Financial Reporting & Accounting

• SEC Enforcement Of Accounting Requirements

• Earnings Management: Swept Away?

• Financial Reporting For International Joint Ventures

M&A

• Applying The New M&A Filing Rules

• How To Succeed In Selling Your Business

Securities Offerings

• What To Do Now That Our Offering Has Aborted

Executive & Directors

• Delaware Cases Affecting Executive Compensation

• Dual Role Of Non-Executive Directors

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Examines the issues involved in privately raising money after a failed public offering. Explores the available alternatives and the factors to be considered when structuring the private offering.

Avoiding integration. If a company begins the process of offering securities publicly and is unable to complete the journey, it often must resort to raising funds privately. It must then be careful when structuring the private offering, to avoid integration with the aborted public offering. If integrated, the solicitation used in the public offering will violate the private offering exemption requirements. To achieve the necessary separation, the company could sell a different security. It may sell equity in the private transaction only to qualified institutional buyers (“QIBs”) and a few other large institutional buyers. To qualify the offering under Regulation D, the issuer must wait six months from the withdrawal of the registration statement before offering securities privately. It may also be able to sell shares offshore under Regulation S.

Consider the facts. Counsel will need to consider the facts of a particular private offering to determine whether it would be integrated with the prior public offering. First review the sophistication of the private investors and their prior connection, if any, with the issuer. Assess the level of marketing activity undertaken in the aborted public offering, and consider whether the registration statement filed in connection with the public offering has been withdrawn. Any differences between the equity offered privately and the security that was publicly offered should be evaluated. Finally, look at how much time has elapsed since the end of the public offering. Each of these considerations will weigh for or against viewing the offerings as integrated.

The type of investors. As outlined in the SEC’s 1990 Black Box no-action letter, the issuer could sell securities privately to QIBs after an aborted public offering without waiting and without withdrawing the registration statement if the public offering had not been marketed and if the other requirements of a private offering were met. Should general marketing activity have taken place, the private offering might still be permissible if the private investors have a preexisting relationship with the company. When the investors in the private offering are institutional investors who are not QIBs as set forth in Black Box, the registration statement should be terminated. Let at least 30 days elapse before the private offering. If the investors are not all accredited, the company might be required to wait six months before making the private offering in order to comply with Regulation D.

The securities being sold. The public and private offerings are less likely to be integrated if a different security is sold in the second offering. Preferred stock immediately convertible into common would not constitute a different security. However, if the preferred is not convertible for a certain period of time, the security may be considered different than the underlying common stock that had been offered in the withdrawn public offering. Even if the preferred stock is not convertible for a relatively long period of time, a sale to nonaccredited investors would be problematic if made soon after the registration statement’s termination.