In early November, the SECs Division of Corporation Finance updated CDI 139.13 under Securities Act Section 5 and withdrew CDIs 139.15 through 139.20. The updated CDI relates to equity line financings.

In many equity line financings, the company will rely on a private placement exemption to sell the securities under the equity line and will then seek to register the “resale” of the securities sold in the equity line financing. However, the staff does not view that transaction as a “resale” but rather as an indirect primary offering because of the company’s right to put shares to the investor in the future and the lack of market risk resulting from the formula price (in contrast to PIPEs).

In what seems to be part of the update, the staff observes that the “at-the-market limitations contained in Rule 415(a)(4) would otherwise prohibit market-based formula pricing for issuers that are not eligible to conduct primary offerings on Form S-3 or Form F-3.” That issue notwithstanding, the staff will not object if these companies register

“the ‘resale’ of the securities prior to the exercise of the equity line put if the transactions meet the following conditions:

  • the company and the investor have entered into a binding agreement with respect to the private equity line financing at the time the registration statement is filed;
  • the ‘resale’ registration statement is on a form that the company is eligible to use for a primaryoffering;
  • there is an existing market for the securities, as evidenced by trading on a national securitiesexchange or alternative trading system, ( such as OTCQX) which is a registered broker-dealer and has an active Form ATS on file with the Commission; and
  • the equity line investor is identified in the prospectus as an underwriter, as well as a selling shareholder.”

In addition, the staff will not object if a company files a registration statement for a private equity line financing prior to the issuance of securities by the company under the equity line “even when there are contingencies attached to the investor’s obligation to accept a put of shares from the company, as long as the above conditions are satisfied and the following terms of the investment have been agreed upon by both parties and disclosed by the company at the time that the resale registration statement is filed:

  • the number of shares registered for resale;
  • the maximum principal amount available under the equity line agreement;
  • the term of the agreement; and
  • the full discounted price (or formula for determining it) at which the investor will receive the shares.”

An earlier version of the CDI allowed the company to register the “resale” of the securities prior to its exercise of the put if, among other conditions, the company had “completed” the private transaction of all of the securities to be registered for “resale” prior to the filing of the registration statement.  It appears that the withdrawn CDIs indicated how certain events and contingencies would impact whether the transaction was considered “completed.” The update eliminated from the interpretation the requirement for a “completed” transaction, instead requiring that there be a binding agreement, allowing certain contingencies to condition the investor’s obligation.

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