The Benefits of Confidentially Marketed Public Offerings for Medtech Companies

Advantages of CMPOs

CMPOs are offerings registered with the SEC on a Form S-3 shelf registration statement.  Since the SEC liberalized the shelf registration rules, the filing of shelves has become commonplace and a company's market price generally does not move when a shelf is filed.  CMPOs primarily are marketed to a targeted group of institutional investors without public announcement.  As discussed below, the offering may be "flipped" into a public offering shortly before pricing, and at this point a retail component is often approached.  CMPOs have several advantages over traditionally marketed public offerings:

• Targeted and streamlined marketing efforts allow companies to complete CMPOs relatively quickly, which is increasingly important as the capital-raising environment can turn from favorable to unfavorable with unprecedented speed.
• CMPOs allow companies to test the market for an offering without automatically subjecting the company's stock to the downward pressure typically associated with announcing an offering – something that is especially valuable if a contemplated offering is not completed.
• Because CMPOs typically involve a short interval (typically no more than one evening) or none at all between publicly announcing the offering and pricing it, the market price for the company's stock is not affected by the offering announcement and is relatively high when the offering is priced at a discount to market.

Necessary Steps for a CMPO

Effective Shelf Registration Statement

A company looking to conduct a CMPO must have an effective shelf registration statement on Form S-3 on file with the SEC that covers the securities to be sold.  If an issuer has an effective shelf registration statement that it has previously used and wishes to conduct a CMPO for an amount greater than is available under the registration statement, SEC rules allow an issuer to file an automatically effective registration statement, covering up to 20% of the dollar amount remaining on the shelf at the time of pricing, to increase the size of the offering to a desirable amount.  The SEC recently expanded the class of issuers eligible to use a Form S-3 shelf registration statement to include companies with a public float of less than $75 million.  These smaller issuers that meet the other requirements for using Form S-3 may use the form to sell securities for up to one-third of the aggregate market value of their public float during a 12-month period.  An issuer that did not have a public float of at least $75 million on the date it filed its Form S-3, therefore, may conduct a CMPO, but the size of the offering inherently will be limited unless the issuer's public float exceeds $75 million subsequent to the effective date of the registration statement. 

Well-known seasoned issuers (WKSIs), which generally include issuers with a public float of more than $700 million, may file a Form S-3 registration statement that is automatically effective when filed.  Subject to certain conditions, WKSIs also have the advantage of not needing to file a registration statement prior to marketing securities; and, as discussed in a related article the SEC proposed amending its rules to eliminate a prohibition on underwriters making offers to sell a security for an issuer that has not filed a registration statement covering the security.  If the SEC adopts these rules as proposed, the process for WKSIs conducting CMPOs would be made even simpler.

Wall-Crossing Procedures and Marketing

In order to avoid insider trading issues and to ensure that a CMPO actually remains confidential, issuers and their financial advisors must carefully implement procedures to avoid public disclosure of a potential offering until after a prospective investor has agreed to keep information regarding the offering confidential.  Confidentiality agreements with prospective investors can be written or oral; however, written agreements are best to ensure the scope of the confidentiality obligation is clear and there are no after-the-fact arguments about the agreement's existence or scope.  Any oral confidentiality agreements should be subsequently confirmed in writing, which could be in e-mail form that requires a response from the person to whom information regarding the offering will be disclosed.  The information that issuers or underwriters share prior to receiving a confidentiality agreement should be scripted and limited to information that could not reasonably be used to identify the issuer, such as information  limited to the industry in which the issuer operates, the intended size of the offering, and the intended use of proceeds.

After a potential investor is "brought over the wall" by agreeing to keep information about the offering confidential, issuers and underwriters can disclose material non-public information about the offering, including the identity of the issuer, to that investor.  Marketing documents for a CMPO typically consist of little more than an issuer's public filings.  Issuers that have general "investor presentations" or other written materials, such as a term sheet they would want to physically deliver or otherwise share with investors apart from a road show presentation, should either file those materials as free writing prospectuses along with the shelf registration statement covering securities that may be sold in a future CMPO or wait to deliver these documents to potential investors until the deal is flipped, when filing the documents as free writing prospectuses will not endanger the confidentiality of the offering. 

There is no requirement to prepare a preliminary prospectus supplement for a CMPO.  However, the listing requirements for both NASDAQ and the New York Stock Exchange require shareholder approval for any offering representing 20% or more of a company's voting power if the securities are sold at a discount to market value and are not sold in a "public offering."  NASDAQ's guidance provides that, while a firm commitment underwritten offering generally will be considered a "public offering," every registered firm commitment underwritten offering will not automatically be considered a public offering for purposes of this rule.  Rather, NASDAQ will consider all relevant factors, including:

• the marketing efforts for the offering;
• whether the offering is underwritten on a firm commitment or on a best efforts basis;
• the number and type (institutional versus retail) of investors to whom the offering is marketed and sold;
• the offering price, including the extent of the discount to the market price of the securities offered; and
• the extent to which the issuer controls the offering and its distribution.

If a CMPO exceeds the 20% threshold, issuers often issue a press release and file a simple preliminary prospectus supplement on the night of pricing or the night preceding pricing to flip the deal and make offers to a broader range of potential investors.  This allows the underwriters' sales forces to reach out to a broad group of institutional and retail investors quickly, which expands the marketing efforts.  This helps to remove doubt about whether a CMPO is a "public offering."  The public offering period typically would last from the close of market on one day to market opening on the next day (and almost never lasts more than one day).  Such a flip to a public offering may be desirable to fill out a CMPO, in addition to addressing potential concerns under the so-called 20% rule. 

Other Legal Considerations

CMPOs present several advantages from a business perspective.  Apart from the wall-crossing process, the legal issues surrounding CMPOs generally are no different than for traditional public offerings.  Underwriters of a CMPO still should conduct their due diligence, including obtaining accountants' comfort letters and opinions of counsel and conducting calls with the company's auditors and important customers and suppliers.  The speed with which CMPOs move can compress the due diligence process, but the exclusion of a preliminary prospectus supplement that is a "true" marketing document can lessen the amount of diligence necessary to back up factual information in the offering documents.  Underwriters that are familiar with an issuer's market can readily identify key due diligence issues and thereby take advantage of the streamlined process. .  Investment banks participating in a CMPO should confirm that there is an exception to filing under FINRA's public finance rule or make the necessary filing, which recently was made easier by FINRA's same-day clearance procedure for shelf takedowns.  Pricing and closing a CMPO are much like a traditional public offering and involve execution and delivery of an underwriting agreement and legal opinions, comfort letters and closing certificates. 

Conclusion

Despite changes to capital markets, companies—including medtech companies—will continue to need access to capital to grow their businesses.  When executed properly, CMPOs provide several advantages that will make them a significant part of the fund raising landscape for the foreseeable future.