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By: Steven J. Slutzky, Kevin R. Grondahl, and Nicholas P. Pellicani
THIS ARTICLE COVERS 10 PRACTICAL TIPS THAT COUNSEL in a secondary offering can use to facilitate execution and avoid common pitfalls. Secondary offerings of equity securities by stockholders of public companies are one of the more frequent capital markets transactions. However, many secondary offerings are conducted on short notice and transactions can take a number of different forms, based on the nature of the issuer, the selling stockholders, and the securities being sold. The transaction itself is also subject to a number of regulatory and logistical challenges and may have a significant impact on the post-transaction governance and ownership of the issuer going forward, all of which must be addressed at the outset. Practitioners representing issuers, selling stockholders, or underwriters should familiarize themselves with the structure of the offering in advance. The following practice tips highlight some of the most crucial issues to be aware of and plan around.
It is critical to understand which type of Securities and Exchange Commission (SEC) registration statement form the issuer is eligible to use and what that means for the timing of an offering. For the first 12 full calendar months after an initial public offering, a domestic issuer will only be eligible to use Form S-1. Registering shares on Form S-1 can add significant time to the process, as a Form S-1 typically takes more time to draft than the other forms and is also subject to SEC review and comment, although the SEC will sometimes decline to review or give an expedited review of a Form S-1 for a secondary offering. Twelve full calendar months after an initial public offering, assuming the issuer has made all required filings under the Securities Exchange Act of 1934, as amended (Exchange Act), the issuer may be eligible to use Form S-3. If the issuer does not qualify as a well-known seasoned issuer (WKSI), the Form S-3 will be subject to SEC review. However, declined and expedited reviews by the SEC are more common in the context of a Form S-3. If the issuer qualifies as a WKSI, the Form S-3 will be automatically effective, bypassing SEC review altogether. Conversely, if the issuer has a public float of less than $75 million, the resale of securities via a Form S-3 is limited to sales of no more than one-third of all equity held by non-affiliates over the prior 12 months (otherwise known as a baby-shelf).
Public communications by the issuer and the selling stockholders must be carefully monitored during a secondary offering, as each will be anxious to make public announcements about secondary offerings. Any communication by the issuer or a selling stockholder during the offering must be evaluated to determine whether it is a free writing prospectus. If it is a free writing prospectus, it must then be determined whether it needs to be filed with the SEC. The rules regarding free writing prospectuses can be complex and require careful consideration by counsel. A best practice is for issuer counsel to make it clear to the issuer and the selling stockholders that all public communications must be reviewed by counsel prior to being released.
To read the full practice note in Lexis Practice Advisor, follow this link.
Steven J. Slutzky is a corporate partner at Debevoise & Plimpton LLP, where he is co-head of the firm’s Capital Markets Group and a member of the firm’s Private Equity Group. His practice focuses on securities offerings and related transactions, and he regularly represents issuers and underwriters in securities transactions including initial public offerings, high-yield debt offerings, secondary equity offerings, debt offerings, tender offers, and consent solicitations and private placements. Kevin R. Grondahl is a corporate associate and a member of Debevoise’s Finance Group. Prior to joining Debevoise in 2013, he worked as an associate at a leading international law firm. Nicholas P. Pellicani is a corporate associate and a member of Debevoise’s Capital Markets and Banking Groups. Mr. Pellicani joined Debevoise in 2011.
For a discussion about the various legal opinions customarily delivered by attorneys for offerings of securities, see
> LEGAL OPINIONS FOR SECURITIES OFFERINGS
> Capital Markets & Corporate Governance > Secondary Offerings and Resales > Secondary Offerings > Practice Notes
For a review of the federal liability provisions applicable to disclosures made in security offerings, see
> LIABILITY UNDER THE FEDERAL SECURITIES LAWS FOR SECURITIES OFFERINGS
For guidance on the preparation of the Form S-1 registration statement to be filed with the SEC, see
> FORM S-1 REGISTRATION STATEMENTS
For an overview of the role of underwriters in registered securities offerings, see
> UNDERWRITING REGISTERED SECURITIES OFFERINGS
For a guide to permissible communications by issuers in connection with registered securities offerings, see
> SEC COMMUNICATIONS RULES FOR ISSUERS IN REGISTERED OFFERINGS (CHART)
> Capital Markets & Corporate Governance > Secondary Offerings and Resales > Secondary Offerings > Checklists
For a list of management due diligence questions for use by counsel to conduct interviews with the issuer’s management, see
> MANAGEMENT DUE DILIGENCE QUESTIONS
> Capital Markets & Corporate Governance > Secondary Offerings and Resales > Secondary Offerings > Forms