Tag: stock

The Confidentially Marketed Public Offering for the Smaller Reporting Company

What is it?

A Confidentially Marketed Public Offering (“CMPO”) is an offering of securities registered on a shelf registration statement on Form S-3 where securities are taken “off the shelf” and sold when favorable market opportunities arise, such as an increase in the issuer’s price and trading volume resulting from positive news pertaining to the issuer.  In a CMPO, an underwriter will confidentially contact a select group of institutional investors to gauge their interest in an offering by the issuer, without divulging the name of the issuer.  If an institutional investor indicates its firm interest in a potential offering and agrees not to trade in the issuer’s securities until either the CMPO is completed or abandoned, the institutional investor will be “brought over the wall” and informed on a confidential basis of the name of the issuer and provided with other offering materials.  The offering materials made available to investors are typically limited to the issuer’s public filings, and do not include material non-public information (“MNPI”).  By avoiding the disclosure of MNPI, the issuer mitigates the risk of being required to publicly disclose the MNPI in the event the offering is terminated.  Once brought over the wall, the issuer, underwriter and institutional investors will negotiate the terms of the offering, including the price (which is usually a discount to the market price) and size of the offering.  Once the offering terms are determined, the issuer turns the confidentially marketed offering into a public offering by filing a prospectus supplement with the Securities and Exchange Commission (“SEC”) and issuing a press release informing the public of the offering.  Typically, this occurs after the close of markets.  Once public, the underwriters then market the offering broadly to other investors, typically overnight, which is necessary for the offering to be a “public” offering as defined by NASDAQ and the NYSE (as discussed further below).  Customarily, before markets open on the next trading day, the issuer informs the market of the final terms of the offering, including the sale price of the securities to the public, the underwriting discount per share and the proceeds of the offering to the issuer, by issuing a press release and filing a prospectus supplement and Current Report on Form 8-K with the SEC.  The offering then closes and shares are delivered to investors and funds to the issuer, typically two or three trading days later.

What Type of Issuer Can Conduct a CMPO and How Much Can an Issuer Raise?

To be eligible to conduct a CMPO, an issuer needs to have an effective registration statement on Form S-3, and is therefore only available to companies that satisfy the criteria to use such form.  For issuers that have an aggregate market value of voting and non-voting common stock held by non-affiliates of the issuer (“public float”) of $75M or more, the issuer can offer the full amount of securities remaining available for issuance under the registration statement.  Issuers that have a public float of less than $75M will be subject to the “baby shelf rules”.   In a CMPO, issuers subject to the baby shelf rules can offer up to one-third of their public float, less amounts sold under the baby shelf rules in the trailing twelve month period prior to the offering.  To determine the public float, the issuer may look back sixty days from the date of the offering, and select the highest of the last sales prices or the average of the bid and ask prices on the exchange where the issuer’s stock is listed.  For an issuer subject to the baby shelf rules, the amount of capital that the issuer can raise will continually fluctuate based on the issuer’s trading price.

What Exchange Rules Does an Issuer Need to Consider?

The public offering period of a CMPO must be structured to satisfy the applicable NASDAQ or New York Stock Exchange criteria for a “public offering”.  In the event that the criteria are not satisfied, rules requiring advance shareholder approval for private placements where the offering could equal 20% or more of the pre-offering outstanding shares may be implicated.  Moreover, a sale of securities in a transaction other than a public offering at a discount to the market value of the stock to insiders of the issuer is considered a form of equity compensation and requires stockholder approval.  Nasdaq also requires issuers to file a “listing of additional shares” in connection with a CMPO.

Advantages and Disadvantages of CMPOs

There are a number of advantages of a CMPO compared to a traditional public offering, including the following:

  • A CMPO offers an issuer the ability to raise capital on an as needed basis as favorable market conditions arise through a process that is much faster than a traditional public offering.
  • The shares issued to investors in a CMPO are freely tradeable, resulting in more favorable pricing for the issuer.
  • In a CMPO, the issuer can determine the demand for its securities on a confidential basis without market knowledge.  If terms sought by investors are not agreeable to the issuer, the issuer can abandon the CMPO, generally without adverse consequences on its stock price.
  • If properly structured as a public offering, a CMPO will negate the requirement to obtain stockholder approval for the transaction under applicable Nasdaq and NYSE rules.

Disadvantages of conducting a CMPO include:

  • To conduct a CMPO, an issuer must be eligible to use Form S-3 and have an effective registration statement on file with the SEC.
  • Issuers subject to the baby shelf rules may be limited in the amount of capital they can raise in a CMPO.
  • In the event a CMPO is abandoned, investors that have been “brough over the wall” and received MNPI concerning the issuer may insist that the issuer publicly disclose such information to enable such investors to publicly trade the issuer’s securities.

This article is for general information only and may not be relied upon as legal advice.  Any company exploring the possibility of a CMPO should engage directly with legal counsel.

© Copyright 2021 Stubbs Alderton & Markiles, LLP
For more articles on the NASDAQ and NYSE, visit the NLR Financial, Securities & Banking section.

Founder’s Stock – a Legal Fiction

In common usage, a founder is an individual who creates or helps create a company, but in legal terms, there is no such thing as a “founder” or “founder’s stock,” only early participants in a company’s organization and ownership of its initial equity capital. Why is this so? Because, for all practical purposes (from a startup’s point of view), there are two types of stock – common stock and preferred stock – and “founders” are just the initial holders of the company’s common stock, usually before any financing, in-licensing, or contribution of assets. It should be noted that common stock and preferred stock can be divided further into subclasses or series (e.g., Class A common stock, or Series B preferred stock) that further differentiate the rights and privileges of the holders, and additional side agreements can be put into place to further restrict or grant rights to a particular holder of equity, but those topics are beyond the scope of this post.

As background, to create a corporation an individual (the incorporator) needs to file a certificate of incorporation with the Secretary of State of the state of organization (e.g., Massachusetts, Delaware, California, New York). Immediately thereafter, the incorporator will execute an organizational action where they will appoint the initial director(s) of the corporation and resign from their position as the incorporator. The director(s) will then have an organizational meeting where the director(s), among other things, will adopt by-laws, appoint officers, and issue stock to the initial stockholders, typically common stock. The price of that stock initially issued is very low and is normally equal to the par value per share (e.g., $0.0001/share) because the company has just been created and does not have any real value at this point in time.  This initial equity is what is referred to as “founder’s stock”.  And founder’s stock can be issued outright or can be subject to a vesting schedule with unvested shares forfeited back to the company in certain circumstances, usually related to termination of employment.

Why does any of this matter? From an organizational standpoint, it doesn’t matter – up until the point that the company contemplates issuing stock to employees, investors, or other individuals or acquiring or licensing assets.  Often the early employees and individuals will either (i) want to receive common stock at the same price that the founder(s) paid or (ii) want to ensure their interests are protected. For more information on the latter, please read A Balanced Approach to Founder’s Equity.

If an individual wants to receive common stock at the same price paid by the founder(s) and the individual is a service provider, the individual will be deemed to have received compensation equal to the difference between the (i) fair market value of the stock received and (ii) the amount paid by the recipient; this amount can become significant depending on the then current value of the company. Note, the founders did not have to deal with this “compensation” issue because when the founders purchased their shares of the company at the organizational meeting, the fair market value of the company’s shares at such time was almost nothing (as the company had yet to conduct any business). To avoid this recognition of income, service providers will typically accept options with a purchase price per share equal to the current fair market value. Options provide the service provider with the ability to receive equity in the future without the initial upfront cost of the equity and the income tax issue does not present itself here because the exercise price of the option equals the current exercise price of the share. It should be noted that options do not provide the option holder with any rights as a stockholder. There are advantages and disadvantages of owning options in comparison to stock, and a discussion of those issues is beyond the scope of this post.  But it’s also worth noting that, if six months or so after the issuance of founder’s stock there have been no activities that have created value (financing, assets, activities, etc.), it may be possible to still fairly conclude that the company is still nearly worthless, and thus still have an opportunity to issue “founder’s stock” to a new key member joining the team.  You should consult your attorney when such matters arise.

 

©1994-2018 Mintz. All Rights Reserved.
This post was written by Michael Bill of Mintz.

Firestorm Over Passenger Forced Removal Proves Costly for United

United AirlinesUnited Airlines stock tumbled nearly 4% in early trading Tuesday morning before recovering late in the day as the company continued to deal with fallout after video surfaced showing a passenger being forcibly dragged from a United flight at Chicago’s O’Hare International Airport. United shares were down by as much as 6% in premarket trading Tuesday morning, according to MarketWatch.

Shocked viewers responded with universal outrage Monday to a video appearing to show a 69-year old man being brutally dragged off his flight by three uniformed officers from the Chicago Department of Aviation, one of which has since been placed on leave. The man’s face was bloodied and he appeared disheveled as officers dragged him along the narrow aisle of the plane.

“The incident on United flight 3411 was not in accordance with our standard operating procedure and the actions of the aviation security officer are obviously not condoned by the Department,” the agency said in a statement. “That officer has been placed on leave effective today pending a thorough review of the situation.”

Compounding the Airline’s misery was a letter sent to employees Monday night by United’s CEO, Oscar Munoz, saying that he supported the actions of the flight’s crew in removing the passenger, who Munoz accused of being “disruptive and belligerent.” Munoz later apologized directly to the passenger but his public sentiment was judged disingenuous in the wake of the leaked employee memo.

The passenger was removed from the flight to make room for four United employees, although it was initially reported that the passenger was removed from the flight to Louisville due to overbooking—a standard industry practice of selling more seats on any given flight than are actually available to shield the airline from lost revenue from no-shows. Although the flight was not technically overbooked, United followed the policy in order to seat the four employees.

In 2016, the 12 largest U.S. airlines bumped slightly more than 40,600 of 659.7 million passengers, for a rate of 0.62 per 10,000 passengers, down from 0.73 per 10,000 in 2015, according to the Bureau of Transportation Statistics, Bloomberg reported.

In this case, the airline requested that four passengers relinquish their seats to United employees. According to reports, the airline first offered passengers $400 in addition to hotel and flight vouchers, and then raised the cash component to $800. When there were no takers, the airline chose four passengers to be removed. Approached by the flight’s crew, the man declined to give up his seat, asserting that he is a doctor and needed to see patients Monday morning.

The incident also sparked an international outrage across China, where it was the top item trending on Sina Weibo, as it was reported the removed passenger was Asian. The BBC reported that a passenger seated next to the doctor said the doctor was originally from Vietnam, where there was also widespread negative reaction. The hashtag #UnitedForcesPassengerOffPlane had more than 270 million views and an online petition, “Chinese Lives Matter,” which has some 38,000 signatures and calls for a U.S. investigation into the case, according to Bloomberg.

Reputational damage can be potentially costly as a company may have to deal with expenses related to managing a crises, such as public relations and advertising, as well as any loss to the company’s stock market value. The incident is the second in as many weeks to envelop United, which previously suffered scorn in the court of public opinion after barring two nonrevenue passengers from boarding a flight based on a dress code violation.

United’s largest shareholder is Warren Buffet, whose 9% stake in the airline, worth roughly $2 billion, was down some $90 million when United’s stock was at its lowest point on Tuesday.

ARTICLE BY Caroline McDonald of Risk and Insurance Management Society, Inc. (RIMS)

Risk Management Magazine and Risk Management Monitor.

Copyright 2017 Risk and Insurance Management Society, Inc. All rights reserved.

GoPro Announces Plans to Sell Millions In Stock

McBrayer NEW logo 1-10-13

Stock sell-off, a term which our readers may have come across before, refers to the selling of securities by a company, whether stocks or bonds or other commodities. According to Investopedia.com, sell-offs can occur for a variety of reasons, such as after a less than satisfactory earnings report or when oil prices significantly increase. A sell-off can be a smart way for companies to deal with uncertainties in the stock market, depending on how they are handled.

Recently, GoPro—the company famous for designing and manufacturing high-definition personal cameras—announced that it would be selling off $100 million worth of stock in order to free up capital to expand its business. The company went public in June, and it is not uncommon for companies to sell stock after a successful initial public offering, particularly when there is still a need to raise capital to launch the company to greater success.

In addition to the $100 million sell-off, existing shareholders are going to sell off $700 million. In total, the sell-off could increase the company’s capital by over 40 percent. That money will reportedly be going toward investment in human capital, technology, as well as infrastructure and potential acquisitions.

There are a variety of ways companies can utilize sell-offs to better position themselves in the marketplace. Regardless of the approach used, it is critical that the sell-off is situated in the context of a long-term plan for the company’s success. Companies considering a sell-off should, naturally, work with an experienced legal team to ensure the success of their efforts.

Source: San Jose Mercury News, “GoPro plans $100 million cash boost with stock sale,” Heather Somerville, Nov. 10, 2014.

ARTICLE BY

Business and Corporate Law Practice Group
OF
McBrayer, McGinnis, Leslie and Kirkland, PLLC