Public Deals Become More Private

If nothing else, the JOBS Act has focused more attention on the “metaphysics” of securities offerings.  Even those who are not securities geeks might readily acknowledge that at some point in our recent past, there were some characteristics typically associated with “private placements” and private placements could be distinguished from public offerings.  Beginning in the mid-1990’s many of those distinctions became increasingly blurred as hybrid offering alternatives, like PIPE transactions, became more popular.  The objective of a PIPE transaction was to reduce the liquidity discount typically associated with restricted securities that had been offered in a private placement by enabling the holders of those securities to resell them pursuant to a resale registration statement.  Of course, a PIPE transaction also has the benefit of permitting an already public company to undertake a financing transaction without having to make a premature announcement.  A PIPE transaction is announced only once a definitive agreement has been executed.  Other developments, such as the shortening of the Rule 144 holding period, and the development of private secondary trading markets have contributed to making restricted securities more liquid.  The relaxation of the prohibition against general solicitation will contribute to a further blurring of lines.  An issuer or the financial intermediary acting on its behalf will be able to reach investors having no pre-existing relationship with the company or the intermediary.  Changes in the Exchange Act reporting threshold and the almost certain boom in activity in secondary trading markets are likely to contribute to more reliance on private offerings as a capital-raising technique.

Undoubtedly, all of this is interesting and will have a lasting impact on capital formation.  An area that has received considerably less attention is that, just as private offerings have become more public, public offerings have become more private.  Perhaps this development is less exciting from a theoretical perspective, but it merits consideration as it reflects important developments in the capital markets.  As more companies have become eligible to use a registration statement on Form S-3, these companies have sought to conduct shelf takedowns where they might once have had to rely on a PIPE transaction.  This is not to say that PIPE transactions no longer have a role in capital formation—they remain important in more structured or special situations, such as to provide acquisition financing or in connection with a recapitalization.  According to data published recently by William Blair, approximately 85% of the 471 follow-on equity offerings that priced in 2012 were completed as shelf takedowns.  Perhaps more interesting still, most follow-on public offerings in the U.S. were not broadly marketed.  The confidentially marketed public offering, which begins with wall-crossing selected institutional investors subject to confidentially undertakings, has become the offering format of choice.  Again, data from William Blair indicates that for 2012, accelerated deals represented 61% of all follow-on offerings.  Seasoned issuers remain concerned about heightened levels of volatility.  Also, in an announced or “traditionally” marketed follow-on offering, the issuer’s stock is often the subject of shorting.  Finally, marketing a public offering like a PIPE transaction or like a private offering once was marketed (without “general solicitation”) permits an issuer to preserve its optionality and, if price levels prove unattractive or market interest insufficient, the issuer need not suffer the stigma of a failed deal.  Over time, it will be interesting to analyze whether we see even more convergence between private and public.

To view recent slides on this subject, please click here.  Morrison & Foerster has also produced a JOBS Act book that is available here.