October 31, 2022

Capital Markets: PIPEs & Registered Directs as Down Market Alternatives

Turbulent market conditions have made this a tough year for many public companies looking for additional financing. This Cooley blog explores two alternative methods of financing that may be attractive options for some of those companies – PIPEs and Registered Direct Offerings (RDOs).  This excerpt discusses underwritten and non-underwritten RDOs:

Non-Underwritten RDOs. In non-underwritten RDOs, the issuer sells the securities directly to the investor in a share purchase agreement (SPA), just as in a PIPE. The primary differentiating factor relative to a PIPE is that the securities are sold pursuant to an effective registration statement, meaning that they are unrestricted and freely tradable out of the gate.

As a result, an RDO is conducted as a fully documented deal – a prospectus supplement, comfort letters and 10b-5 letters from multiple law firms all have the potential to increase legal and auditor costs, as compared to the relatively leaner PIPE. The RDO also requires having an effective registration statement or the ability to a file an automatically effective registration statement (i.e., be a well-known, seasoned issuer).

Underwritten RDOs. The primary difference between an underwritten and non-underwritten RDO is that the shares in an underwritten offering will settle through the banking syndicate instead of directly with third-party investors. The deal is marketed and conducted just like a non-underwritten RDO, with the banks wall-crossing investors and the shares being taken down off an effective S-3 shelf. But instead of the company contracting directly with investors through an SPA, the deal is papered on an underwriting agreement, with the banks purchasing the share block and settling onwards to their accounts.

The blog points out that although there are many similarities between PIPEs and RDOs, the advantage of the latter is the issuer’s ability to avoid the illiquidity discount associated with a PIPE by issuing registered shares to RDO investors.

John Jenkins