Catalyst - Winter 2009 - Alternative Financing: Fresh Ideas in Times of Economic Uncertainty
In the current state of economic uncertainty, access to capital markets to fund growth and development has greatly contracted. Small- and mid-cap public biotech and technology companies are struggling to raise capital through traditional methods. As opportunities to raise capital in the public markets are scarce, it is increasingly important to consider alternative financing transactions as a means to access much needed capital.
An increasingly popular source of financing in recent years has been private investment in public equity (PIPE.) Although conducive to various structures, PIPEs generally involve a sale by a public company of unregistered equity or equity-linked securities to a limited group of accredited investors in a targeted private placement. Shortly following closing, the issuer, as contractually required, files and maintains a re-sale registration statement covering the securities previously sold in the transaction.
PIPE transactions are generally quick, straightforward financings often involving serial investors who conduct limited due diligence, as they often rely upon the issuer's public filings. Structured as a private placement of unregistered securities to accredited investors, the issuer is not burdened with filing a registration statement and clearing SEC comments prior to closing. Instead, the issuer is able to postpone the effort and expense of registration until after proceeds from the investment are received.
To counterbalance the fact that PIPE securities are initially unregistered, PIPEs are generally priced at a discount to market (ranging from five to 25 percent) with a commitment by the issuer to register the securities shortly after closing, subject to liquidated damages if such registration statement is not filed, declared effective and maintained according to the agreed upon schedule. Additionally, recent amendments to Rule 144 of the Securities Act of 1933 have made PIPE investments more attractive, as non-affiliates may freely sell restricted securities following a six-month holding period regardless of an effective registration statement; provided that certain conditions under Rule 144 are met.
Although relatively quick and cost-efficient, PIPEs have certain drawbacks. The most common of which is stockholder approval which may be required under certain circumstances. Under NYSE, NASDAQ and AMEX rules, stockholder approval is required before a listed company may issue securities at a discount to market if the amount of securities to be issued exceeds 20 percent of the issuer's then-outstanding securities.
Registered Direct Offerings
A registered direct offering (RDO) is a public offering of registered securities sold by a placement agent on an agency, or best efforts, basis to a selected number of investors (typically to institutional investors). Similar to PIPEs, RDOs offer issuers a quick means of raising capital using a very flexible structure.
Employing a two-step process, RDOs require the filing and effectiveness of a registration statement (known as a "shelf,") followed by the offering by a placement agent of the registered securities. Because the RDO requires the sale of registered securities, issuers may file the necessary registration statement well in advance of their financing needs and simply sell securities "off the shelf" when market conditions allow or needs require.
Since securities being sold are registered, RDOs are not typically offered at deep discounts. Therefore, issuers typically are able to raise more capital from fewer investors than in a traditional PIPE transaction.
As with PIPEs, there are also certain disadvantages to RDOs as a financing alternative. First, in order to enjoy the benefits of a RDO, the issuer must be eligible to register securities on a shelf registration statement on Form S-3. Additionally, in the event securities are offered at a discount, the same stockholder approval requirements required by the stock exchanges described above regarding PIPEs will apply. There are also additional considerations regarding the use of a placement agent.
Raising capital in an uncertain market is always difficult, but there are options. If traditional methods are unavailable, small- and mid-cap issuers may consider these alternative financing structures. As described above, there are benefits and disadvantages that must be evaluated when deciding whether to raise funds through an alternative method of financing.
Andrew Gilbert is a partner at Morgan, Lewis & Bockius LLP in the Princeton office. David Schwartz and Rebecca Jewell are associates at Morgan, Lewis & Bockius LLP in the Princeton office.
EisnerAmper's Catalyst: Winter 2009
Welcome to Catalyst
Nurturing New Businesses
New Jersey's Thriving Incubator System Aids Entrepreneurs
A New Way of Thinking
Varied Funding Strategy Gives PTC Therapeutics 'Multiple Shots on Goal'
Fresh Ideas in Times of Economic Uncertainty
Life Science Financing: A Needle in a Haystack?
Investment Experts Weigh in on Myriad Funding Strategies
Venture Capital and Private Equity: Influencing Growth and Exit