Integration During the Going Public Process – Securities Lawyer 101

Integration During the Going Public Process
Securities Lawyer 101 Blog

Issuers often need to raise funds during their going public transactions to offset legal and accounting costs.  The SEC integration rule addresses the circumstances under which an issuer can raise capital privately while a Form S-1 registration statement is pending during the going public process.
The integration rules were created to prevent companies from improperly avoiding registration by dividing a single securities offering into multiple offerings to take advantage of Securities Act exemptions that would not be available for the combined offering.

A pending registration statement does not prevent an issuer from raising funds in a concurrent private offering if certain conditions are met.

The SEC’s position is that the filing of a registration statement is a general solicitation of investors including in a going public transaction where an issuer uses a Form S-1.  The SEC’s position on integration has created some confusion for issuers who conduct a concurrent private offering while there is a registration statement pending with the SEC since Rule 506(c) under the JOBS Act became effective, the absence of general solicitation and advertising was a fundamental condition to an unregistered offering.

The SEC addressed integration of concurrent public and private offerings in a 2008 Compliance and Disclosure Interpretation providing guidance concerning its 2007 release addressing integration.

The Compliance and Disclosure Interpretation provides useful guidance in determining whether a private offering will be exempt from registration under the Securities Act while a registration statement is pending.

Under limited circumstances, issuers can conduct a private offering under Rule 506 while a registration statement is pending.  The issuer must identify the Rule 506 investors by means other than its Form S-1 registration statement.

Whether a particular securities offering is integrated with another offering requires an analysis of the facts and circumstances of the particular offerings.  The focus is on how the Rule 506 investors are solicited – whether by the registration statement or through some other methods.

Issuers should determine if an offering is exempt under Section 4(2) of the Securities Act without independent of the registration statement.  The SEC’s release provided useful guidance for common scenarios in going public transactions.

If a company files a registration statement on Form S-1 and then offers and sells securities in a Rule 506 offering to an investor that invests because of the registration statement, then the registration statement was a general solicitation and the Section 4(2) exemption would not be available for the issuer’s private offering. Conversely, if the investor invested in the concurrent Rule 506 offering because of some means other than the Form S-1 registration statement such as through a substantive, pre-existing relationship with the company or direct contact by the company outside of the registration statement process then the pending registration statement will not impact the potential availability of the Rule 506(c) exemption.

Pre-existing relationship include vendors, customers and suppliers as well as existing investors and shareholders. Under these circumstances, an investors is not identified as a result of the public offering and did not contact the issuer as a result of the general solicitation by means of the registration statement.  As such, the Rule 506 offering can be conducted while the registration statement is pending.

Rule 506(c) should streamline integration issues since general solicitation can be used in connection with a Rule 506(c) offering. Even where Rule 506(c) is relied upon, issuers in going public transactions should remember that an offering that starts as a public offering must be completed as a public offering and a private offering must be completed as a private offering, except in those circumstances specified in Rule 155.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855