similar disclosure in registration will be available, but the a Form 8-K or other periodic report is breadth of this exemption varies by greater than 1 percent of the number state. A blue sky survey is usually of of the class of prepared by underwriter’s counsel for security sold.30 If such securities are these types of offerings in order to sold for cash, then the Form 8-K must inform the underwriter of the types of

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include disclosure of the aggregate stockholder approval and, if so, offering price and underwriting whether the required approval has commission. been obtained. Rule 312.03(c) of the NYSE Listed Company Manual requires stockholder approval for any Notices, transactions or series of transactions Approvals and Stockholder where either (i) the common stock Vote Requirements to be issued in the offering (or If the securities being offered in underlying the convertible securities a bought deal are to be listed on to be issued in the offering) has/will either the NYSE or Nasdaq, certain have upon issuance voting power exchange notices and approvals may be equal to or in excess of 20 percent of necessary. In addition, the exchanges the voting power outstanding before require stockholder approval prior to the issuance or (ii) the number of consummating certain offerings. As a shares to be issued in the offering (or result, the deal team should focus on underlying the convertible securities the NYSE and Nasdaq requirements to be issued in the offering) are/ in order to determine as early as will be upon issuance equal to or possible whether any such notices or greater than 20 percent of the number approvals will be necessary. However, of shares outstanding prior to the in the context of a bought deal for issuance. Obviously, the need to common stock, stockholder approval solicit advance stockholder approval will generally not be required under typically eliminates the advantages either the NYSE or Nasdaq rules to of a bought deal. Fortunately, there the extent the offering takes the form are three exceptions to the NYSE’s 20 of a registered offering for cash that Percent Rule: is underwritten on a firm commitment basis.31 o “public offerings” for cash; o “bona fide private financings;”32 The NYSE requirements are: and • Notification and Approval to List. o offerings for distressed companies NYSE-listed companies are required in limited circumstances. to file an application for the listing of The Nasdaq requirements are: additional shares. Additional shares cannot be listed until the issuer • Notification. Rule 5250(e)(2) of the receives notification of the NYSE’s Nasdaq listing rules requires the approval. The NYSE suggests that issuer of any class of securities all filings be made approximately (other than American Depositary two weeks prior to the time when Receipts) listed on Nasdaq to submit authorization is required. While electronically a listing of additional the NYSE will work with issuers to shares notification in connection grant their authorization on a more with certain issuances, or potential accelerated timeframe, issuers should issuances, of common stock or make this confidential filing as soon securities convertible into common as a bought deal moves beyond a stock. The listing notification must be theoretical discussion, particularly submitted at least 15 calendar days33 if the offering requires significant prior to: analysis under the “20 Percent Rule” o issuing any common stock (or discussed below. security convertible into common • Stockholder Approval and the stock) in connection with the 20 Percent Rule. Among other acquisition of the stock or assets informational requirements, the of another company, if any additional listing application must officer or director or “substantial indicate whether the offering requires shareholder” of the issuer has 5

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percent or greater interest (or if outstanding before the issuance collectively such persons have a for less than the greater of book or 10 percent or greater interest) in market value of the stock. the company to be acquired or Note that registered offerings do not consideration to be paid; or necessarily constitute “public offerings” o issuing any common stock, or any under the NYSE’s and Nasdaq’s rules. security convertible into common As a result, a fact-specific inquiry will stock in a transaction that may be required and practitioners should result in the potential issuance of determine early on whether stockholder common stock, greater than 10 approval pursuant to the NYSE’s or percent of either the total shares Nasdaq’s rules will be necessary. The outstanding or the voting power application of the NYSE and Nasdaq outstanding on a pre-transaction rules in the context of offerings of basis. convertible securities is particularly tricky. If you are planning a bought In addition, Rule 5250(e)(1) requires deal for convertible securities, this topic an issuer to notify Nasdaq when there needs special focus prior to launch. is an aggregate increase or decrease of any class of its securities that exceeds 5 percent of the amount of Conclusion the securities of the class outstanding. Bought deals demand speed and grace Notification is required to be filed under pressure from every member no later than 10 calendar days after of the deal team. Both underwriters such occurrence. Nasdaq reviews and issuers are focused on completing these filings in order to confirm that bought deal financings before the any proposed transaction complies market moves or market participants can with the various Nasdaq listing rules, affect the price of the issuer’s securities including the stockholder approval through hedging. To accomplish this, all requirements described below. of the required documentation should • Stockholder Approval. Rule 5635(d) be in final form before any underwriter of the Nasdaq listing rules generally bids are submitted and accepted. requires stockholder approval of Remember that all of the customary transactions (other than “public issues encountered in fully marketed offerings”) involving: transactions also exist in bought deals, including all of the issues arising under o the sale, issuance or potential SEC and FINRA rules and regulations, issuance by an issuer of common the NYSE and Nasdaq rules, state blue stock (or securities convertible into sky laws and the antifraud provisions or exercisable for common stock) at of the federal securities laws. The only a price below the greater of book difference is that everything happens at or market value, which together lightning speed. with sales by officers, directors or “substantial shareholders,” is at Endnotes least 20 percent of the common 1 Securities Industry and Financial Markets stock or at least 20 percent of the Association, Block Trade Guidelines, March voting power outstanding prior to 2008, available at http://www.sifma.org/ uploadedfiles/for_members/committees/capital_ the issuance; or markets_group/equity_markets(1)/sifma%20 o the sale, issuance or potential block%20trade%20guidelines%20(2008).pdf. issuance by an issuer of common 2 Although a bought deal can in theory be effected stock (or securities convertible into pursuant to a registration statement on Form or exercisable for common stock) S-1, the inability to forward-incorporate reports equal to 20 percent or more of filed by the issuer under the Securities Exchange the common stock or 20 percent Act of 1934, among other practical impediments, or more of the voting power makes this an atypical structure.

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3 See Rule 462(e). For a review of the definition to the issuer (such as an attorney, investment of WKSI, see our Words of Wisdom blog entry banker, or accountant)” and to a person “who “Joining the Club: WKSIs Part 1” (February 14, expressly agrees to maintain the disclosed 2012), available at http://www.wowlw.com/wksis/ information in confidence.” Accordingly, the wksi-part-1/. exception covering communications between 4 For more information on how Rule 462(b) works an investment banker (a temporary insider) and for shelf upsizing, see our Words of Wisdom blog an issuer is implied and, therefore, need not be entry “‘For a Few Dollars More’: Upsizing Your expressly made. Shelf Deal” (May 25, 2010), available at http:// 10 For an overview of the practical aspects of the www.wowlw.com/shelf-offerings/for-a-few-dollars- EDGAR filing process, see our Words of Wisdom more-upsizing-your-shelf-deal1/. blog entries “‘All About EDGAR’ (and Exhibits)” 5 Public companies with less than $75 million (May 11, 2010), available at http://www.wowlw. aggregate market value of voting and non-voting com/edgar/all-about-edgar1-and-exhibits/ and common equity held by non-affiliates (public “All About EDGAR, Part II–Filings: Paper or float) are subject to an additional limitation Plastic?” (May 24, 2011), available at http://www. when offering common stock. Under General wowlw.com/edgar/all-about-edgar-part-ii--filings- Instruction I.B.6 of Form S-3, they cannot use paper-or-plastic/. Form S-3 to sell securities amounting to more 11 This limited information includes: (1) basic than the equivalent of one-third of their public factual information about the issuer; (2) float during any 12 consecutive month period. information about the terms of the securities Therefore, any issuer with a public float of less offered; (3) the names and roles of participating than $75 million will need to consider capacity underwriters; (4) the anticipated schedule for the with respect to this one-third offering limitation offering; (5) a description of the procedures by before entering into a bought deal transaction. which the underwriters will conduct the offering; 6 For the issuer and the underwriter, a takedown (6) the names of selling security holders, if any; triggers a new effective date as of the earlier and (7) the exchanges on which the securities of the date of first use of a pro supp filed under are traded. See Rule 134(a). Rule 424(b) and the time of the first contract 12 Arguably, the issuance of a press release of sale of the securities to which the pro supp concurrently with launch is by itself sufficient relates. A pro supp generally does not create to satisfy Regulation FD’s simultaneous public a new effective date for the company’s auditor disclosure requirement for issuers who are by virtue of Rule 430B(f)(2), and accordingly actively followed by the wire services. See Rule there is typically no need to update the auditor’s 101(e)(2) of Regulation FD. However, many consent pursuant to Section 7 of the Securities issuers choose to concurrently file or furnish the Act. See Securities Offering Reform, Release press release on Form 8-K in order to update No. 33-8591, text accompanying note 470 both the Section 11 and Section 12 files. See (July 19, 2005) (hereinafter, “Offering Reform Rule 101(e)(1) of Regulation FD. Release”). 13 WKSIs can make material changes to the plan of 7 For a thorough review of the law and the lore distribution by incorporated Exchange Act reports surrounding “offers,” see our Client Alert “The or prospectus supplements. See Rule 430B and Good, the Bad and the Offer: Law, Lore and Offering Reform Release text accompanying FAQs,” available at http://www.lw.com/page/ note 449. Non-WKSIs, however, must file a thegood-thebad-theoffer. post-effective amendment if there is a material 8 See Rule 163(c) and note 170 to Offering change to the plan of distribution. Reform Release (“In addition, as with the 14 Section 202.05 of the NYSE’s Listed Company other exemptions and safe harbors that are Manual requires a listed company to “release available only to the issuer, the definition of quickly” to the public any news or information by or on behalf of the issuer [in Rule 163] that might reasonably be expected to materially explicitly excludes offering participants who are affect the market for its securities. Although the underwriters or dealers.”). In 2009, the SEC NYSE, in Section 202.01 of the Listed Company proposed amendments to Rule 163(c) that would Manual, pointed to various developments that have allowed underwriters to make pre-filing are potentially material (e.g., earnings, mergers/ offers on behalf of WKSIs, but these proposed acquisitions, securities offerings and pricings amendments are not currently expected to be related to these offerings and major product enacted. launches), it leaves the ultimate determination 9 See Rule 100(b)(2) of Regulation FD, excluding of materiality, and therefore disclosure, with the from its requirements disclosure made “to a listed company. person who owes a duty of trust or confidence

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In 2011, the NYSE provided guidance on how Proceedings to Determine Whether to Approve its timely alert policy affects secondary offerings or Disapprove a Proposed Rule Change, as and, specifically, bought deals. The NYSE modified by Partial Amendment No. 1, to Adopt guidance provides: FINRA Rule 5123 (Private Placements of “In the case of a ‘bought deal,’ the materiality Securities) in the Consolidated FINRA Rulebook of a particular transaction will depend on a Release No. 34-66203 (Jan. 20, 2012). number of factors, including, but not limited 20 In contrast to Sections 11 and 12 of the to, the number of shares sold, the size of the Securities Act, scienter is required to establish discount to the public market price paid by liability under Rule 10b-5 of the Exchange Act. the underwriter, and whether the transaction 21 Pursuant to Rule 101(c)(1) of Regulation M, an involves a sale by the company or one of “actively-traded security” includes securities with its stockholders. If the discount to the public an average daily trading volume of at least $1 market price is such that its disclosure would million and that are issued by an issuer whose materially affect the market for the securities, common equity securities have a public float then it may be appropriate to disclose value of at least $150 million. the pricing terms (or amount of securities 22 In some cases, the absence of a lock-up may sold and net proceeds to the company or be material information that the deal team stockholder) even if the number of shares should consider including in the Section 12 file, sold in the transaction is not itself material.” particularly where investors would expect to 15 As a result of anticipated downward pressure see a lock-up based on market practice or prior on the price of the stock following launch, the experience with the issuer. difference between the price the underwriter 23 Rule 139 requires, among other things, that the pays for the shares and the last closing price issuer in question be eligible to conduct primary does not necessarily represent the effective offerings under General Instruction I.B.1 of compensation to the underwriter. Form S-3 (e.g., meets the $75 million minimum 16 For a discussion of the practical and legal public float requirement) and that the publication issues surrounding disclosure of recent results, in question is not an initiation or re-initiation see our Client Alert “Recent Developments In of research coverage (i.e., that the report is a Recent Developments — Using ‘Flash’ Numbers continuation of regularly published reports on the in Securities Offerings,” available at http://www. issuer). lw.com/page/flash-numbers-securities-offerings. 24 Other exemptions include certain offerings 17 Sellers of common stock are most likely to involving non-convertible debt and preferred explore a private investment in public equity, securities, most private placements and certain or PIPE, in this context. A common stock PIPE exchange offers in which listed securities are involves the private sale to accredited investors issued. typically coupled with resale registration rights 25 See FINRA Rule 5110(b)(7)(C)(i). with respect to the purchased shares. Would- be underwriters of a bought deal may act as 26 One scenario in which the filing of the takedown placement agents in this context. may not be required in this instance is if the issuer filed the original shelf at a time when no 18 Bear in mind that, under Rule 144A(d)(3)(i), debt FINRA member was involved (this is because the securities convertible into common stock with Corporate Financing Rule’s filing requirement is an effective conversion premium of less than 10 technically triggered only when a FINRA member percent are treated as fungible with securities of is participating in the offering). Nonetheless, the class into which they are convertible. In other because FINRA’s procedures with regard to shelf words, in that case, if the exemption under Rule filings are subject to change, it is best practice 144A is unavailable for the common stock, it to assess the situation at the time to determine would similarly be unavailable for the convertible whether a FINRA filing will be necessary. debt. 27 See FINRA Rule 5121(f)(5) and (6) for a 19 Note that FINRA is currently proposing new definition of “Conflict of Interest” and “Control,” filing and disclosure obligations on certain respectively. private placements in which a FINRA member participates. Fortunately, the proposed rules 28 FINRA filings made in connection with the filing have several exemptions, including placements of a shelf registration statement (whether filed by to qualified institutional buyers and offerings issuer’s or underwriters’ counsel) must include under Rule 144A and Regulation S. See Self- a representation that the maximum amount of Regulatory Organizations; Financial Industry underwriting compensation in connection with Regulatory Authority, Inc.; Notice of Filing of offerings off the shelf will not exceed 8 percent Partial Amendment No. 1 and Order Instituting of the maximum offering proceeds. Such

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representation must also appear in the base “public offerings” from the stockholder approval prospectus included in the shelf registration requirements of the Nasdaq Listing Rules. statement. However, Nasdaq has also provided additional One item of note with respect to FINRA Rule guidance on what constitutes a “public offering” 5121 is that the definition of “conflict of interest” for the purposes of Rule 5635(d): “Generally, a for purposes of that rule relates to a FINRA firm commitment underwritten securities offering member’s participation in “an entity’s public registered with the Securities and Exchange offering.” However, the defined term “entity” in Commission will be considered a public offering Rule 5121 excludes “a ‘real estate investment for these purposes. . . . However, Nasdaq staff trust’ as defined in Section 856 of the Internal will not treat an offering as a ‘public offering’ Revenue Code.” While this exclusion doesn’t for purposes of the shareholder approval exempt a REIT from FINRA filing requirements rules merely because they are registered with alone, it does effectively mean that a conflict of the Commission prior to the closing of the interest as defined for purposes of Rule 5121 transaction.” Nasdaq Listing Rules, IM-5635-3, cannot exist in the context of an offering by a “Definition of a Public Offering.” REIT. As a result, conditional clearance of the 32 Rule 312.04(g) of the NYSE Listed Company base prospectus by a REIT by and large only Manual defines a “bona fide private financing” leaves underwriter compensation for FINRA to include a sale in which “a registered broker- review at the time of a subsequent takedown. dealer purchases the securities from the issuer 29 See SEC Division of Corporation Finance, with a view to the private sale of such securities Compliance and Disclosure Interpretations, to one or more purchasers.” Accordingly, an Exchange Act Form 8-K, Question 102.02. Some exempt bought deal will generally qualify for this issuers choose to file the underwriting agreement exception. as an exhibit under Item 9.01 of Form 8-K. By 33 While Rule 5250(e)(2) of the Nasdaq listing rules doing so, the issuer can incorporate the terms specifies that the listing notification must be of the underwriting agreement by reference into submitted 15 calendar days prior to the issuance Item 1.01 and provide a more limited summary of of the applicable securities, in practice Nasdaq the terms of the agreement. However, the issuer staff has been receptive to the concern that, may also choose to wait and file the underwriting in many cases, complying with this advance agreement as an exhibit to its next quarterly or notice requirement is impossible, given that the annual Exchange Act filing covering the period offering may only become a reality a few days during which the bought deal occurred. (or a single day) prior to the date the securities 30 For smaller reporting companies (as defined by are issued and sold. Accordingly, Nasdaq staff the SEC), the threshold is increased to greater will often accommodate the submission of the than 5 percent (as opposed to 1 percent) of the listing notification inside of this 15-day window. number of shares outstanding of the class of However, the deal team should reach out to security sold. Nasdaq as soon as they become aware of a possible offering and offer to submit a draft 31 Although a “public offering” for cash is exempted notification in advance. Constant communication from the stockholder approval requirements of with Nasdaq will generally assist in facilitating NYSE Rule 312.03, the NYSE Listed Company greater flexibility with respect to the 15-day Manual does not include a definition of “public window. offering” for the purposes of assessing this exemption. Nasdaq Rule 5635(d) also exempts

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Annex A Note: This timeline is based on the assumption that there will be one week between the first phone call and the launch date. In many cases, the schedule will be significantly accelerated. In those cases, the to-do list will not change, but the timeline will need to be compressed. Good luck! Sample Timeline for a Registered Bought Deal FIVE BUSINESS DAYS PRIOR TO TWO/THREE BUSINESS DAYS PRIOR TO TRADE DAY: TRADE DAY: • Issuer engages its own counsel and • Issuer’s counsel reaches out to designated underwriter’s counsel potential underwriters to confirm agreement as to confidentiality and • Check for an effective shelf wall-crossing procedures registration statement (with sufficient unused capacity to cover green shoe) • Issuer conducts a call with potential and no stop-order underwriters to discuss process and timing for solicitation of final bids • Determine whether stock exchange filings/stockholder approvals are • Underwriter’s counsel completes its needed documentary due diligence • Submit FINRA filing (if required) and • Potential underwriters contact request pre-clearance for trade day underwriter’s counsel to receive an up-to-date diligence download • Submit stock exchange filing (if required) • All underwriter comments on the relevant transaction documents are • Contact auditors to initiate the submitted and resolved comfort letter process • Final form of comfort letter is • Instruct underwriter’s counsel to begin circulated, negotiated and agreed its due diligence process TRADE DAY: FOUR BUSINESS DAYS PRIOR TO TRADE DAY: • The underwriter hosts a bring-down due diligence call with counsel, the • Issuer’s counsel circulates drafts for issuer and its auditor comment to underwriter’s counsel of the: • Final bids are submitted immediately o Preliminary prospectus supplement after the close of trading o Launch press release* • A winning underwriter is selected o Pricing press release • Issue launch press release (and file or o Underwriting agreement furnish it on Form 8-K) o Form of lock-up agreement (if an • File preliminary pro supp with SEC equity offering) • Provide a pdf of preliminary pro supp o Authorizing resolutions of the board to underwriters of directors • Commence public sales and begin to o Any other transaction confirm orders documentation • Execute the underwriting agreement,** lock-up agreements and • Underwriter’s counsel updates its due the auditor’s comfort letter diligence

* See SIFMA’s Block Trade Guidelines for recommended forms of launch press releases for common stock deals. ** In some cases, the underwriting agreement is not executed until the next morning.

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TRADE DAY +1: TRADE DAY +2: • Continue confirming orders*** • File final prospectus supplement with the SEC pursuant to Rule 424(b) at • Issue press release announcing the close of business clearing price if a primary fixed price offering (before the market opens) • Assemble execution versions of closing documents, bring down o Notify stock exchange prior to issuing press release comfort letter, various officer’s certificates and legal opinions • Execute and overnight stock powers and medallion guarantees to transfer CLOSING (TRADE DAY +3): agent • Hold bring-down due diligence call • Notify stock exchange about intention to list additional shares (if applicable) • Close offering • File Form 8-K

*** In a “sticky” deal, confirmation of orders may continue for multiple days. In this case, the deal team will need to be mindful of Rule 159 and Registration M issues.

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If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult:

Senet S. Bischoff Kirk A. Davenport II +1.212.906.1834 +1.212.906.1284 [email protected] [email protected] New York New York Brandon J. Bortner Dana G. Fleischman +1.202.637.2117 +1.212.906.1220 [email protected] [email protected] Washington, D.C. New York Alexander F. Cohen Joel H. Trotter +1.202.637.2284 +1.202.637.2165 [email protected] [email protected] Washington, D.C. Washington, D.C.

Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorney with whom you normally consult. A complete list of our Client Alerts can be found on our website at www.lw.com. If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit www.lw.com/LathamMail.aspx to subscribe to our global client mailings program.

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23 Number 1305 | March 15, 2012