Alternative Strategies for Raising Equity Capital is the Subject of McDermott Webinar
NEW YORK (April 13, 2009) — On April 1, 2009, McDermott Will & Emery LLP sponsored a webinar on "Raising Capital in a Changed World." Members of McDermott's Corporate Department, along with representatives from leading investment banks, explained that in the current troubled economic climate, issuers must explore alternative ways to raise equity capital. Participants in the webinar learned about the current market for raising capital via traditional and structured PIPEs (Private Investment in Pubic Equity), rights offerings, and at-the-market (ATM) offering programs (or dribble programs). "With less money available and more time required to raise it, a careful assessment of each issuer's unique situation is essential to achieving success in this market," cautioned Joel Rubinstein, a partner in McDermott's New York office.
According to Stephen Older, also a partner in the New York office, "Issuers who in the past would not consider PIPEs, are doing so now." Whereas PIPE transactions had been dominated in the past by mid and small cap companies, Mr. Older noted as a "new phenomenon this year" that PIPEs were becoming increasingly popular with investors taking larger stakes in larger companies.
Mr. Older explained that although PIPEs offer benefits to issuers, such as speed and lower transaction costs, restrictive covenants may create operating limitations on the issuer. Webinar participants learned that PIPEs are advantageous because investors, such as VC firms, are able to buy a significant stake in an issuer at a discount with warrant coverage, and can negotiate and customize terms. "PIPE investors are demanding more onerous terms as protection in the event of a possible bankruptcy by the issuer," explained Mr. Older. These include greater warrant coverage, higher coupon or interest rates on debt or preferred stock, and a reduction in the price-to-earnings multiple used to value a company.
Mr. Rubinstein explained that companies often need to turn to insiders to raise the needed funds in a private PIPE transaction. "In this circumstance, careful planning and execution is crucial to ensure company directors fulfill their fiduciary duties in connection with an insider transaction," cautioned Mr. Rubinstein. One possible strategy is to conduct a rights offering to all shareholders that can be "backstopped" by the inside investors.
Kyle Guse, a partner in McDermott's Silicon Valley office, described how to structure a rights offering. "The primary advantage of a rights offering is that it avoids dilution to the existing stockholders. And with stock prices at all time lows, this is a significant concern of management." However, he noted that unlike a PIPE, rights offerings may take longer due to any required SEC review, and that some shareholder approval requirements may be applicable under certain circumstances.
Participants also learned how ATM offerings, or dribble programs, can allow public company issuers to raise capital with limited advance disclosure. This strategy allows the issuer to dribble shares into the market on a registered basis over an extended period of time and at varying prices. Instead of a normal follow-on, dribbling out shares over time can result in raising capital at higher prices.
Historically, ATM or dribble programs were done by small issuers. "But because the traditional follow-on market is closed off, we are seeing the size of ATM offerings grow substantially and by large issuers," said Mr. Guse. However, it is important to note that management must commit the time and funds to participate in regular due diligence sessions.
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