| Raising capital in today's uncertain economic | | | | can market the transaction confidentially, enabling the |
| environment requires public companies to look | | | | parties to assess the market for the issuer's |
| beyond the methods used in the past. Private | | | | securities without creating downward selling pressure |
| investment in public equity (PIPE) transactions or fully | | | | on the stock that would typically accompany a public |
| underwritten offerings can be expensive and time | | | | announcement of a proposed share offering. An RDO |
| consuming in the best of times. | | | | transaction is typically publicized just prior to or at |
| Because shares placed in a PIPE transaction are not | | | | pricing. |
| registered, a resale registration statement must be | | | | 4. Lower legal and administrative expenses - |
| filed with the SEC and declared effective for the | | | | Investors in an RDO are not required to negotiate |
| shares to be freely tradable in open market | | | | and sign individual purchase agreements as they |
| transactions. Investors in PIPE transactions typically | | | | would otherwise be required to do in a PIPE |
| request a heavy discount to the issuer's current | | | | transaction. Additionally, the shares in an RDO are |
| share price and possibly warrant coverage to | | | | typically offered under a shelf registration statement |
| compensate for the risks related to this illiquidity. | | | | and therefore, are marketed based upon the issuer's |
| Additionally, the terms of the PIPE transaction may | | | | existing public disclosures, which eliminates the |
| include penalties or liquidated damages provisions in | | | | complexities of crafting a preliminary prospectus |
| the event the issuer fails to obtain an effective | | | | supplement as a selling document. RDO transactions |
| registration statement within a prescribed timeframe. | | | | also avoid the 'give and take' with the SEC typically |
| An underwritten or secondary offering of shares can | | | | associated with registration statements filed in |
| be time consuming and expensive, given the need to | | | | connection with secondary offerings. |
| file a registration statement and accompanying | | | | 5. Exchange Rules - Certain securities exchanges |
| prospectus with the SEC and the associated legal and | | | | require that any offering of securities that is |
| underwriting fees. The shares cannot be priced or | | | | determined not to be a 'public offering,' such as a |
| placed until the SEC declares the registration | | | | PIPE, and which is greater than 20% of an issuer's |
| statement effective which, depending on the SEC | | | | outstanding capital stock, must be presented to |
| review process and any related follow on comments | | | | shareholders for approval. The determination of |
| that need to be addressed, can take time, a | | | | whether an RDO qualifies as a public offering is |
| commodity that many smaller public companies | | | | typically on a case by case basis; however, an RDO |
| cannot afford. | | | | can be structured to allow the issuer to sidestep the |
| A registered direct offering provides an alternative to | | | | 20% rule and avoid the need for shareholder |
| public companies seeking capital and provides a | | | | approval of the proposed transaction. |
| number of benefits to the above alternatives; | | | | What are the disadvantages of an RDO? |
| however, an RDO is not without its downsides. | | | | RDO's are not a financing cure-all and there are some |
| What is a Registered Direct Offering? | | | | disadvantages to RDO's over other methods of |
| A registered direct offering (RDO) is similar to a PIPE | | | | financing. |
| transaction, in that both are marketed and sold to a | | | | 1. Distribution - Because an RDO is marketed to a |
| limited number of accredited and institutional | | | | select number of investors, shares are not as widely |
| investors; however, unlike a PIPE, shares sold in an | | | | distributed as would typically be the case in a |
| RDO are registered and therefore, liquid, and can be | | | | secondary offering. As a consequence, the issuer's |
| sold to anyone. To complete an RDO, an issuer must | | | | shareholder base is not necessarily broadened as a |
| be eligible to use Form S-3 and should have an | | | | result of an RDO transaction. |
| effective shelf registration statement on file with the | | | | 2. Exchange Rules - If an RDO cannot be structured |
| SEC. If an issuer is Form S-3 eligible, but doesn't have | | | | to meet an exchange's definition of a public offering, |
| an effective shelf registration statement on file, the | | | | and the proposed transaction is greater than 20% of |
| issuer must file either a single purpose registration | | | | the issuer's outstanding capital stock, shareholder |
| statement (i.e. "bullet") covering the shares to be | | | | approval may be required, which would erode the |
| issued in the RDO, or a shelf registration statement. | | | | advantages of timeliness and cost effectiveness of |
| RDO transactions are governed by a placement | | | | an RDO transaction. |
| agency agreement, rather than an underwriting | | | | 3. Form S-3 - An issuer must be Form S-3 eligible to |
| agreement. With a placement agency agreement, the | | | | complete an RDO. While Form S-3 eligibility |
| offering is sold on a 'best efforts' basis, so there is | | | | requirements have been relaxed, not all issuers will |
| no firm commitment for the placement of a specific | | | | qualify. |
| number of shares, and the placement agent never | | | | 4. Best efforts basis - A 'best efforts' basis means |
| takes possession of any securities. The placement | | | | no firm commitment to the issuer regarding the |
| agency agreement will typically include issuer | | | | number of shares to be sold. If the market fails to |
| representations and warranties concerning itself and | | | | materialize for the issuer's securities, the placement |
| its business, certain covenants applicable to the | | | | agent has no obligation to purchase any shares. |
| issuer, a promise to indemnify the placement agent | | | | How do I start the process? |
| for any Securities Act liabilities arising from the | | | | If an issuer does not already have an effective shelf |
| transaction, as well as closing conditions, such as legal | | | | registration statement on file, the first step in the |
| opinions, comfort letter requirements, delivery of | | | | process is to determine, together with legal counsel, |
| certificates, etc. | | | | the issuer's Form S-3 eligibility. The next step is to |
| To complete the RDO pursuant to an effective | | | | assess any exchange rules that might apply regarding |
| registration statement, the issuer will ultimately | | | | the determination of whether a proposed RDO is a |
| prepare and file a preliminary or final prospectus | | | | 'public offering.' If the issuer is eligible for an RDO |
| supplement that describes the offering, depending | | | | transaction, identification of the appropriate |
| upon how the shares are marketed and sold. | | | | placement agent is the next critical hurdle. For a |
| What are the advantages of an RDO? | | | | successful RDO, the placement agent should have |
| An RDO has multiple advantages over a PIPE or | | | | longstanding relationships with a number of |
| traditional secondary offering. | | | | institutional investors who prefer to invest in the |
| 1. Pricing - The shares sold in an RDO are freely | | | | issuer's industry or niche. |
| tradable and therefore, there is no liquidity discount | | | | The Bottom Line |
| that would normally apply in a PIPE transaction. | | | | RDO's are quicker to close than either a PIPE |
| Additionally, the warrant coverage, if any, is typically | | | | transaction or a secondary offering, which allows the |
| lower in an RDO than would otherwise be the case in | | | | issuer to quickly take advantage of favorable capital |
| a PIPE. | | | | market conditions. The securities offered in an RDO |
| 2. Timeliness - With an effective shelf registration | | | | are priced similar to a secondary offering, but without |
| statement on file, an issuer can offer registered | | | | the related hurdles, and an RDO transaction can be |
| shares when market conditions permit, rather than be | | | | marketed confidentially, which will reduce selling |
| subject to the regulatory timeline that is typical in | | | | pressure on the issuer's stock prior to completion of |
| secondary offerings and that can cause an issuer to | | | | the transaction. Additionally, RDO transactions are |
| miss a market window. Investors in a PIPE | | | | typically cheaper to complete, in terms of discount, |
| transaction negotiate and execute individual purchase | | | | fees and related warrant coverage. |
| agreements, which can delay the closing of the | | | | With the loosening of Form S-3 eligibility requirements |
| transaction, whereas investors in an RDO are not | | | | in 2008, RDOs are an effective alternative for smaller |
| required to sign or complete any such documentation. | | | | public companies to raise capital in today's capital |
| 3. Confidentiality - Because an RDO is marketed | | | | market environment. |
| similarly to a PIPE, an issuer and the placement agent | | | | |