January 30, 2007

Corp Fin Speaks on Problematic PIPEs

Following up to my blog last month on problematic PIPEs, Corp Fin Staffers have begun speaking about when resales of securities underlying convertible notes will encounter Staff scrutiny. Recently, the Staff has questioned the availability of Rule 415(a)(1)(i) for delayed or continuous secondary offerings of securities in PIPE transactions by issuers that are not primary S-3 eligible when the amount being registered is disproportionately large in relation to the issuer’s capitalization. My guess is that the Staff is tired of folks trying to squeeze abusive convertible note transactions into the Staff’s longstanding PIPEs analysis by calling them catchy things like “structured PIPEs” and doesn’t want abusive, toxic convertible notes to hide behind the cloak of the traditional PIPE analysis.

Last week, Deputy Directors Marty Dunn and Shelley Parratt spoke about the issue at Northwestern’s Securities Regulation Institute in San Diego. David Mittelman of Reed Smith reports on what they said:

– the Staff has not changed its historical position, but has increased its focus on “extreme convertible” note secondary offerings that dilute the market

– expect Staff comments when a non-shelf eligible issuer seeks to register for resale more than 1/3 of the outstanding common stock held by non-affiliates prior to the convertible note transaction

– the comments will request an analysis of why the offering is a secondary resale, rather than a primary given its size

– whether the Staff objects to use of Form S-3 will depend upon the facts and circumstances, but non-fixed convertible notes and other “toxic” securities are less likely to pass muster

– Staff comments also may request information, with a view toward disclosure, of 10 to 12 items including (i) how the issuer determined the number of shares to sell and (ii) if known to the issuer, any short positions held by selling shareholders

– the Staff will not object to the issuer registering an additional 1/3 tranche of the securities underlying the convertible note offering provided the later of (a) 60 days has elapsed since sale of “substantially all” of the prior tranche, or (b) six months has elapsed since effectiveness of the prior tranche registration statement. In other words, additional tranches can be registered after the later of 6 months from the effective date and 60 days after sale of substantially all the shares registered for a selling shareholder. This is to be determined on a per selling shareholder (and its affiliates) basis.

– Corp Fin does not expect to issue written guidance in this area other than through the comment letter process

An M&A Conversation with Chief Justice Myron Steele

Tomorrow, catch this important webcast: “An M&A Conversation with Chief Justice Myron Steele.”

The SEC in 2006

A while back, the SEC issued its 2006 Performance and Accountability Report, which includes financial statements from the GAO and SEC with these interesting tidbits:

– Internal control reportable conditions still existed at the end of the SEC’s last fiscal year ending September 30th; there has been significant improvement from the prior year (page 60).

– A drop in the percentage of companies and investment companies having their disclosures reviewed (page 13).

– The SEC has a rising attrition rate, as noted on pages 24-25. In the past, the SEC disclosed the actual rate, but did not this year. However, from reviewing the SEC’s annual reports, we can glean that the SEC had 3,865 staff as of September 30, 2005, compared to 3,590 a year later – that is a reduction of 275 people (thus, a reduction of 7.1%).

– A decline in the percentage of the budget spent on enforcement activities (page 38)

– A decline in overall spending, which declined form $917 million in 2005 to $888 million in 2006; this included a decline in enforcement spending from $364 million to $336 million (page 61 and pages 83 and 84)