Co-written by Erin E. Karzmer, Jennifer C. Kogut, Timothy J. Melton and James E. O’Bannon

Introduction

The Securities and Exchange Commission has adopted new rules relating to the integration of public and private securities offerings. The new rules, which become effective on March 7, 2001, enhance an issuer’s ability to convert a public offering to a private offering, or to convert a private offering to a public offering, providing latitude that is especially valuable in times of turbulent market conditions.

Background

When market conditions are volatile, the relative merits of public and private offerings may change quickly. When the Nasdaq plummeted in early 2000, many start-up companies that had commenced public offerings delayed or withdrew their offerings due to rapidly changing market conditions. Some of those companies then needed to turn back to the private markets to raise the capital necessary to sustain their businesses. Conversely, companies that have commenced a private offering may find that strong market conditions and investor interest may make a public offering more advantageous than a private offering.

Under the current rules, switching between a private offering and a public offering involves many uncertainties due to the SEC’s integration doctrine, under which two or more separate securities transactions may be treated as a single transaction. If a withdrawn public offering were integrated with a subsequent private offering, the general solicitation related to the public offering may negate the ability to claim a private placement exemption from the registration requirements under the federal securities laws. Conversely, if an abandoned private offering were integrated with a public offering, the offers made before the filing of the registration statement would be deemed to violate the securities laws because those offers were made prior to the filing of a registration statement.

Under the current rules, determining whether a public offering and a private offering should be integrated requires analysis under a five-factor test that considers the facts and circumstances of the particular case. Application of the five-factor test is subjective, however, and the test typically fails to provide any certainty as to whether offerings would be deemed to be integrated. The existing integration safe harbors relating to private and public offerings - including Rule 152, the six-month safe harbor under Rule 502 of Regulation D, and the safe harbors in the interpretive guidance issued by the SEC in its Black Box and Squadron, Ellenoff letters - are very limited and provide little flexibility to issuers. Rule 155 does not otherwise affect the traditional analysis for integration of securities offerings.

New Integration Safe Harbors For Abandoned Private And Public Offerings

Rule 155, the new Securities Act rule relating to integration, provides greater flexibility to issuers by creating new nonexclusive integration safe harbors for private offerings that follow withdrawn public offerings and for public offerings that follow abandoned private offerings. These new safe harbors will help issuers complete their securities offerings based on prevailing market conditions.

Safe Harbor For Integration Of A Withdrawn Public Offering With A Subsequent Private Offering. New Rule 155(c) creates a safe harbor for issuers that first withdraw a registration statement for a public offering and subsequently commence a private offering. In order to take advantage of the safe harbor, the following conditions must be met:

  • No securities may have been sold in the public offering;
  • The issuer must withdraw its registration statement;
  • The issuer may not commence the private offering until 30 days following the effective date of withdrawal of its registration statement; and
  • The issuer must notify each offeree in the private offering that:
    • the private offering is not a registered offering;
    • the securities received in the private offering will be "restricted securities" under Rule 144 and cannot be resold without registration unless an exemption from registration is available;
    • purchasers in the offering will not have the remedies available under Section 11 of the Securities Act; and
    • a registration statement for the abandoned public offering was filed and withdrawn, and the date of withdrawal.

In addition, any disclosure document used by the issuer (or on its behalf) in the private offering must disclose any changes in the issuer's business or financial condition that occurred after the issuer filed the registration statement that are material to an investment decision in the private offering.

Safe Harbor For Integration Of An Abandoned Private Offering With A Subsequent Public Offering. New Rule 155(b) creates a safe harbor for issuers that first abandon a private offering and subsequently commence a public offering. In order to qualify for the safe harbor, the following conditions must be met:

  • No securities may have been sold in the private offering;
  • All private offering activity must terminate before the issuer files its registration statement;
  • Any prospectus filed as part of the registration statement must disclose information about the abandoned private offering, including:
    • the size and nature of the private offering;
    • the date on which the issuer terminated all private offering activity;
    • that any offers to buy or indications of interest in the private offering were rejected or otherwise not accepted; and
    • that the prospectus delivered in the registered offering supercedes any selling material used in the private offering.

Further, the issuer may file the registration statement relating to the public offering immediately as long as securities were offered in the private offering only to persons that were (or the issuer reasonably believes were) "accredited" (i.e., meet the requirements of Rule 501(a)) or "sophisticated" (i.e., satisfy the knowledge and experience standards of Rule 506(b)(2)(ii)). If securities were offered to persons that were not accredited or sophisticated, the registration statement may not be filed until at least 30 days after the termination of the private offering.

General. For purposes of Rule 155, a "private offering" is defined as an unregistered offering of securities that is exempt from registration under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D. As a result, an offering under Rule 504 or 505 of Regulation D does not qualify as a "private offering" for purposes of Rule 155. Issuers should note that under the safe harbor rules, a private offering must qualify as a valid private placement; issuers may not use the integration safe harbors as a mechanism to avoid the private offering prohibition on general solicitation and advertising. Issuers should also note that the SEC has not defined when an offering is deemed to "commence" or "terminate," and the precise meanings of those terms are uncertain.

The release states that the SEC staff intends to monitor use of Rule 155 carefully to prevent its misuse, and that in connection with its review of registration statements, the staff may request supplemental information from issuers to determine whether the conditions of Rule 155 have been met. To that end, issuers that take advantage of Rule 155 should be sure to maintain records evidencing their compliance with the terms of the rule.

Other Amendments

Effective Time of Withdrawal of Registration Statement. In order to facilitate the operation of the Rule 155(c) safe harbor for public-to-private offerings, the SEC has amended Rule 477 to provide that an issuer's application to withdraw a pre-effective registration statement will become effective automatically upon filing, unless the SEC objects within 15 days following the filing. Applications for withdrawal of registration statements following effectiveness will continue to require the consent of the SEC. If an issuer is seeking withdrawal of a registration statement in anticipation of using the Rule 155(c) safe harbor, the issuer must state in its application for withdrawal that it may undertake a subsequent private offering in reliance on that safe harbor, although the release notes that providing this statement is not a condition of the Rule 155(c) safe harbor. This statement should not include any information regarding the proposed terms of the private offering to avoid the possibility of a general solicitation.

Offset of Filing Fee. Rule 457 has been amended to provide that an issuer that withdraws a registration statement may apply the filing fee for that statement to a registration statement filed within five years following the initial filing date by the issuer, any majority-owned subsidiary of the issuer, or a parent that owns more than 50 percent of the issuer's outstanding voting securities.

In the past, issuers considering whether or not to withdraw a registration statement would consider the loss of the registration fee as a factor weighing against withdrawal. Since this cost of withdrawal from registration has been eliminated, issuers that have filed a registration statement but are considering a possible private offering as an alternative may now wish to consider promptly withdrawing the registration statement so as to start the running of the 30-day waiting period that must lapse before a private offering is commenced.

Further Information

This Jones Day Commentaries is a publication of Jones, Day, Reavis & Pogue and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.