As this recent Wilson Sonsini memo explains, private investments in public equity (PIPEs) and registered direct offerings (RDOs) can be attractive paths to capital during times of market volatility. Here are a few of the pros & cons:
PIPEs and RDOs can be good alternatives to traditional underwritten offerings, particularly during periods of market volatility, because they can be negotiated discreetly and publicly announced after the parties agree to terms. However, given the lack of company leverage (usually) and near-term illiquidity of the securities sold, the cost of capital is typically higher for PIPEs than underwritten offerings.
Because an investor receives freely tradable securities in an RDO, the securities are typically sold at a smaller discount to the current market price of the company’s common stock in an RDO than in a PIPE; in 2024, the average discount for PIPEs surveyed was 6.2% while RDOs surveyed priced the securities at an average premium of 2.0% above market price.
The 43-page report summarizes trends in these types of financings, based on the 205 PIPEs and RDOs by U.S.-based technology and life sciences companies that raised at least $10 million and had at least one closing between January 1 and December 31, 2024. Here are a few key takeaways:
– The mix of transactions shifted towards PIPEs. Compared to the prior year, 2024 saw a 38.1% increase in the number of PIPE transactions reviewed, while the number of RDOs remained unchanged. This shift may be driven by the SEC’s “baby shelf” rule, which limits the ability of smaller market cap companies (i.e., those with a public float of less than $75 million) to raise over one-third of their market cap using a registration statement on Form S-3 (which provides the flexibility to finance without necessarily undergoing SEC review) over the course of the previous 12 months.
When a company wishes to sell securities in excess of this limitation, it will typically do so through a PIPE. In 2024, 42.8% of PIPEs and 56.9% of RDOs were completed by companies with a public float under $75 million; however, of these small cap companies, 87.9% of PIPEs were for over one-third of the company’s public float (which would otherwise trigger the baby shelf rules even if no other securities were sold by the company over the prior 12 months), while only 55.2% of RDOs by small cap companies were for over a third of the company’s public float. See the sections on “2024 PIPE and RDO Activity” and “‘Baby Shelf’ Rule” for additional information.
– RDOs priced their securities at a premium to market price. 2024 saw a continuation of a trend of securities sold in RDOs pricing higher relative to prior periods. In 2024, the average premium for RDOs surveyed was 2.0%, compared to an average discount of 1.8% and 3.9% for 2023 and 2022, respectively. The average discount for PIPE transactions was relatively flat between 2024 and 2023.
This trend may reflect marginally stronger investor sentiment for companies that are not subject to the “baby shelf” rules or transactions that do not required delayed liquidity through registration rights. See the section on “Security Price” for more information.
– Insiders participated in fewer transactions. In another signal that markets may be warming up again, in 2024 company insiders (e.g., directors, officers, and affiliates) participated in 18.5% of the deals reviewed, compared to 27.6% in 2023. The decrease was more pronounced among technology transactions, which saw a 50% decrease in the percentage of deals with insider participation compared to the prior year.
In challenged markets, insiders typically participate in more financings to help attract outside investors or simply to preserve the viability of a company. Conversely, a decrease in insider participation suggests an increase in the investment appetite of outside investors who generally present fewer reporting and approval requirements than when insiders are involved. See the section on “Types of Investors” for additional information.
On the topic of smaller company financings, we covered how the “baby shelf” limitation is measured in the context of an at-the-market offering in the September-October 2024 issue of The Corporate Counsel newsletter. That issue is available online to members of The CorporateCounsel.net who subscribe to the electronic format.
Here’s something Meredith blogged last week on DealLawyers.com: Some predicted the demise of SPACs after the new disclosure rules went effective last summer, but this Norton Rose Fulbright memo says companies looking to go public should be seriously considering a de-SPAC as a quicker, cost-effective way to go public during a limited IPO market. While it acknowledges that “regulatory loopholes were the founding principle of SPACs,” it argues that the new rules will improve the process and, by doing so, render SPACs “an even more appealing option.”
Here are a few of the benefits the article says the de-SPAC approach still offers versus IPOs:
– Price certainty: The price discovery process in a traditional IPO typically occurs one day prior to the IPO, at the conclusion of a six-month process of going public. The underwriters typically undervalue the company to provide an advantage to their traditional institutional clients. In contrast, the price discovery process in a SPAC merger typically occurs upfront, typically upon the signing of a term sheet, and is a bilateral negotiation between the SPAC and the target. This process frequently results in a higher valuation of the company.
– Timing: Usually taking 9 to 24 months, traditional IPOs expose businesses to a range of outside economic changes that could compromise valuation and lower investor appetite. The regulatory load related to IPOs, comprised of extensive SEC additional filings and compliance measures, further extends the time period it takes for a company to go public. On the other end of the spectrum, the likelihood of negative market conditions derailing the public listing process is significantly reduced by choosing to execute a SPAC transaction within a six-month window.
– Projections: Critics contend that SPACs are susceptible to inflated valuations due to the excessive scope for speculative projections they allow. Nevertheless, pro forma projections are indispensable for emerging companies that possess disruptive innovation and limited historical performance. In a traditional IPO, historical performance is predominantly considered. In contrast, SPACs allow companies to provide forward-looking projections, thereby being more attractive to such investors who attach premium to a company’s long term economic performance and growth. The problem is not the projections themselves, but rather the necessity for enhanced regulatory oversight to guarantee transparency—a matter that the SEC’s new regulations are attempting to resolve.
– SPAC Sponsors: SPAC sponsors will often raise debt or private investment in public equity (PIPE) funding in addition to their original capital to not only finance the transaction, but also to stimulate growth for the combined company. The purpose of this backstop debt and equity is to guarantee the successful completion of the transaction, even if the majority of SPAC investors redeem their shares. Furthermore, a SPAC merger does not necessitate an extensive roadshow to pique the interest of investors in public exchanges (although raising PIPE necessitates targeted roadshows). Sponsors of SPAC are frequently seasoned financial and industrial professionals. They may utilize their network of contacts to provide management expertise or assume a role on the board.
On Friday, the Corp Fin Staff published a statement to address the characteristics of stablecoins that would cause them to be – or not be – a “security.” Here’s the bottom line:
It is the Division’s view that the offer and sale of Covered Stablecoins, in the manner and under the circumstances described in this statement, do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”).[5] Accordingly, persons involved in the process of “minting” (or creating) and redeeming Covered Stablecoins do not need to register those transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration.
The statement is a true delight for anyone who considers themselves a “securities law nerd” – because it explains how the Staff applies the seminal cases of Reves v. Ernst & Young and SEC v. W.J. Howey Co. to stablecoins. The Staff first discusses characteristics that would weigh against a stablecoin being a “security”:
– Designed to maintain a stable value relative to the United States Dollar, or “USD,” on a one-for-one basis, at any time and in unlimited quantities
– Can be redeemed for USD on a one-for-one basis (i.e., one stablecoin to one USD); and
– Backed by assets held in a reserve that are considered low-risk and readily liquid with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation.
Additionally, the statement identifies marketing practices that would indicate the stablecoin isn’t being sold as a “security”:
– Marketed solely for use in commerce;
– Does not entitle a Covered Stablecoin holder to the right to receive any interest, profit, or other returns;
– Does not reflect any investment or other ownership interest in the Covered Stablecoin issuer or any other third party;
– Does not afford a Covered Stablecoin holder any governance rights with respect to the Covered Stablecoin issuer or the Covered Stablecoin; and/or
– Does not provide a Covered Stablecoin holder with any financial benefit or loss based on the Covered Stablecoin issuer or any third party’s financial performance.
On Friday, state intervenors in the litigation over the SEC’s climate disclosure rule filed a motion to hold the case in abeyance. The motion resulted from the Commission’s recent withdrawal from defending its rule. When the SEC officially dropped its defense, Commissioner Crenshaw objected to the decision on procedural grounds. Her point, basically, was that the SEC Commissioners must follow an administrative process to undo the agency’s rules, not just sit back, “rooting for the demise of this rule, while they eat popcorn on the sidelines.” She stated:
If the agency chooses not to defend that rule, then it should ask the court to stay the litigation while the agency comes up with a rule that it is prepared to defend (be it by rescission or otherwise, but certainly in accordance with APA mandates). At the very least, if the court continues without the Commission’s participation, it should appoint counsel to do what the agency will not – vigorously advocate in the litigation on behalf of investors, issuers and the markets.
So now, someone other than the SEC has asked the court to suspend the litigation – the 18 states that had previously intervened to defend the rule. This September 2024 explainer from the NYU School of Law about the role of states as amici and intervenors points to litigation over the Affordable Care Act as an example of state intervenors keeping a rule alive after the government dropped its defense due to a change in administration. It also reminds me of how the National Association of Manufacturers, as an intervenor, is the only party still defending the SEC’s 2020 proxy advisor rules.
At this point, the states in this case have simply requested the court to pause litigation until the SEC determines what action it will take on the rules (the motion also asks the court to direct the SEC to file status reports every 90 days). It’s not clear yet whether the court will grant that motion. And given other priorities and limited resources, I’m not holding my breath for the SEC to come up with an alternative rule that it’s prepared to defend.
Last Thursday, the Senate Banking Committee voted to advance the nomination of Paul Atkins to serve as Chair of the SEC, following the hearing that was previewed by John and summarized by Dave. The voting tally was 13 to 11, according to this Reuters article.
The article shares predictions on how Atkins would approach the PCAOB if/when confirmed. We’re tracking the nomination proceedings here…
Earlier this year – which already feels like a lifetime ago – I blogged about an enforcement action that alleged a public company had overstated its “artificial intelligence” capabilities. Although it appears a lot has changed in terms of the SEC enforcement environment, it’s still important for AI-related disclosures to be carefully reviewed for accuracy – for two reasons.
First, securities regulations do still exist. It’s too early to tell whether enforcement activity will in fact dwindle to record lows, and even if it does, you’ll have to contend with a statute of limitations that may extend into an administration with different priorities. Second, and arguably more relevant right now, class action lawsuits aren’t going away. This blog from Kevin LaCroix at the D&O Diary says that there were 15 AI-related securities suits filed in 2024 – and four so far this year. The blog summarizes the two latest actions – which were both filed earlier this month and relate to statements made in 2023-2025. Kevin notes:
Over the last couple of years, investors have shown a willingness to pay a premium for the shares of companies that appear positioned to capitalize on rise of AI. The share prices of AI-connected companies have (at least until recently) soared. These financial market features create incentives for companies to try to portray themselves as poised to capitalize on the advent of AI. However, when projected AI benefits fail to materialize, company share prices decline, investors are disappointed, and, as these two new lawsuits demonstrate, securities class action lawsuits can follow.
In both of these new lawsuits, the defendant companies allegedly attempted to project themselves as being in a position to benefit from the rise of AI, allegedly setting investors up for later disappointment when reality fell short. The shareholder plaintiffs in both of these actions allege that the companies overstated their AI capabilities or prospects, in a demonstration of what has been called “AI-washing.”
These (lightly edited) excerpts from Kevin’s blog give more color on the statements underlying the plaintiffs’ claims:
The first securities lawsuit alleges that during from May 2023 to February 25, 2025, the Company, in order to project financial growth and stability, made statements to investors concerning its launch of its digital ad platform and its use of “cutting-edge AI technologies” to match advertisements to mobile games and to allow its customers to expand into web-based marketing and e-commerce support financial growth. Throughout the period, the company reported impressive financial results, outlooks, and guidance.
…
The complaint alleges that during the class period the defendants “continually touted the new and improved ad platform and cutting-edge AI technologies as the main reason why the Company has seen exponential growth since 2022. In actuality, the Company used manipulative practices that forced unwanted apps on customers via a ‘backdoor installation scheme’ in order to erroneously inflate installation numbers, and in turn, profit numbers.”
And for the second complaint:
According to the subsequently filed securities complaint, during the period July 2024 to February 5, 2025, the Company projected favorable growth in its smartphone segment and for the Company as a whole, among other things, saying that it expected that the rise of AI would “ignite a transformative smartphone upgrade cycle,” and that the Company was in the early stages of this “multi-year trend,” and that the Company was “well-positioned to capitalize on it.”
However, on February 5, 2025, the Company reported disappointing results for its fiscal first quarter and lowered its guidance for the second quarter, citing a “competitive landscape” that had “intensified.” According to the securities complaint, the Company’s share price declined 24% on this news.
…
The complaint alleges that the during the class period, the defendants made misrepresentations or failed to disclose that “its long-standing relationship with Apple, its largest customer, did not guarantee that Apple would maintain its business with the Company for its anticipated iPhone launch. Additionally, Defendants oversold the Company’s position and ability to capitalize on AI in the smartphone upgrade cycle.” The complaint alleges that the Company’s statements “absent these material facts” caused investors to purchase the company’s securities at “artificially inflated prices.”
As you can see, when it comes to AI-related opportunities, “anything you say can and will be held against you.” Business folks are understandably excited to talk about this stuff, which is all the more reason for securities counsel to pressure-test these disclosures before they’re publicly released.
Earlier this week, the SEC announced a new “Small Entity Compliance Guide” to assist in complying with the upcoming transition to EDGAR Next. The guide not only sheds light on key topics (for small businesses & beyond) – it also serves as a timely reminder that the March 24th transition date for EDGAR Next is rapidly approaching!
As we’ve previously shared, existing filers will be able to enroll through a transition period ending September 12th. But that doesn’t mean you can put this off until August – especially if you have directors who sit on other companies’ boards. You should coordinate with those companies now, so that nobody ends up inadvertently locked out of an insider’s account on the eve of a Form 4 deadline. And remember that if you have new-filer directors joining your board after March 24th, you’ll need to be ready to follow the new process for them right off the bat.
We’re posting memos in our “EDGAR” Practice Area. Additionally, mark your calendar for our Section16.net webcast – “How to Prepare for EDGAR Next” – which is happening this upcoming Tuesday, March 18th at 1:30 p.m. ET. If you aren’t already a Section16.net member and want access to this webcast and our other helpful resources, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Dave and I are having a blast with our new “Mentorship Matters” podcast, where we share our thoughts on mentorship, career paths, and how to succeed as a corporate and securities lawyer. In our latest 30-minute episode, we interviewed Brad Kern, who is Managing Director and Associate General Counsel at Wells Fargo, where he heads up the securities law practice.
In addition to his substantive expertise, Brad has been committed to mentorship throughout his career. He led the inaugural career and development month for Wells Fargo’s entire Legal Department and has participated in many leadership and mentorship activities during his 12 years practicing as in-house counsel, as well as while he was in private practice at the firm formerly known as Shearman & Sterling. We discussed:
1. Brad’s career path and what he’s learned along the way
2. Key features of Wells Fargo’s mentorship and career development program, and the process for establishing the program
3. Observations on successful mentorship relationships in the in-house and private practice environments
4. Recommendations for creating or enhancing mentorship opportunities
5. Mentorship and training expectations that in-house teams have for outside counsel
6. How new technologies might affect client expectations on outside counsel staffing and training
Thank you to everyone who has been listening to the podcast and providing feedback! We’re excited to unveil other guests in the months to come. If you have a topic that your think we should cover or guest who you think would be great for the podcast, feel free to contact Dave or me by LinkedIn or email.
Yesterday, in another signal that the SEC is focusing on capital raising right now, the Corp Fin Staff released a batch of updates to Compliance & Disclosure Interpretations that relate to the simplified exempt offering framework adopted by the SEC way back in 2020. Better late than never!
In total, there are 24 interpretations that have been revised / withdrawn / newly issued. Here are a few of the topics addressed:
– Reg A draft offering statements
– Use of Reg D by foreign issuers
– Reg D definitions
– Application of general solicitation rules to “angel networks” and “demo days”
– Crowdfunding communications and advertising
Here’s the big ole’ line-item list of affected CDIs:
Two of the new CDIs issued yesterday provide very welcome guidance on what the Corp Fin Staff views as an acceptable process for verifying “accredited investor” status in a Rule 506(c) offering, which could make these “general solicitation” offerings much more usable. Specifically, the Staff added questions 256.35 and 256.36.
CDI 256.35 clarifies that the list of verification methods in Rule 506(c)(2)(ii) is “non-exclusive and non-mandatory.” The CDI cites back to the Commission’s 2020 adopting release for the exempt offering simplification rules, as well as the 2013 Reg D updates for a discussion of what will qualify as reasonable steps to verify that purchasers are accredited. This is a facts & circumstances analysis – the CDI and the 2013 release say that these factors are among those that the issuer should consider:
– the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
– the amount and type of information that the issuer has about the purchaser; and
– the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
CDI 256.36 addresses how minimum investment amounts can factor into the “reasonable steps to verify” requirement. This new CDI is based on a Latham & Watkins no-action letter that also was issued yesterday, which goes into more detail about relevant conditions that – when they accompany a minimum investment amount – would increase the likelihood that a purchaser is accredited and evidence reasonable steps to verify. Here’s the incoming letter with background on the interpretive request – and here’s an excerpt from the Staff’s response:
We agree that a high minimum investment amount is a relevant factor in verifying accredited investor status. As you note, the Commission stated that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” Securities Act Release No. 9415 (July 10, 2013).
We also note your representation that the minimum investment amount would be accompanied by written representations, from the purchaser, as to: (1) their accreditation (under Rule 501(a)(5) or (a)(6) if they are a natural person, or under Rule 501(a)(3), (7), (8), (9) or (12) if they are a legal entity), and (2) the fact that the purchaser’s minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.
In addition, we note your representation that the issuer would have no actual knowledge of any facts that indicate: that any purchaser is not an accredited investor; or that the minimum investment amount of any purchaser (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of any such equity owner) is financed in whole or in part by any third-party for the specific purpose of making the particular investment in the issuer.