Bought Deal Bible

Client Alert

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Number 1305 March 15, 2012

Latham & Watkins Capital Markets Group

“

This

Client

Alert

provides a

comprehensive

review of all of the

legal and practical

issues you will

face in executing

a bought deal. In

Annex A, we have

included a sample

timeline for a

registered bought

deal that will help

you get control of

the process.

”

The Bought Deal Bible: A User’s Guide to

Bought Deals and Block Trades

It’s Monday morning and you’ve been

told that your favorite seasoned issuer is

planning a bought deal that is scheduled

to launch after the close of trading on

Wednesday. What do you do? Well, you

don’t need to panic — we have you

covered. All you need to do is answer

the following simple questions:

• Will it be a public offering?

• Is the issuer a well-known seasoned

issuer?

• Is there available room under an

effective shelf?

• Does the issuer’s disclosure need

topping up in light of recent or

pending events or announcements?

• Does the issuer need to file a Form

8-K with any necessary topping

up disclosure or will a prospectus

supplement or press release be

sufficient?

• Is the fact that a deal is pending

material?

• Will the underwriter be pre-

marketing the deal prior to public

announcement?

• Will the underwriter be wall-

crossing potential investors prior to

announcement?

• Will the underwriter need to promise

wall-crossed accounts a “free-to-

trade” date that might require

issuer disclosure if the deal does not

proceed?

• Will the underwriter need a

preliminary prospectus supplement at

the time of launch?

• Will there also be a press release at

the time of launch?

• Will the sale by the underwriter be

in a fixed price offering or a variable

price reoffering?

• Will there be a “pricing” press release

after pricing?

• Will there be any selling stockholders?

• Do the selling stockholders (or their

board designees) have any material

non-public information?

• Are there any underwriting

agreement issues to be negotiated?

• What lock-ups will be required from

existing stockholders, if any?

• Are there any NYSE or Nasdaq issues

to consider?

• Will a FINRA filing be required?

• Are there any “blue sky” issues?

• Are there any difficult comfort or due

diligence issues?

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This Client Alert provides a

comprehensive review of all of the legal

and practical issues you will face in

executing a bought deal. In Annex A,

we have included a sample timeline for

a registered bought deal that will help

you get control of the process. You now

have the tools you need to answer all of

these questions.

For simplicity’s sake, we will start by

discussing bought deals as if they are

always for the account of the issuer.

In practice, however, this is often

not the case. There are a number of

special issues that apply to bought

deals involving resales of outstanding

securities by selling stockholders.

We review those issues below under

“Special Issues in Secondary Trades.”

What’s a Bought Deal or a

Block Trade Anyway?

In this Client Alert, when we refer to

a “bought deal,” we mean a securities

offering in which an underwriter agrees

to purchase an issuer’s securities at an

agreed price (or pricing formula) without

a prior marketing process. The term

“block trade” means a sale of a block

of securities (typically 10,000 or more

shares of stock or $200,000 or more in

principal amount of bonds) and is often

used interchangeably with the term

bought deal, particularly where the

seller is an existing stockholder rather

than the issuer.

A bought deal decreases execution risk

for the issuer or selling stockholder and

shifts market risk to the underwriter

earlier in the transaction by allowing

sellers of securities to lock in the seller’s

price before launch and without an

extensive issuer marketing process. Of

course, there is no such thing as a free

lunch. Bought deals demand execution

within a very quick timeframe,

while at the same time requiring the

maintenance of customarily strict due

diligence and documentation standards.

They are not for the faint of heart.

SIFMA Guidelines

In March 2008, the Securities Industry

and Financial Markets Association

published a set of guidelines for

bought deals entitled “Block Trade

Guidelines.”

The SIFMA guidelines

emphasize the importance of having all

documentation ready prior to launch to

enable the underwriter to confirm trades

as soon as a deal is struck between the

issuer and the underwriter.

Preparedness is everything in the

context of a bought deal. Delay can

result in major financial losses —

minutes can mean millions of dollars.

Shelf Registration

The first question to ask when

contemplating a registered bought deal

is whether the issuer has an effective

shelf registration statement with

sufficient available capacity. If so, you’re

off to the races.

Even if not, you’re still good to go if

the issuer qualifies as a well-known

seasoned issuer, since WKSIs can file

an immediately effective automatic

shelf registration statement on Form

S-3 without SEC Staff review.

Non-

WKSI issuers without an effective shelf

registration statement, by contrast,

will not be in a position to consider a

registered bought deal, because they

will not typically have the time to wait

for a new Form S-3 to become effective.

As a result, bought deals for non-WKSI

issuers are sometimes accomplished

through an exempt offering. Bought

deals involving newly issued common

stock are usually done on a registered

basis, however, because the Rule 144A

exemption from registration is generally

not available for securities that are

fungible with a class of securities listed

on a US national securities exchange,

e.g., common stock listed on the NYSE

or the Nasdaq.

If the issuer has an effective shelf, the

question becomes whether there is

sufficient capacity under the shelf to do

the bought deal. Once again, it’s good

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Latham & Watkins | Client Alert

to be a WKSI. In the first place, a WKSI

shelf can be filed without specifying a

deal size or a number of securities under

Securities Act Rule 430B(a). Instead,

a WKSI can rely on the “pay-as-you-

go” provisions of Securities Act Rules

456(b) and 457(r) to pay fees at the

time the final pro supp for the offering

is filed under Rule 424(b). Even if the

WKSI shelf specifies a maximum deal

size and there is insufficient remaining

capacity, a WKSI can simply file a new,

immediately effective automatic shelf.

Issuers that are Form S-3 eligible

but are not WKSIs don’t enjoy the

luxuries of an automatically effective

registration statement or the pay-

as-you-go fee system. Their options

are much more limited if they have

insufficient shelf capacity remaining

for the proposed bought deal. One

possibility is to upsize an existing shelf

by filing an immediately effective

short-form registration statement under

Securities Act Rule 462(b). However,

the Rule 462(b) option can only be

used once per shelf and is limited to

20 percent of the remaining unused

capacity of the original shelf.

The issuer

could, of course, file a new Form S-3

registration statement, but that would

introduce timing uncertainties. Even

if the SEC Staff chooses not to review

the new registration statement, that

determination itself takes a few days,

and the shelf filing may send signals

to the market and generate downward

selling pressure that the issuer would

prefer to avoid. Given these limitations,

a non-WKSI issuer should file a shelf

registration statement well in advance

of an anticipated bought deal and pay

the requisite filing fees for any and all

securities anticipated to be sold in the

offering.

When considering whether a currently

effective Form S-3 shelf is suitable for a

planned bought deal, keep in mind that

a shelf for a primary offering (WKSI or

non-WKSI) has a three-year life after

its initial effective date by virtue of

Securities Act Rule 415(a)(5). Obviously,

this time limit poses a less significant

obstacle for WKSIs than for non-WKSIs,

given that a WKSI can simply put up

a new automatic shelf registration

statement. You should be aware of

the possibility that a particular bought

deal may not be successfully resold

immediately, in which case an expiring

underlying shelf can be problematic.

Note also that the expiration date

issue does not apply to resale shelf

registration statements covering resales

by selling stockholders.

Assessing Your Disclosure

Package: The Section 11 and

Section 12 Files

The Section 11 File

Section 11(a) of the Securities Act

imposes liability if any part of a

registration statement, at effectiveness,

contained a material misstatement or

omission. Section 11 liability covers

only the registration statement and

information included in the registration

statement (and accordingly, would not

typically cover free writing prospectuses

or road show slides).

For the purposes of this Client Alert, we

use the term “Section 11 file” to cover

all of the information deemed to be

part of the registration statement at the

relevant moment of effectiveness.

A shelf registration statement can have

multiple effective times:

• the time of original effectiveness;

• the time a post-effective amendment

became effective;

• the time of filing an annual report

that is incorporated by reference in

the shelf and acts as an update under

Securities Act Section 10(a)(3); and

• at each takedown off the shelf.

As a result, the Section 11 file changes

over time. In a bought deal, the original

effective date of a shelf registration

statement is usually the least interesting

moment because subsequent Exchange

Act reports and pro supp filings will,

over time, supersede or modify the

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information in the shelf registration

statement’s base prospectus. The deal

team will instead want to focus on

whether the Section 11 file is accurate

and complete at the time of launch.

If the deal team determines that the

Section 11 file needs to be updated

before launch, one option is to add any

missing information by means of a final

pro supp filed under Rule 424(b). That

pro supp is typically filed at the very

end of the second business day after

pricing, and the information it contains

is retroactively deemed part of the

Section 11 file at the time of the first

contract of sale by virtue of the magic

of Rule 430B(f). The other way to “top

up” the Section 11 file is to make a pre-

launch Exchange Act filing (such as a

press release filed on Form 8-K) that will

be incorporated by reference into the

shelf registration statement.

The Section 12 File

By contrast to Section 11, Section 12 of

the Securities Act imposes liability on

any person who offers or sells a security

in a registered offering by means of a

prospectus, or any oral communication,

which contains a material misstatement

or omission. Section 12 looks to the

sum of what investors have been told

up to the time the underwriter confirms

orders. In the context of a bought deal,

Section 12’s focus is the base prospectus

(together with any incorporated

Exchange Act filings), any preliminary

pro supp sent to investors and any

additional information that may have

been conveyed to investors (orally or

in writing) on or before the time orders

are confirmed. For the purposes of this

Client Alert, we refer to this collection of

information as the “Section 12 file.”

To determine what additional

information needs to be communicated

to investors in connection with a bought

deal, the issuer will need to focus on the

adequacy of each of the Section 11 file

and the Section 12 file at launch. If an

important event in the issuer’s business

has occurred or is pending, or if the

issuer expects to announce earnings

shortly after the offering, the deal team

will want to consider whether additional

disclosure is required before launch.

For just this reason, many bought deals

are timed to follow promptly after

an earnings release or the filing of a

periodic report.

Regulation FD

Regulation FD requires an issuer to

publicly disclose any material, non-

public information simultaneously with

its intentional disclosure to members

of the financial community. The plan

to launch a bought deal can itself be a

material fact in some cases. To comply

with Regulation FD, the issuer will need

to publicly announce the launch of any

bought deal that is material to the issuer

prior to approaching potential investors.

Determining whether the coming launch

of a particular bought deal is material to

the issuer will always depend on all of

the facts and circumstances. Consider

the following presumptions as helpful

rules of thumb:

• an issuance of common equity,

convertible notes or high yield bonds

is presumptively material;

• an issuance of investment grade

bonds is presumptively not material;

and

• a resale of outstanding shares

of common stock by an existing

stockholder is sometimes material and

sometimes not material.

Like all rules of thumb, these three are

only the starting point in an analysis that

must take into account all relevant facts

and circumstances, including disclosures

in previously filed Exchange Act

documents about the issuer’s financing

plans and the importance of a particular

transaction to the issuer’s business.

Testing the Waters

Regardless of whether a particular

bought deal is initiated by the

underwriter or the issuer, the

underwriter may want to engage in a

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limited pre-marketing process before

submitting its bid to the issuer. This is

only natural, since the underwriter will

want to avoid a scenario in which it is

unable to sell the “bought” securities

at or above the agreed-upon price paid

to the issuer. When pre-marketing a

bought deal to potential investors, the

underwriter will need to be cognizant

of both the SEC’s restrictions on offers

and Regulation FD’s prohibition on

selective disclosure. The issuer will want

to review and discuss the underwriter’s

pre-marketing plans in order to satisfy

itself that Regulation FD will be

complied with and that the underwriter

is communicating appropriately with

potential buyers. Many issuers like

to keep tight control over these pre-

marketing efforts to avoid the risk of

market movement prior to the official

launch of the deal.

The Restrictions on Offers

If an underwriter inquires of individual

investors as to their appetite for a

particular security of a particular issuer,

the question arises as to whether that

inquiry amounts to an “offer” of the

security being discussed.

Oral offers

to sell securities are permissible if the

securities are covered by a previously

filed registration statement. If a

registration statement has not already

been filed, then all offers are prohibited

unless the issuer is a WKSI offering its

own securities directly to investors or

the offering is exempt from registration

under Rule 144A, Regulation S or

another exemption.

Securities Act Rule 163 allows WKSIs

to make unrestricted oral and written

offers of their own securities prior to

the filing of a registration statement.

However, this WKSI exception applies

only to offers made by the WKSI itself,

and does not allow the underwriter

to make pre-filing offers on a WKSI’s

behalf.

As a result of the limitations

of Rule 163, an underwriter is able to

make pre-marketing offers in registered

offerings only after the issuer has filed

a registration statement. WKSIs can

enable an underwriter to make such

offers simply by filing an automatic

shelf, but some WKSIs are hesitant to do

so because a shelf filing will signal to

the market the likelihood of an offering

and thereby create execution and

market risk and, possibly, downward

pressure on its stock price.

Wall-Crossing and Testing the

Waters

An underwriter desiring to determine

market demand for securities that may

shortly be offered in a bought deal also

needs to be concerned about Regulation

FD if the fact that the issuer is planning

an offering is itself material non-public

information. There are at least two ways

that the underwriter might “test the

waters” with the particular accounts

it expects to participate in an offering.

Each of these techniques has different

consequences under Regulation FD.

If the underwriter wants to gauge

investor interest without restricting

the investors with whom it speaks, the

underwriter may make “no names”

inquiries about investor appetite for

specific securities of a broad range of

issuers in a particular industry sector. In

that case, especially if the underwriter

has not yet been approached by the

issuer about a possible offering, the

underwriter may be able to conclude

there is no Regulation FD or selective

disclosure issue and, hence, no need

to restrict the investors with whom it

speaks.

In order to test the waters about

a particular bought deal that is

material to the issuer prior to the

public announcement of the deal,

the underwriter may want to “name

names” and get a more concrete

estimate of investor interest. To do that,

the underwriter will ask the potential

investor if it is willing to be “wall-

crossed” (i.e., moved to the restricted

side of the firm’s trading wall) as to an

unnamed issuer in a particular industry.

If the investor agrees to be restricted,

the underwriter may send the investor

an email confirming its willingness to

keep confidential whatever it is about

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to learn, although some underwriters

take the view that the investor’s verbal

acknowledgement of the confidentiality

arrangement is sufficient to establish

the existence of an express agreement

for Regulation FD purposes.

Some

underwriters also ask for a return email

from the investor acknowledging the

confidentiality arrangement.

Prior to agreeing to be wall-crossed,

most investors will want to agree on a

future date (often not more than a few

days out) when the wall-cross trading

restrictions will lapse. The issuer will

ordinarily participate in determining

the free-to-trade date, since the issuer

may have a part to play in publicly

disseminating the information necessary

to ensure free tradability by a date

certain.

Once the investor has agreed to be wall-

crossed, the underwriter can name the

issuer and have an explicit discussion

with the investor about its interest in

participating in the upcoming offering,

subject only to the restrictions on offers

described above.

Launching the Deal and Post-

Launch Communications

The underwriter will want to publicly

announce the deal and begin allocating

securities to buy-side accounts as soon

as the issuer accepts its bid. The public

announcement of launch serves as a “for

sale” sign to the market and satisfies

any Regulation FD concerns about

selective disclosure. In most cases, the

issuer and the underwriter will agree

on a price immediately after the close

of trading (4:00 p.m., New York City

time). The underwriter will expect to

begin reselling the bought securities

immediately and will hope to have the

entire deal sold prior to the open of

trading on the next day (9:30 a.m., New

York City time). Because this time period

is critical to the underwriter’s marketing

efforts, it is essential that all documents

be finalized ahead of time so that the

deal can be publicly announced as soon

as the issuer accepts the underwriter’s

bid.

The form of the announcement that

is appropriate for a given bought

deal depends upon the adequacy of

issuer information already available to

investors by way of prior Exchange Act

filings, the nature of the security being

offered and the proposed manner of

resale by the underwriter.

Getting the Word Out

There are a number of ways to

announce a bought deal, including a

Rule 134-compliant press release filed

or furnished on Form 8-K, a preliminary

pro supp filed under Rule 424(b) or,

preferably, both.

A bought deal can

also be launched using an issuer FWP

under Rule 433. Whichever approach

is chosen, the issuer must carefully

consider whether the announcement,

when taken together with all other

information made available to investors

in the registration statement and

incorporated Exchange Act filings,

conveys all the information required to

be disclosed under the federal securities

laws.

• Rule 134 Press Release. Rule 134

enables an issuer with an effective

registration statement to issue a

press release that includes certain

limited information related to an

offering without the communication

being deemed to be a prospectus or

an issuer FWP.

The use of a Rule

134-compliant press release is the

most common way to announce the

launch of a bought deal because it

can be prepared and disseminated

quickly. A press release has the added

benefit of satisfying the requirements

of Regulation FD, particularly if it

is concurrently filed on Form 8-K.

Although a press release is an

effective way to announce a bought

deal, the issuance of the release alone

will not serve to update the Section 11

file — it will need to be filed on Form

8-K to achieve that goal. The SIFMA

Block Trade Guidelines include

a recommended form of launch

press release for both primary and

secondary sales of common stock.

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• Preliminary Pro Supp. For an issuer

desiring to top up the Section 12

file at the moment of launch, a

preliminary pro supp is a good way

to go. The use of a preliminary

pro supp filed under Rule 424(b)

immediately prior to the launch of

the offering provides the underwriter

with a comprehensive method of

announcing the offering and the terms

of the securities as well as any other

information the deal team determines

is appropriate to add to the Section 12

file. A publicly filed preliminary pro

supp also constitutes public disclosure

of the deal that satisfies Regulation

FD (although many issuers choose

to issue a press release and file it

on Form 8-K concurrently with the

Rule 424(b) filing immediately prior

to launch). For these reasons, some

underwriters opt to use a preliminary

pro supp in every deal, whether it is

strictly necessary or not. On the other

hand, some underwriters will agree to

dispense with a preliminary pro supp

where there is no need to convey

additional information to accounts

prior to confirming orders.

Post-Launch Communication

The customary practice for issuer

communications after a bought deal

has been launched is directly related

to the manner of distribution by the

participating underwriter. Let’s review

the two methods of resale used by

underwriters to distribute a bought deal.

Fixed Price Offering

In a fixed price offering, the underwriter

purchases the shares from the issuer

or the selling stockholders and reoffers

the shares to the public at a fixed price,

often called the “clearing price.” In

these transactions, the underwriter

expects to sell all of the shares on offer

at the clearing price, although the plan

of distribution language in the base

prospectus normally includes language

allowing the underwriter to change the

pricing at any time without notice (in

case it turns out to be a “sticky” deal).

Variable Price Reoffering

In a variable price reoffering, the

underwriter resells the purchased

securities at variable prices as

determined by market conditions and

subsequent negotiations with buy-side

accounts.

Since the issuer cannot know at the

time its shelf registration statement

is initially filed with the SEC what

method(s) of distribution will be used by

its underwriters in future takedowns, the

issuer should include broad language

in the base prospectus so there will

be no need for an update at the time

of a takedown. We suggest including

language in the plan of distribution

section of the base prospectus to the

effect that:

“We may sell the securities covered

by this prospectus in any of three

ways (or in any combination): (i) to

or through underwriters or dealers;

(ii) directly to one or more purchasers;

or (iii) through agents.

We may distribute the securities

covered by this prospectus from time

to time in one or more transactions:

(i) at a fixed price or prices, which

may be changed from time to time;

(ii) at market prices prevailing at the

time of sale; (iii) at prices related to

the prevailing market prices; or (iv) at

negotiated prices.

Each time we offer and sell securities

covered by this prospectus, we

will make available a prospectus

supplement or supplements that will

describe the method of distribution

and set forth the terms of the

offering, including: (i) the name

or names of any underwriters,

dealers or agents and the amounts

of securities underwritten or

purchased by each of them; (ii) if

a fixed price offering, the public

offering price of the securities and

the proceeds to us; (iii) any options

under which underwriters may

purchase additional securities from

us; (iv) any underwriting discounts or

commissions or agency fees and other

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items constituting underwriters’ or

agents’ compensation; (v) terms and

conditions of the offering; (vi) any

discounts, commissions or concessions

allowed or reallowed or paid to

dealers; and (vii) any securities

exchange or market on which the

securities may be listed.”

However, even if the issuer omits this

broad description of offering methods

in the plan of distribution section of the

base prospectus, a WKSI can add this

disclosure by means of a pro supp under

Rule 430B(a).

There are generally two types of post-

launch communications associated

with bought deals: (i) a “pricing” press

release issued as soon as the clearing

price in a fixed price offering has been

established and (ii) the required final

pro supp filed pursuant to Rule 424(b).

The Pricing Press Release

There is no specific SEC rule requiring

the issuer to publicly announce the

results of its offering prior to filing the

final pro supp pursuant to Rule 424(b)

(which can be as late as 5:30 p.m. on

the second business day after pricing).

However, if the offering is a primary

offering, the issuer will have two reasons

to consider issuing a pricing press

release once the deal has been sold and

the clearing price has been established.

First, there may be a Regulation FD

concern in some cases if the clearing

price is known to some market

participants and not others. A pricing

press release that discloses the

clearing price and is filed on Form 8-K

completely eliminates any Regulation

FD concern.

Second, the NYSE takes the position

that a pricing press release is necessary

if either the underwriting discount

or the clearing price is itself material

information.

If the NYSE determines

that these pricing terms are material, it

may refuse to open the issuer’s stock for

trading following an overnight bought

deal until a pricing press release has

been issued. Obviously, no one wants

to see that happen. For this reason,

even where the deal team determines

that neither the clearing price nor the

underwriting discount is material, it is

prudent to have a pricing press release

drafted and ready to go in case the

NYSE sees it differently. In fact, some

underwriters advise their clients to issue

a pricing press release in every fixed

price deal as a preemptive measure.

In practice, the NYSE will often

seek the views of the issuer and its

counsel on the question of whether the

underwriting discount or the clearing

price for a particular bought deal is

material. Materiality in this context,

as always, depends on all of the facts

and circumstances. The NYSE does

not apply any bright-line tests, but

our experience suggests that, if the

underwriter purchases shares for less

than 85-90 percent of the last closing

price, you should expect to have a

conversation with the NYSE about

disclosure before the start of trading.

Even where the underwriter’s purchase

price is more than 90 percent of the

last closing price, the NYSE may want

to have a discussion with the issuer

or the underwriter about the size

of the underwriting discount or the

clearing price before acquiescing to the

materiality judgment of the deal team,

which can have the effect of slowing

down the transaction and possibly

even delaying the opening of the stock.

Remember that the NYSE expects a

phone call at least 10 minutes before

any material news is released during the

trading day or shortly prior to open so

it can make a determination of whether

to halt trading while the market absorbs

the new information. Nasdaq does not

currently expect its listed companies

to issue a press release following the

pricing of a bought deal.

Filing the Final Pro Supp

The final pro supp is a particularly

interesting document in a bought

deal. The pricing information that first

appears in the final pro supp is the focus

of extra attention in the bought deal

world. The price per share paid by the

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underwriter in a bought deal is typically

determined based on a discount to the

closing price per share of the issuer’s

stock on the day prior to launch. In

some cases, the agreed-upon price

is based on a formula that takes into

account the clearing price, once known.

Underwriters generally prefer to utilize

the entire two business day-period

contemplated by Rule 424(b) before

filing the final pro supp.

Disclosing the pricing information,

including the underwriter’s discount,

in the final pro supp has the effect of

including the information in the Section

11 file (by virtue of the magic of Rule

430B), but it does nothing for the Section

12 file. Most issuers and underwriters

conclude that an underwriting discount

that is within a customary range is not

material and, therefore, need not be

included in the Section 12 file (i.e., can

be omitted from the launch press release

and the preliminary pro supp). However,

each deal team should consider the

facts and circumstances surrounding its

particular offering before determining

that omitting the underwriter’s discount

(and hence the net proceeds to the

issuer) from the Section 12 file at the

time of sale is acceptable. Some of the

factors a deal team may wish to consider

in this regard include the size of the

discount as compared to the closing

price of the security on the day prior

to launch, whether the bought deal is

a primary or secondary offering, the

intended use of proceeds from the

offering and whether the security in

question has a high trading volume.

Hard and fast rules are rarely useful

in the context of an offering, but it’s

worth noting that public disclosure of

underwriter discounts and issuer net

proceeds prior to the filing of the final

pro supp is quite rare in the context of

bought deals.

Special Issues in

Secondary Trades

Sales of securities in bought deals by

existing securityholders typically involve

sales of common stock by affiliates of the

issuer. Non-affiliates holding restricted

common stock can usually resell

under Rule 144 without much (or any)

underwriter assistance, but affiliates

who want to reduce or exit their

investment in a particular issuer are

subject to Rule 144’s rather significant

volume limitations.

A number of important issues arise in

the context of resale bought deals that

do not exist in bought deals for the

account of the issuer. Let’s examine the

three most important issues.

Special Due Diligence Concerns

Sections 11 and 12 of the Securities

Act provide underwriters with a due

diligence defense to liability. Therefore,

the underwriter in a bought deal

will want to conduct a reasonable

investigation to get comfortable that

the issuer’s disclosures (including,

if applicable, the disclosure in the

preliminary pro supp) are accurate

and complete in all material respects.

The added challenge in the context of

a secondary trade is that the selling

stockholder will likely not have

unlimited attention from the issuer’s

management. Even though registered

resale transactions almost always

involve resales by controlling affiliates

of the issuer, “control” for purposes of

determining affiliate status is not always

the same as control for purposes of a due

diligence effort. The deal team will need

to construct a reasonable investigation

that suits the circumstances of the

particular transaction. One size does not

fit all.

The “Clean Hands” Representation

Whenever an affiliate is selling

securities, the question arises whether

the affiliate has had access to material

information that is not in the public

domain — for example, knowledge of

early-stage acquisition or divestiture

discussions. In most circumstances, the

selling affiliate provides the underwriter

with a “clean hands” representation

to the effect that the affiliate is not

in possession of (or making its “sell”

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decision on the basis of) any material

non-public information. If the selling

affiliate is in possession of material

non-public information, it is always

possible to level the playing field by

disclosing that information to the public

in a preliminary pro supp prepared

specifically for the offering or by filing

a Form 8-K prior to launch, but the

issuer may not be prepared to make

public disclosures about future plans

that are not yet finalized. Many issuers

are reluctant to make special out-of-

cycle disclosures to facilitate resales by

affiliates. And most issuers have insider

trading policies that limit affiliate resales

to trading windows following Exchange

Act filings. In many cases, the right

decision is for the affiliate to keep out of

the market until a pending transaction

has been publicly announced or formally

abandoned.

These selective disclosure concerns

are often addressed by timing a resale

bought deal to follow promptly on the

heels of the filing of a periodic report

by the issuer. The various disclosure

requirements applicable to Exchange

Act reports, particularly annual

reports on Form 10-K and quarterly

reports on Form 10-Q, are sufficiently

comprehensive that the deal team

can usually conclude that the public

disclosure file is complete following

a periodic report filing. The same

conclusion may be possible following

the filing of an earnings release in some

cases. Note, however, that an earnings

release that is merely “furnished” on

Form 8-K will not be considered to be

part of the Section 11 file, which may

indicate the need for a final pro supp

that includes a “recent developments”

section.

Special FINRA Issues

Bought deals involving securities of

seasoned issuers do not, as a general

rule, require a filing with, or review by,

FINRA, as we will discuss in greater

detail below. However, FINRA uses a

different standard from that used by

the SEC for determining “seasoned”

status. As a result, not all WKSIs are

seasoned issuers in FINRA’s world.

FINRA will expedite the review of a

primary offering for an unseasoned

WKSI or non-WKSI issuer under

certain circumstances, but it will not

currently promise expedited or same-

day clearance for a secondary offering

of securities of an unseasoned WKSI or

non-WKSI issuer. If this is your scenario,

early communication and coordination

with FINRA may become central to your

deal timing.

Exempt Bought Deals

So far in this Client Alert, we have

discussed bought deals in the context

of a registered offering only.

However,

executing a bought deal on an exempt

basis is a viable option for US issuers

offering straight debt or convertible

securities when an effective registration

statement is not available.

The private

market for debt and convertible debt

securities of issuers that are seasoned

enough to be considering a bought

deal is deep and wide. Limiting the

universe of available purchasers to

qualified institutional buyers and non-

US investors doesn’t typically affect the

execution of such an offering, or the

price at which underwriters are willing

to purchase the securities, because

institutional investors are the accounts

targeted in offerings of straight debt

and convertible debt securities. Of

course, privately placed securities are

“restricted securities” subject to Rule

144’s restrictions on trading, which may

necessitate a modest liquidity discount.

There are a few additional benefits of an

exempt bought deal worth noting.

Disclosure and Other

Regulatory Obligations

Exempt offerings generally are not

subject to FINRA’s corporate finance

filing requirement and related review

process, which can require significant

lead time.

The underwriter also has

additional flexibility to pre-market

an exempt offering as compared to a

registered offering because none of the

restrictions on offers under Section 5 of

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the Securities Act apply in the context

of an exempt offering, other than the

prohibition on general solicitation.

The underwriter may also prefer an

exempt offering because Sections 11

and 12 of the Securities Act do not

apply to unregistered transactions.

In addition, there may also be deal-

specific issues that prevent an issuer

from consummating a registered offering

that can be avoided through an exempt

offering. For example, if an issuer

does not have the necessary financial

information available to satisfy all of the

applicable requirements of Regulation

S-X, the issuer and the deal team may

be able to conclude that satisfaction of

some of the more technical Regulation

S-X requirements is not required by

sophisticated institutional investors.

In those cases, a private offering may

be a viable option even if a registered

offering is not.

Regulation M

Regulation M is designed to prohibit

manipulation of the price of a security

(or certain related securities) during a

“distribution” of the security. Rule 101

of Regulation M covers distribution

participants (including any underwriter,

prospective underwriter, broker, dealer

or any other person who has agreed

to participate or is participating in a

distribution), while Rule 102 covers the

issuer and any selling securityholder.

Regulation M broadly prohibits covered

persons from directly or indirectly

bidding for, purchasing, or inducing

others to bid for or purchase, covered

securities until a specified restricted

period for the distribution has ended.

Although Rule 101 of Regulation M

includes an exemption for trading

by distribution participants during a

distribution by an issuer with “actively

traded securities,”

no such exemption

exists under Rule 102 for the issuer itself

or for a selling securityholder. However,

there is a broad exception from the

restrictions of Regulation M for a “pure”

Rule 144A exempt offering (meaning an

offering and sale in the United States

only to qualified institution buyers).

Accordingly, in a Rule 144A exempt

offering, distribution participants,

issuers and selling stockholders can

bid for or purchase the securities being

distributed, even during the offering.

Lock-Up and Clear Market

Considerations

To facilitate a successful distribution of

the securities the underwriter commits

to purchase in a bought deal, the

underwriter will typically require that

the issuer, certain company insiders and

any selling stockholders contractually

agree not to sell any of the covered

securities into the market for a period of

time after the offering. To the extent that

the applicable sellers are party to the

underwriting agreement, this covenant

can be included in the underwriting

agreement itself. Otherwise, the

restrictions are set forth in a separate

lock-up agreement. If your deal has

a lock-up provision (in either the

underwriting agreement or in a separate

lock-up agreement), consider whether

the terms of the lock-up, including any

negotiated carveouts, should make their

way into the Section 12 file. If so, a

preliminary pro supp or an issuer FWP

may be necessary.

While the lock-up period is often a

heavily negotiated offering-specific

term, in the context of a bought deal,

the restricted period typically ranges

from 30 to 90 days. Bear in mind that

many bought deals are timed to follow

promptly on the heels of an earnings

release or the filing of a quarterly or

annual report to coincide with a trading

window in the issuer’s insider trading

policy (in the case of a secondary trade)

and to avoid the need for topping-up

disclosure prior to launch. Accordingly,

selling stockholders may look to

negotiate a lock-up period that ends

prior to the anticipated date of the next

quarterly earnings release, which will

likely be their next opportunity to access

the market.

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Even if the negotiated lock-up period

expires before the next earnings

release, the deal team will need to

take into account the prohibitions of

FINRA’s equity research rule, NASD

Rule 2711. Absent an exemption, Rule

2711 prohibits a FINRA member that

acted as a manager or co-manager of

a public offering from publishing a

research report on, or making a public

appearance regarding, the applicable

issuer during the 15 days prior to

and after the expiration, waiver or

termination of a lock-up agreement. To

the extent that a lock-up expires or is

waived in close proximity to the end of

an issuer’s fiscal period, Rule 2711 can

prove problematic because research

analysts often publish reports on or

make appearances regarding an issuer

shortly following an issuer’s earnings

announcement. In order to protect the

research analysts’ ability to publish

reports or make appearances following

an earnings release or similar event

affecting an issuer, lock-up agreements

typically include a “booster shot”

provision that automatically extends

the term of the lock-up for up to an

additional 34 days if the expiration

or termination of the lock-up would

otherwise trigger Rule 2711’s research

quiet provisions.

However, the booster shot can also serve

as an impediment to an issuer or selling

stockholder looking to launch a bought

deal shortly after the publication of

the next earnings release. Fortunately,

Rule 2711 provides FINRA members

some relief from the restrictions to

the extent the company in question

is (i) an issuer with “actively traded

securities” as defined in Regulation M

and (ii) the member seeking to publish

or make a public appearance could issue

research reports in accordance with the

requirements of Securities Act Rule 139.

If these conditions are met, the FINRA

member may make a public appearance

or issue a Rule 139-compliant research

report during the 15-day period prior to,

and during the 15-day period following,

an earnings release or other issuer

announcement — activities that would

otherwise be prohibited under Rule

2711.

Accordingly, sellers may choose

to structure the lock-up agreement

such that the related booster falls away

to the extent that the issuer qualifies

for Rule 2711’s actively traded security

exemption and the underwriter can

issue Rule 139-compliant research on

the issuer at the time the lock-up would

otherwise expire.

Other Required Filings

To avoid speed bumps, the deal team

should plan ahead with respect to all

aspects of the required documentation,

including any required FINRA, stock

exchange or state blue sky law filings.

FINRA Filings

FINRA reviews, among other things,

the underwriting and other terms and

arrangements relating to the distribution

of securities by its members (e.g., a US

underwriter in a bought deal) to ensure

that such terms and arrangements are

not “unfair or unreasonable.” Pursuant

to FINRA Rule 5110 (also known as

the “Corporate Financing Rule”), all

US public debt and equity offerings

must be filed with FINRA for review

and approval prior to making any

sales, unless an express exemption is

available.

The Seasoned Issuer Exemption

There are several filing exemptions

under Rule 5110,

however, in the

context of a bought deal the most

relevant exemption is commonly

referred to as the “seasoned issuer

exemption.”

The seasoned issuer exemption is

available for offerings “registered with

the SEC on registration statement Forms

S-3 or F-3 pursuant to the standards for

those Forms prior to October 21, 1992

and offered pursuant to Rule 415 of SEC

Regulation C.”

The pre-October 1992

Form S-3 eligibility criteria required

an issuer to have at least 36 months

of Exchange Act reporting history and

either a $150 million public float or at

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least a $100 million public float coupled

with an annual trading volume of at

least three million shares. Note the

importance of this exemption in the

context of a bought deal — no FINRA

filing will be required if the issuer

met the pre-October 1992 Form S-3

eligibility criteria at the time the shelf

was filed and continues to meet such

criteria at the time of the shelf takedown

for the bought deal.

If this is not the case, however, the deal

team will need to review the particular

facts and circumstances to determine

whether a filing is needed for the

takedown. For example, a FINRA filing

could be required if the issuer met the

pre-October 1992 Form S-3 eligibility

citeria at the time of the original shelf

filing but no longer meets such criteria

at the time of the takedown. A filing

could also be required if the issuer

meets the pre-October 1992 Form S-3

eligibility criteria at the time of the

takedown but did not meet such criteria

at the time the shelf was filed.

Unfortunately, the definition of a

WKSI in Rule 405 does not track the

pre-October 1992 Form S-3 eligibility

criteria, in particular with respect to

the three-year Exchange Act reporting

history. As a result, even though a

WKSI can file an automatically effective

shelf registration statement, a FINRA

filing may nonetheless be required

in connection with an underwritten

offering of a WKSI’s securities. The

FINRA staff, however, has indicated

that they will expedite the review and

approval process for WKSIs that are not

yet considered seasoned issuers and will

endeavor to complete the review process

within 24 hours (and typically will

complete the process in a much shorter

period if alerted in advance and if there

are no difficult compensation issues that

require a more extensive discussion

with senior staff). Nonetheless, failure

to recognize early in the process the

requirement to effect a FINRA filing in

connection with a bought deal can cause

additional delay. Accordingly, before

finalizing the timeline for a proposed

bought deal, the deal team should first

assess whether the seasoned issuer,

or any other exemption, applies to the

offering.

In addition, the seasoned issuer

exemption does not necessarily apply

to offerings that fall within the “conflict

of interest” provisions of FINRA Rule

5121. Even if the issuer would otherwise

be exempted from a FINRA filing, the

presence of a conflict of interest may

trigger the need for a FINRA filing. The

most common situations that give rise to

a conflict of interest are an underwriter

being deemed to be under common

control with an issuer or where more

than 5 percent of the net proceeds from

the offering will be used to repay certain

indebtedness owed to the underwriter

or its affiliates or is otherwise intended

to be directed to the underwriter or its

affiliates.

Conflicts of interest must always be

disclosed in the offering materials

and, under certain circumstances, a

qualified independent underwriter, or

“QIU,” must be engaged to participate

in the preparation of the registration

statement and the prospectus or other

offering document and exercise the

usual standards of due diligence

in connection therewith. If QIU

participation is required, the seasoned

issuer and other filing exemptions will

not be available and FINRA approval

must be obtained prior to making any

sales of the offered securities. Given

the tight timing of bought deals, an

analysis of potential conflicts of interest

(including those arising as a result of

concurrent or pending transactions)

should be performed at the outset and

taken into consideration when selecting

underwriters.

Preparing for FINRA in Advance

If a determination has been made that

a FINRA filing will be necessary, there

are a few steps that an issuer can take

in advance to help facilitate a smooth

FINRA process on the day the bought

deal is launched.

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Although the underwriter of a future

bought deal will almost certainly

not have been identified at the time

the shelf registration statement of a

non-WKSI is first filed with the SEC,

FINRA will accept a filing by issuer’s

(or designated underwriter’s) counsel

that requests conditional clearance

on the base prospectus concurrently

with or following the time the shelf

registration statement is filed with the

SEC. Another filing is required when

the underwriter for a particular bought

deal is selected (in order for FINRA

to assess any conflicts of interest and

underwriter compensation issues), but

obtaining conditional clearance speeds

the subsequent review process because

future takedowns should not require

individual approval (or additional filing

fees) unless there are material changes

to the original shelf filing.

To the extent a filing exemption isn’t

available, FINRA members and non-

WKSI issuers can also take advantage

of FINRA’s “same-day clearance” option

with respect to shelf offerings. Same-day

clearance filers will typically receive a

no objections letter within minutes of

making certain required representations

through FINRA’s COBRADesk filing

system. FINRA does, however, reserve

the right to review a transaction post

filing. The same-day clearance option

is available in connection with initial

shelf filings, takedowns from previously

approved shelf filings and initial shelf

filings with concurrent takedowns (but,

in each case, not if the final pro supp

has been filed with the SEC). The same-

day clearance option is a highly useful

tool in the context of a bought deal,

with one glaring limitation. The same-

day clearance option is not currently

available for secondary offerings.

This means that even if an issuer has

obtained conditional clearance on the

base prospectus, FINRA does not have

a process specifically established for

obtaining same-day clearance for a

secondary bought deal. If the deal team

is faced with this situation, counsel

for the selling stockholder and the

underwriter are advised to reach out to

the FINRA staff to discuss expediting

the review process.

In order to take advantage of the same-

day clearance option, issuers must agree

to file the final pro supp and executed

underwriting agreement with FINRA

within one business day of filing the

final pro supp with the SEC and must

also make the following representations:

• the terms with the underwriter do not

include any prohibited arrangements

(as described in Rule 5110(f));

• the aggregate amount (including

underwriting discounts and

commissions and all other “items of

value”) received by the underwriter

does not exceed 8 percent of

the offering proceeds, and all

underwriting compensation will be

disclosed in the offering document;

• the underwriter has not acquired

unregistered securities that would be

deemed compensation during the 180-

day period preceding the filing (note

that, because of this requirement,

the same-day clearance option may

not technically be available if the

underwriter or related persons have

entered into a derivative transaction

with the issuer in connection with the

offering (even if such instrument is

deemed to have “zero compensation

value” under the rule));

• in the event of a Rule 5121 conflict of

interest that requires the appointment

of a QIU, the QIU meets all the

necessary standards to act as a QIU

in the subject offering (taking into

account the type and size of the

offering); and

• final offering documents will be

submitted to FINRA.

Since non-WKSIs can avail themselves

of the same-day clearance option in most

instances and WKSIs have their own

expedited review process, some forward

thinking by the deal team with respect

to the Corporate Financing Rule’s review

and approval requirements can help

minimize FINRA as a gating item at

the time of the bought deal. However,

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because the same-day clearance option

is not currently available in connection

with a secondary offering, the deal team

will need to engage in communications

with FINRA in advance to discuss how

the related review will impact timing.

Additionally, regardless of whether

same-day clearance is an option, certain

representations and other information

will always be required by FINRA, so

the deal team will want to gather the

information necessary to make the

required representations as early in the

process as possible.

Blue Sky Filings

It’s easy to overlook the need for state

securities law clearance in a bought

deal. In most cases, the analysis breaks

down as follows:

• The Listed or “Senior to a Listed”

Exemption. Securities listed on a

national securities exchange or

securities of the same issuer that

are equivalent or senior in rank to a

listed security qualify as a so-called

“covered security” under Section 18

of the Securities Act and have the

benefit of federal preemption of any

applicable filing or fee required under

state securities laws. Accordingly, for

bought deals that involve securities

of a listed company, offers and sales

can be made to all types of investors

in the United States by broker-dealers

registered in each applicable state

without any other sort of qualification

under the various states’ securities

laws.

• Other Public Offerings. If the bought

deal is for securities of an issuer that

does not have any securities listed

on an exchange, blue sky filings will

be required to sell to retail investors.

Generally, if offers and sales are

limited to institutional investors,

an exemption from state securities

registration will be available, but the

breadth of this exemption varies by

state. A blue sky survey is usually

prepared by underwriter’s counsel for

these types of offerings in order to

inform the underwriter of the types of

investors who may participate in the

offering in each state.

• Rule 144A/Regulation S Offerings. If

the offering is to be conducted under

Rule 144A to qualified institutional

buyers located in the United States,

an exemption from registration is

available in every state if the offer

and sale is made by a registered

broker-dealer. State securities laws

likewise do not apply to the sale of

securities outside the United States

under Regulation S.

Form 8-K Filings in Addition to the

Launch Press Release

Generally, a Form 8-K must be filed with

the SEC within four business days of the

underlying event that triggers the need

for disclosure. In the context of a bought

deal, the deal team should consider the

following potential triggering events

(in addition to the launch press release

discussed above):

• Material Definitive Agreement. Item

1.01 of Form 8-K requires a reporting

company to file a Form 8-K describing

the terms of any material definitive

agreement it has entered into outside

of the ordinary course of business.

Practitioners have differing opinions

as to whether the underwriting

agreement associated with a bought

deal is material, given the paucity of

ongoing obligations post-closing.

the underwriting agreement is filed,

the underwriter will likely request

that it be filed after the final pro supp

is filed.

• Unregistered Sales of Equity

Securities. A company must file a

Form 8-K if it sells equity securities

in a private placement or other

transaction not registered under the

Securities Act and the amount of

securities sold since the last time the

company made similar disclosure in

a Form 8-K or other periodic report is

greater than 1 percent of the number

of shares outstanding of the class of

security sold.

If such securities are

sold for cash, then the Form 8-K must

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include disclosure of the aggregate

offering price and underwriting

commission.

Stock Exchange Notices, Listing

Approvals and Stockholder

Vote Requirements

If the securities being offered in

a bought deal are to be listed on

either the NYSE or Nasdaq, certain

exchange notices and approvals may be

necessary. In addition, the exchanges

require stockholder approval prior to

consummating certain offerings. As a

result, the deal team should focus on

the NYSE and Nasdaq requirements

in order to determine as early as

possible whether any such notices or

approvals will be necessary. However,

in the context of a bought deal for

common stock, stockholder approval

will generally not be required under

either the NYSE or Nasdaq rules to

the extent the offering takes the form

of a registered offering for cash that

is underwritten on a firm commitment

basis.

The NYSE requirements are:

• Notification and Approval to List.

NYSE-listed companies are required

to file an application for the listing of

additional shares. Additional shares

cannot be listed until the issuer

receives notification of the NYSE’s

approval. The NYSE suggests that

all filings be made approximately

two weeks prior to the time when

authorization is required. While

the NYSE will work with issuers to

grant their authorization on a more

accelerated timeframe, issuers should

make this confidential filing as soon

as a bought deal moves beyond a

theoretical discussion, particularly

if the offering requires significant

analysis under the “20 Percent Rule”

discussed below.

• Stockholder Approval and the

20 Percent Rule. Among other

informational requirements, the

additional listing application must

indicate whether the offering requires

stockholder approval and, if so,

whether the required approval has

been obtained. Rule 312.03(c) of

the NYSE Listed Company Manual

requires stockholder approval for any

transactions or series of transactions

where either (i) the common stock

to be issued in the offering (or

underlying the convertible securities

to be issued in the offering) has/will

have upon issuance voting power

equal to or in excess of 20 percent of

the voting power outstanding before

the issuance or (ii) the number of

shares to be issued in the offering (or

underlying the convertible securities

to be issued in the offering) are/

will be upon issuance equal to or

greater than 20 percent of the number

of shares outstanding prior to the

issuance. Obviously, the need to

solicit advance stockholder approval

typically eliminates the advantages

of a bought deal. Fortunately, there

are three exceptions to the NYSE’s 20

Percent Rule:

o “public offerings” for cash;

o “bona fide private financings;”

and

o offerings for distressed companies

in limited circumstances.

The Nasdaq requirements are:

• Notification. Rule 5250(e)(2) of the

Nasdaq listing rules requires the

issuer of any class of securities

(other than American Depositary

Receipts) listed on Nasdaq to submit

electronically a listing of additional

shares notification in connection

with certain issuances, or potential

issuances, of common stock or

securities convertible into common

stock. The listing notification must be

submitted at least 15 calendar days

prior to:

o issuing any common stock (or

security convertible into common

stock) in connection with the

acquisition of the stock or assets

of another company, if any

officer or director or “substantial

shareholder” of the issuer has 5

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percent or greater interest (or if

collectively such persons have a

10 percent or greater interest) in

the company to be acquired or

consideration to be paid; or

o issuing any common stock, or any

security convertible into common

stock in a transaction that may

result in the potential issuance of

common stock, greater than 10

percent of either the total shares

outstanding or the voting power

outstanding on a pre-transaction

basis.

In addition, Rule 5250(e)(1) requires

an issuer to notify Nasdaq when there

is an aggregate increase or decrease

of any class of its securities that

exceeds 5 percent of the amount of

the securities of the class outstanding.

Notification is required to be filed

no later than 10 calendar days after

such occurrence. Nasdaq reviews

these filings in order to confirm that

any proposed transaction complies

with the various Nasdaq listing rules,

including the stockholder approval

requirements described below.

• Stockholder Approval. Rule 5635(d)

of the Nasdaq listing rules generally

requires stockholder approval of

transactions (other than “public

offerings”) involving:

o the sale, issuance or potential

issuance by an issuer of common

stock (or securities convertible into

or exercisable for common stock) at

a price below the greater of book

or market value, which together

with sales by officers, directors or

“substantial shareholders,” is at

least 20 percent of the common

stock or at least 20 percent of the

voting power outstanding prior to

the issuance; or

o the sale, issuance or potential

issuance by an issuer of common

stock (or securities convertible into

or exercisable for common stock)

equal to 20 percent or more of

the common stock or 20 percent

or more of the voting power

outstanding before the issuance

for less than the greater of book or

market value of the stock.

Note that registered offerings do not

necessarily constitute “public offerings”

under the NYSE’s and Nasdaq’s rules.

As a result, a fact-specific inquiry will

be required and practitioners should

determine early on whether stockholder

approval pursuant to the NYSE’s or

Nasdaq’s rules will be necessary. The

application of the NYSE and Nasdaq

rules in the context of offerings of

convertible securities is particularly

tricky. If you are planning a bought

deal for convertible securities, this topic

needs special focus prior to launch.

Conclusion

Bought deals demand speed and grace

under pressure from every member

of the deal team. Both underwriters

and issuers are focused on completing

bought deal financings before the

market moves or market participants can

affect the price of the issuer’s securities

through hedging. To accomplish this, all

of the required documentation should

be in final form before any underwriter

bids are submitted and accepted.

Remember that all of the customary

issues encountered in fully marketed

transactions also exist in bought deals,

including all of the issues arising under

SEC and FINRA rules and regulations,

the NYSE and Nasdaq rules, state blue

sky laws and the antifraud provisions

of the federal securities laws. The only

difference is that everything happens at

lightning speed.

Endnotes

Securities Industry and Financial Markets

Association, Block Trade Guidelines, March

2008, available at http://www.sifma.org/

uploadedfiles/for_members/committees/capital_

markets_group/equity_markets(1)/sifma%20

block%20trade%20guidelines%20(2008).pdf.

Although a bought deal can in theory be effected

pursuant to a registration statement on Form

S-1, the inability to forward-incorporate reports

filed by the issuer under the Securities Exchange

Act of 1934, among other practical impediments,

makes this an atypical structure.

18 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

See Rule 462(e). For a review of the definition

of WKSI, see our Words of Wisdom blog entry

“Joining the Club: WKSIs Part 1” (February 14,

2012), available at http://www.wowlw.com/wksis/

wksi-part-1/.

For more information on how Rule 462(b) works

for shelf upsizing, see our Words of Wisdom blog

entry “‘For a Few Dollars More’: Upsizing Your

Shelf Deal” (May 25, 2010), available at http://

www.wowlw.com/shelf-offerings/for-a-few-dollars-

more-upsizing-your-shelf-deal1/.

Public companies with less than $75 million

aggregate market value of voting and non-voting

common equity held by non-affiliates (public

float) are subject to an additional limitation

when offering common stock. Under General

Instruction I.B.6 of Form S-3, they cannot use

Form S-3 to sell securities amounting to more

than the equivalent of one-third of their public

float during any 12 consecutive month period.

Therefore, any issuer with a public float of less

than $75 million will need to consider capacity

with respect to this one-third offering limitation

before entering into a bought deal transaction.

For the issuer and the underwriter, a takedown

triggers a new effective date as of the earlier

of the date of first use of a pro supp filed under

Rule 424(b) and the time of the first contract

of sale of the securities to which the pro supp

relates. A pro supp generally does not create

a new effective date for the company’s auditor

by virtue of Rule 430B(f)(2), and accordingly

there is typically no need to update the auditor’s

consent pursuant to Section 7 of the Securities

Act. See Securities Offering Reform, Release

No. 33-8591, text accompanying note 470

(July 19, 2005) (hereinafter, “Offering Reform

Release”).

For a thorough review of the law and the lore

surrounding “offers,” see our Client Alert “The

Good, the Bad and the Offer: Law, Lore and

FAQs,” available at http://www.lw.com/page/

thegood-thebad-theoffer.

See Rule 163(c) and note 170 to Offering

Reform Release (“In addition, as with the

other exemptions and safe harbors that are

available only to the issuer, the definition of

by or on behalf of the issuer [in Rule 163]

explicitly excludes offering participants who are

underwriters or dealers.”). In 2009, the SEC

proposed amendments to Rule 163(c) that would

have allowed underwriters to make pre-filing

offers on behalf of WKSIs, but these proposed

amendments are not currently expected to be

enacted.

See Rule 100(b)(2) of Regulation FD, excluding

from its requirements disclosure made “to a

person who owes a duty of trust or confidence

to the issuer (such as an attorney, investment

banker, or accountant)” and to a person “who

expressly agrees to maintain the disclosed

information in confidence.” Accordingly, the

exception covering communications between

an investment banker (a temporary insider) and

an issuer is implied and, therefore, need not be

expressly made.

For an overview of the practical aspects of the

EDGAR filing process, see our Words of Wisdom

blog entries “‘All About EDGAR’ (and Exhibits)”

(May 11, 2010), available at http://www.wowlw.

com/edgar/all-about-edgar1-and-exhibits/ and

“All About EDGAR, Part II–Filings: Paper or

Plastic?” (May 24, 2011), available at http://www.

wowlw.com/edgar/all-about-edgar-part-ii--filings-

paper-or-plastic/.

This limited information includes: (1) basic

factual information about the issuer; (2)

information about the terms of the securities

offered; (3) the names and roles of participating

underwriters; (4) the anticipated schedule for the

offering; (5) a description of the procedures by

which the underwriters will conduct the offering;

(6) the names of selling security holders, if any;

and (7) the exchanges on which the securities

are traded. See Rule 134(a).

Arguably, the issuance of a press release

concurrently with launch is by itself sufficient

to satisfy Regulation FD’s simultaneous public

disclosure requirement for issuers who are

actively followed by the wire services. See Rule

101(e)(2) of Regulation FD. However, many

issuers choose to concurrently file or furnish the

press release on Form 8-K in order to update

both the Section 11 and Section 12 files. See

Rule 101(e)(1) of Regulation FD.

WKSIs can make material changes to the plan of

distribution by incorporated Exchange Act reports

or prospectus supplements. See Rule 430B and

Offering Reform Release text accompanying

note 449. Non-WKSIs, however, must file a

post-effective amendment if there is a material

change to the plan of distribution.

Section 202.05 of the NYSE’s Listed Company

Manual requires a listed company to “release

quickly” to the public any news or information

that might reasonably be expected to materially

affect the market for its securities. Although the

NYSE, in Section 202.01 of the Listed Company

Manual, pointed to various developments that

are potentially material (e.g., earnings, mergers/

acquisitions, securities offerings and pricings

related to these offerings and major product

launches), it leaves the ultimate determination

of materiality, and therefore disclosure, with the

listed company.

19 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

In 2011, the NYSE provided guidance on how

its timely alert policy affects secondary offerings

and, specifically, bought deals. The NYSE

guidance provides:

“In the case of a ‘bought deal,’ the materiality

of a particular transaction will depend on a

number of factors, including, but not limited

to, the number of shares sold, the size of the

discount to the public market price paid by

the underwriter, and whether the transaction

involves a sale by the company or one of

its stockholders. If the discount to the public

market price is such that its disclosure would

materially affect the market for the securities,

then it may be appropriate to disclose

the pricing terms (or amount of securities

sold and net proceeds to the company or

stockholder) even if the number of shares

sold in the transaction is not itself material.”

As a result of anticipated downward pressure

on the price of the stock following launch, the

difference between the price the underwriter

pays for the shares and the last closing price

does not necessarily represent the effective

compensation to the underwriter.

For a discussion of the practical and legal

issues surrounding disclosure of recent results,

see our Client Alert “Recent Developments In

Recent Developments — Using ‘Flash’ Numbers

in Securities Offerings,” available at http://www.

lw.com/page/flash-numbers-securities-offerings.

Sellers of common stock are most likely to

explore a private investment in public equity,

or PIPE, in this context. A common stock PIPE

involves the private sale to accredited investors

typically coupled with resale registration rights

with respect to the purchased shares. Would-

be underwriters of a bought deal may act as

placement agents in this context.

Bear in mind that, under Rule 144A(d)(3)(i), debt

securities convertible into common stock with

an effective conversion premium of less than 10

percent are treated as fungible with securities of

the class into which they are convertible. In other

words, in that case, if the exemption under Rule

144A is unavailable for the common stock, it

would similarly be unavailable for the convertible

debt.

Note that FINRA is currently proposing new

filing and disclosure obligations on certain

private placements in which a FINRA member

participates. Fortunately, the proposed rules

have several exemptions, including placements

to qualified institutional buyers and offerings

under Rule 144A and Regulation S. See Self-

Regulatory Organizations; Financial Industry

Regulatory Authority, Inc.; Notice of Filing of

Partial Amendment No. 1 and Order Instituting

Proceedings to Determine Whether to Approve

or Disapprove a Proposed Rule Change, as

modified by Partial Amendment No. 1, to Adopt

FINRA Rule 5123 (Private Placements of

Securities) in the Consolidated FINRA Rulebook

Release No. 34-66203 (Jan. 20, 2012).

In contrast to Sections 11 and 12 of the

Securities Act, scienter is required to establish

liability under Rule 10b-5 of the Exchange Act.

Pursuant to Rule 101(c)(1) of Regulation M, an

“actively-traded security” includes securities with

an average daily trading volume of at least $1

million and that are issued by an issuer whose

common equity securities have a public float

value of at least $150 million.

In some cases, the absence of a lock-up may

be material information that the deal team

should consider including in the Section 12 file,

particularly where investors would expect to

see a lock-up based on market practice or prior

experience with the issuer.

Rule 139 requires, among other things, that the

issuer in question be eligible to conduct primary

offerings under General Instruction I.B.1 of

Form S-3 (e.g., meets the $75 million minimum

public float requirement) and that the publication

in question is not an initiation or re-initiation

of research coverage (i.e., that the report is a

continuation of regularly published reports on the

issuer).

Other exemptions include certain offerings

involving non-convertible debt and preferred

securities, most private placements and certain

exchange offers in which listed securities are

issued.

See FINRA Rule 5110(b)(7)(C)(i).

One scenario in which the filing of the takedown

may not be required in this instance is if the

issuer filed the original shelf at a time when no

FINRA member was involved (this is because the

Corporate Financing Rule’s filing requirement is

technically triggered only when a FINRA member

is participating in the offering). Nonetheless,

because FINRA’s procedures with regard to shelf

filings are subject to change, it is best practice

to assess the situation at the time to determine

whether a FINRA filing will be necessary.

See FINRA Rule 5121(f)(5) and (6) for a

definition of “Conflict of Interest” and “Control,”

respectively.

FINRA filings made in connection with the filing

of a shelf registration statement (whether filed by

issuer’s or underwriters’ counsel) must include

a representation that the maximum amount of

underwriting compensation in connection with

offerings off the shelf will not exceed 8 percent

of the maximum offering proceeds. Such

20 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

representation must also appear in the base

prospectus included in the shelf registration

statement.

One item of note with respect to FINRA Rule

5121 is that the definition of “conflict of interest”

for purposes of that rule relates to a FINRA

member’s participation in “an entity’s public

offering.” However, the defined term “entity” in

Rule 5121 excludes “a ‘real estate investment

trust’ as defined in Section 856 of the Internal

Revenue Code.” While this exclusion doesn’t

exempt a REIT from FINRA filing requirements

alone, it does effectively mean that a conflict of

interest as defined for purposes of Rule 5121

cannot exist in the context of an offering by a

REIT. As a result, conditional clearance of the

base prospectus by a REIT by and large only

leaves underwriter compensation for FINRA

review at the time of a subsequent takedown.

See SEC Division of Corporation Finance,

Compliance and Disclosure Interpretations,

Exchange Act Form 8-K, Question 102.02. Some

issuers choose to file the underwriting agreement

as an exhibit under Item 9.01 of Form 8-K. By

doing so, the issuer can incorporate the terms

of the underwriting agreement by reference into

Item 1.01 and provide a more limited summary of

the terms of the agreement. However, the issuer

may also choose to wait and file the underwriting

agreement as an exhibit to its next quarterly or

annual Exchange Act filing covering the period

during which the bought deal occurred.

For smaller reporting companies (as defined by

the SEC), the threshold is increased to greater

than 5 percent (as opposed to 1 percent) of the

number of shares outstanding of the class of

security sold.

Although a “public offering” for cash is exempted

from the stockholder approval requirements of

NYSE Rule 312.03, the NYSE Listed Company

Manual does not include a definition of “public

offering” for the purposes of assessing this

exemption. Nasdaq Rule 5635(d) also exempts

“public offerings” from the stockholder approval

requirements of the Nasdaq Listing Rules.

However, Nasdaq has also provided additional

guidance on what constitutes a “public offering”

for the purposes of Rule 5635(d): “Generally, a

firm commitment underwritten securities offering

registered with the Securities and Exchange

Commission will be considered a public offering

for these purposes. . . . However, Nasdaq staff

will not treat an offering as a ‘public offering’

for purposes of the shareholder approval

rules merely because they are registered with

the Commission prior to the closing of the

transaction.” Nasdaq Listing Rules, IM-5635-3,

“Definition of a Public Offering.”

Rule 312.04(g) of the NYSE Listed Company

Manual defines a “bona fide private financing”

to include a sale in which “a registered broker-

dealer purchases the securities from the issuer

with a view to the private sale of such securities

to one or more purchasers.” Accordingly, an

exempt bought deal will generally qualify for this

exception.

While Rule 5250(e)(2) of the Nasdaq listing rules

specifies that the listing notification must be

submitted 15 calendar days prior to the issuance

of the applicable securities, in practice Nasdaq

staff has been receptive to the concern that,

in many cases, complying with this advance

notice requirement is impossible, given that the

offering may only become a reality a few days

(or a single day) prior to the date the securities

are issued and sold. Accordingly, Nasdaq staff

will often accommodate the submission of the

listing notification inside of this 15-day window.

However, the deal team should reach out to

Nasdaq as soon as they become aware of a

possible offering and offer to submit a draft

notification in advance. Constant communication

with Nasdaq will generally assist in facilitating

greater flexibility with respect to the 15-day

window.

21 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

FIVE BUSINESS DAYS PRIOR TO

TRADE DAY:

• Issuer engages its own counsel and

designated underwriter’s counsel

• Check for an effective shelf

registration statement (with sufficient

unused capacity to cover green shoe)

and no stop-order

• Determine whether stock exchange

filings/stockholder approvals are

needed

• Submit FINRA filing (if required) and

request pre-clearance for trade day

• Submit stock exchange filing (if

required)

• Contact auditors to initiate the

comfort letter process

• Instruct underwriter’s counsel to begin

its due diligence process

FOUR BUSINESS DAYS PRIOR TO

TRADE DAY:

• Issuer’s counsel circulates drafts for

comment to underwriter’s counsel of the:

o Preliminary prospectus supplement

o Launch press release*

o Pricing press release

o Underwriting agreement

o Form of lock-up agreement (if an

equity offering)

o Authorizing resolutions of the board

of directors

o Any other transaction

documentation

• Underwriter’s counsel updates its due

diligence

TWO/THREE BUSINESS DAYS PRIOR TO

TRADE DAY:

• Issuer’s counsel reaches out to

potential underwriters to confirm

agreement as to confidentiality and

wall-crossing procedures

• Issuer conducts a call with potential

underwriters to discuss process and

timing for solicitation of final bids

• Underwriter’s counsel completes its

documentary due diligence

• Potential underwriters contact

underwriter’s counsel to receive an

up-to-date diligence download

• All underwriter comments on the

relevant transaction documents are

submitted and resolved

• Final form of comfort letter is

circulated, negotiated and agreed

TRADE DAY:

• The underwriter hosts a bring-down

due diligence call with counsel, the

issuer and its auditor

• Final bids are submitted immediately

after the close of trading

• A winning underwriter is selected

• Issue launch press release (and file or

furnish it on Form 8-K)

• File preliminary pro supp with SEC

• Provide a pdf of preliminary pro supp

to underwriters

• Commence public sales and begin to

confirm orders

• Execute the underwriting

agreement,** lock-up agreements and

the auditor’s comfort letter

Annex A

Note: This timeline is based on the assumption that there will be one week between

the first phone call and the launch date. In many cases, the schedule will be

significantly accelerated. In those cases, the to-do list will not change, but the

timeline will need to be compressed. Good luck!

Sample Timeline for a Registered Bought Deal

See SIFMA’s Block Trade Guidelines for recommended forms of launch press releases for

common stock deals.

In some cases, the underwriting agreement is not executed until the next morning.

22 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

TRADE DAY +1:

• Continue confirming orders***

• Issue press release announcing

clearing price if a primary fixed price

offering (before the market opens)

o Notify stock exchange prior to

issuing press release

• Execute and overnight stock powers

and medallion guarantees to transfer

agent

• Notify stock exchange about intention

to list additional shares (if applicable)

TRADE DAY +2:

• File final prospectus supplement with

the SEC pursuant to Rule 424(b) at

the close of business

• Assemble execution versions of

closing documents, bring down

comfort letter, various officer’s

certificates and legal opinions

CLOSING (TRADE DAY +3):

• Hold bring-down due diligence call

• Close offering

• File Form 8-K

***

In a “sticky” deal, confirmation of orders may continue for multiple days. In this case, the deal team will

need to be mindful of Rule 159 and Registration M issues.

23 Number 1305 | March 15, 2012

Latham & Watkins | Client Alert

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