Bought Deals, Block Trades and Confidentially...
Transcript of Bought Deals, Block Trades and Confidentially...
MORRISON & FOERSTER LLP
Bought Deals, Block Trades and Confidentially Marketed Public Offerings
1.5 CLE Credits
November 14, 2013, 8:30AM – 10:00AM
Speakers: Anna T. Pinedo James R. Tanenbaum
1. Presentation
2. Frequently Asked Questions About Bought Deals and Block Trades
3. Frequently Asked Questions About Block Trade Reporting Requirements
©
2013 M
orr
ison &
Foers
ter
LLP
| A
ll R
ights
Reserv
ed | m
ofo
.com
Block Trades, Bought Deals
and
Confidentiality Marketed
Public Offerings
November 2013
NY2 726410
2
Market Trends
3
Market Trends • Privates have become more “public”
• In an effort to improve access to capital and minimize liquidity discounts, hybrid
techniques have become more important
• SEC’s Office of Risk Fin published a study in February 2012 (“Capital Raising in
the U.S.: The Significance of Unregistered Offerings Using the Regulation D
Exemption”) which showed that from 2009 to 2011 there was a shift from public to
private or hybrid offerings
• The shortened Rule 144 holding period, and the popularity of PIPE transactions,
and other hybrids contributed to the rise of private or targeted offering techniques
• JOBS Act changes to general solicitation rules will contribute even further to
making privates even less private
4
Market Trends (cont’d) • Perhaps more importantly, public offerings are becoming less
“public”
• Due to market developments, such as heightened volatility and concerns about
investor front-running, fewer public offerings involve traditional marketing
• Most public offerings begin as confidentially marketed public offerings
• During 2013, we also have seen a resurgence of bought deal activity
5
Our traditional financing continuum
Private Hybrid Public
Conventional
private placements
Private placements
with trailing
registration rights
Traditional PIPEs
Structured PIPEs
Private equity lines
Registered direct
offerings
144A offerings
Underwritten
offerings
Pre-marketed (over-
the-wall)
underwritten
offerings
Bought deals
At-the-market
offerings
Equity shelf
programs
Rights offerings
Less Liquid More Liquid Liquid
6
Most Liquid
Current Continuum
Less Liquid
Unannounced Offerings Announced Offerings
• 506(b) offering • PIPE transaction • Registered Direct
offering • Bought deal • Confidentially
Marketed Public Offerings
144A Offering
• 506(b) offering • Crowdfunded
offering • Initial public
offering • Marketed follow-
on offering • At-the-market
offering
7
Market Trends (cont’d)
8
Market Trends (cont’d)
9
Market Trends (cont’d)
10
Market Trends (cont’d)
11
Market Trends (cont’d)
12
Market Trends (cont’d) • Overall, as the charts illustrate, companies rely on unannounced
deals (PIPEs, registered directs, CMPOs)
• In 2012, more than $29 bn in 770 equity offerings that were unannounced
• The same trends are evident in 2013 (to date)
• Reliance on unannounced deals in unlikely to abate
• As among deal formats, reliance on PIPE transactions has declined
significantly. More companies are eligible to use a Form S-3 for
takedowns (completed as registered directs or as underwritten
confidentially marketed public offerings)
13
Block trades, bought deals and CMPOs
• All involve sales of securities into an existing market
• All can be used for primary or for secondary shares
• All may be done as “take-downs” off of an effective shelf registration
statement
• All involve little “public” marketing
• Bankers may use these terms to describe very different transactions
14
Block Trades
15
Block trades: Background • A “trade” of a large quantity of stock usually consisting of at least
10,000 shares of stock
• Shares may be “restricted” securities or may be pursuant to a shelf
registration statement
• An investment bank may execute a block trade on an agency basis or
on a principal basis
16
Who uses block sales and why? Who?
• Issuer may sell through a block trade, but unlikely and not common
• Usually, block sales are used by sponsors, VCs, and other large
stockholders (often securityholders that acquired stock in an M&A
transaction) to sell down their position
Why?
• Cheaper than an underwritten transaction
• Effective execution for smaller amounts of stock
• Often an affiliate may not be able to meet the 144 requirements and
may choose to sell through block instead
17
Working a block • Block trade desk may or may not use “special selling efforts”
may sell into the market
may sell over the course of a few days
may have identified demand
18
Distribution, or not?
• A block trade may or may not be a “distribution” for
securities law purposes
• The intermediary should consider the following
• primary or secondary shares?
• if secondary, are these shares held by an affiliate?
• magnitude of the offering
• intended sales process (agency or principal; sales period; use of
special selling efforts)
19
Documentation • The intermediary may want a sales agency agreement (agented
sales) or an underwriting agreement
• Diligence defense
• May require issuance of a press release
20
The “4(a)(1½) Exemption”
21
The “4(a)(1½) exemption” • The Section 4(a)(1½) exemption has evolved in practice, without the
benefit of any official rulemaking.
• It is a hybrid consisting of:
• a Section 4(a)(1) exemption which exempts transactions by anyone other than an
“issuer, underwriter or dealer,” and
• a Section 4(a)(2) analysis to determine whether the seller is an “underwriter,” i.e.,
whether the seller purchased the securities with a view to a distribution.
• In 1980, the SEC recognized the section 4(a)(1½) exemption, which
although not specifically provided for in the Securities Act “[is] clearly
within its intended purpose,” provided that the established criteria for
sales under both sections 4(a)(1) and 4(a)(2) are satisfied.
22
When is the “4(a)(1½) exemption” used?
• The Section 4(a)(1½) exemption can be used by institutional
investors to resell restricted securities purchased in a private
placement.
• The Section 4(a)(1½) exemption can also be used by affiliates for the
sale of control securities when Rule 144 is unavailable.
• It is still used for resales to accredited investors.
23
How are 4(a)(1½) sales structured? • In a Section 4(a)(1½) transaction:
• the seller must sell in a “private” offering to an investor that satisfies the
qualifications (for example, sophistication, access to information, etc.) of an
investor in a Section 4(a)(2) private offering, and
• the investor must agree to be subject to the same restrictions imposed on the
seller in relation to the securities (for example, securities with a restricted legend).
• Given that a Section 4(a)(1½) transaction seeks to replicate a
statutory private placement, it is our view that general solicitation
cannot be used in connection with this transaction.
24
Common practices for 4(a)(1½) sales • Because the 4(a)(1½) exemption seeks to recreate the conditions
that enabled the original private placement, a number of common
practices have emerged among practitioners in connection with
4(a)(1½) transactions, including:
• purchaser agrees to resale restrictions and make representations and warranties
regarding its sophistication and investment intent;
• Inquiring into the identity of the purchaser, including its financial condition, in order
to assess the likelihood that the purchaser will be able to hold the securities for
investment and not resell prematurely;
• legal opinions confirming the view that no registration is required;
• restrictive legends on the securities to alert the purchaser to the restricted nature
of the securities;
• stop transfer instructions from the issuer;
• reselling the restricted securities in large minimum denominations or investments
to bolster the purchaser’s claims regarding its sophistication and investment
intent.
25
Summary: what should you ask? • Who is selling? What is their status?
• Do they have a resale registration statement?
• How long have they held?
• Why are they selling?
• How will shares be sold? Over what period of time? In what
manner?
• Has fee been negotiated and documented?
26
Bought Deals
27
Bought deals • Firm commitment transaction (sometimes referred to as an
“overnighter”) wherein the underwriter purchases the securities from
the issuer without pre-marketing
• An issuer or a selling securityholder may need certainty of execution, and, as a
result, may prefer a bought deal to a CMPO
• Generally, a bought deal will only be feasible for a WKSI
• Usually, it is easier to execute a bought deal following the filing of a 10-Q or 10-K
when the issuer’s disclosures are current
• The underwriter must use its best efforts to re-sell the securities
(once purchased)
28
Process • An underwritten public offering (unlike a block trade, which may be
agented, and may involve restricted securities). The issuer and the
underwriter enter into an underwriting agreement containing all of the
“standard” provisions
• No doubt that there is a “distribution” (unlike a block trade, which may
or may not be a distribution)
• The underwriters undertake customary diligence for a shelf
takedown. The process is abbreviated, and, as a result of the
compressed time period, caution should be exercised.
29
Process (cont’d) • The issuer may “bid” out the deal
• Usually, in the context of a deal that is being bid out, the issuer will have
designated underwriters’ counsel. In advance of notifying potential bidding banks,
the issuer and its counsel will have worked with designated underwriters’ counsel
to obtain a draft comfort letter, negotiate an underwriting agreement, and confirm
that other deliverables will be available at closing
• There is no pre-announcement. The deal is announced once the
underwriting agreement is executed. Investors would not be able to
front-run the transaction.
Sometimes, the issuer may announce the deal after market close and keep it open
until before market open the following day.
30
Communications • Typically, the transaction will be announced promptly after market
close through the issuance of a launch press release that will comply
with Rule 134
• After the launch, it remains critical to maintain the confidentiality of
the price that the underwriters have agreed to pay the issuer (or the
selling security holder) for the securities.
31
Trading • After completion of a bought deal (completion in this context means
the sale by the issuer to the underwriter), the underwriter will re-sell
the securities
the underwriter may re-sell all of the securities at a fixed price (that price may
vary)
the underwriter may re-sell the securities at varying prices
the underwriter may hold shares in a proprietary account
the underwriter may allocate to asset management accounts (subject to
compliance with applicable policies)
• Communications and trade reporting may vary depending on the
underwriter’s execution
32
Variable re-offers • The issuer will disclose that the underwriter may vary the price at
which the securities are offered to the public and sell the securities
from time to time in various types of transactions. There is no
announcement at pricing of a single price paid to the issuer because
the underwriters may still be long the securities.
• Underwriters engaged in a variable price re-offer should include the
following language in both the preliminary (if any) and final
prospectus supplements and in any launch or pricing press release:
• Cover: The underwriter may offer the common stock from time to time in one or
more transactions in the over-the-counter market or through negotiated
transactions at market prices or at negotiated prices. See “Underwriting.”
• Generally, the cover page will not be set up with the traditional fee table
(disclosing the gross proceeds number, minus underwriter’s spread).
33
Variable re-offers (cont’d) • Underwriting section: The underwriter proposes to offer the shares of common
stock from time to time for sale in one or more transactions in the over-the-counter
market, through negotiated transactions or otherwise at market prices prevailing at
the time of sale, prices related to prevailing market prices or negotiated prices,
subject to receipt and acceptance by it and subject to its right to reject any order in
whole or in part. In connection with the sale of the shares of common stock
offered hereby, the underwriter may be deemed to have received compensation in
the form of underwriting discounts. The underwriter may effect such transactions
by selling shares of common stock to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriter and/or purchasers of shares of common stock for whom it may act
as agent or to whom it may sell as principal.
• Press release: The underwriter may offer the common stock from time to time in
one or more transactions in the over-the-counter market or through negotiated
transactions at market prices or at negotiated prices.
34
Pricing information • After the overnight marketing, underwriters may express confidence
that they have allocated the entire block of securities to accounts.
However, the pricing announcement should be deferred until all
investor orders have been confirmed
• A gross proceeds number may be calculated and disclosed but this
would not inform the market of the price paid by the underwriters
• The underwriting discount and the fixed price are not in and of
themselves material
35
Unsold allotments • An underwriter in a bought deal may not be able to re-sell all of the
securities it has purchased immediately. In order to deem the
distribution completed, the underwriter would have to move the
securities to a proprietary account
• The securities would then be considered an unsold allotment
• The underwriter will need a current prospectus to resell any unsold
allotment
• It is especially important in the context of a bought deal to focus on
the provisions in the underwriting agreement requiring the issuer to
keep the prospectus current, as well as on the disclosure in the
“Underwriting” section of the prospectus
36
Wall-Crossed Deals
37
Pre-Marketed Offerings: Methodology
• A proposed offering is confidentially marketed prior to the public
announcement of the offering to a select group of institutions,
including:
Mutual funds and hedge funds that are among the issuer’s largest shareholders
Private equity investors
Sovereign wealth funds
• For SEC-registered offerings, confidential pre-marketing should not
be done without an effective shelf registration statement in place.
38
Unannounced offerings • Compressed time period necessitates special diligence and
disclosure procedures
• Requires careful coordination on the part of the working group
• Often raises challenging Reg FD questions
39
Pre-marketing public offerings • Assumes that the issuer already has an effective shelf registration
statement
Will the eventual offering be a public or a private offering?
Is the issuer’s disclosure grid current? is it necessary to file updated risk factors?
is it necessary to provide guidance on the current quarter? on write-downs? on
anticipated ratings actions?
What is the best approach for updating the issuer’s disclosures (if needed)?
Plan ahead all of the required (or desired) filings (e.g., these may include: 8-K,
preliminary prospectus supplement or FWP, term sheet, press release, final
prospectus supplement)
40
Material non-public information • What information is being shared with potential purchasers?
• What is the anticipated duration of the marketing period?
• When will information shared with potential purchasers be publicly disclosed? When will the information become stale? Covenant to file a Form 8-K
“Standstill” agreement
41
Pre-marketing public offerings From the issuer’s perspective:
• Consider issuer’s Reg FD policy
• Consider trading windows/blackout period policy
• Consider whether there will be any insider participation
42
Pre-marketing public offerings (cont’d)
From the financial intermediary’s perspective:
• Consider length of the marketing process
• Who will be involved in the marketing effort? (consider “Best
Practices”)
• Trading lists
• Selling restrictions
• Confidentiality agreements
43
Why a pre-marketed offering? • Why a confidentially marketed public offering?
• Wider distribution: An advantage of a registered direct offering is that it is marketed in a targeted manner. However, that often means that the offering is not as widely distributed as other public offerings, in which case a pre-marketed public offering may be attractive (it can be opened up to retail investors).
• 20% rule: If an issuer anticipates offering and selling a number of shares that exceeds 20% of the total shares outstanding prior to the offering, and those shares will be sold at a discount, a registered direct offering may not be considered a “public offering” under the rules of the applicable exchange; thus presenting shareholder vote issues under the 20% rule. A pre-marketed public offering may be an attractive alternative because it is underwritten (important for NASDAQ) and in the second (public) stage can be opened up to a broader universe of offerees.
• Perceived better pricing: Many issuers still view an underwritten offering to be the most desirable financing alternative.
• Underwriter can stabilize or over-allot (if it chooses to do so): Depending on market conditions, this may be important.
44
Fiction/fact scenarios • Fiction: A pre-marketed offering involves widespread marketing and
solicitation of investors like other public underwritten offerings.
• Fact: Yes and no. The first stage of the process involves confidential marketing
prior to the public announcement of the offering to a select group of institutions.
Only after this announcement, will the underwriters commence a more widespread
marketing effort which culminates in an underwritten public offering.
• Fiction: Investment banks should only contact up to 50 investors during the
pre-marketing phase.
• Fact: Provided that the bank has procedures that are effective in wall crossing
investors, there is no limitation on the number of offerees.
• Fiction: An investment bank can contact investors on behalf of a well-known
seasoned issuer (WKSI) before the WKSI has filed an automatic shelf
registration statement under SEC Rule 163.
• Fact: Rule 163 only permits the WKSI to make offers prior to the filing of an
automatic shelf registration statement. The SEC proposed to amend Rule 163 in
2009 to permit investment banks to approach potential investors in a WKSI
offering prior to the filing a registration statement, but did not adopt any final rules.
45
Fiction/fact scenarios (cont’d) • Fiction: In the pre-marketing phase, investors may be provided material,
non-public information (“MNPI”) regarding the issuer/offering.
• Fact: Yes, provided that certain restrictions are imposed on the investors:
• Wall-crossed investors must agree to keep the MNPI confidential.
• Wall-crossed investors must agree not to trade while in possession of the
MNPI.
• Fiction: The investor is permanently subject to the confidentiality undertaking
and covenant not to trade.
• Fact: No. Often, investors request that the issuer file a Form 8-K disclosing the
financing within a certain period of time. Once a press release is issued, the
investors and other potential investors contacted by the placement agent are
released from their confidentiality undertakings and accompanying trading
restrictions.
• Fiction: Merely contemplating an offering is “material” information and
requires a cleansing press release.
• Fact: It depends. Counsel should consider and discuss in advance.
46
Fiction/fact scenarios (cont’d) • Fiction: Once indications of interest have been obtained, the issuer
files a press release with disclosure and selling documents.
• Fact: That is correct, however, this can also be in the form of a free writing
prospectus, a current report on Form 8-K, or a preliminary prospectus
supplement.
• Fiction: A pre-marketed offering involves a lengthy roadshow.
• Fact: No, typically the widespread marketing effort involves a short time period,
often from the market close to the following morning.
• Fiction: The underwriters may not further syndicate the offering.
• Fact: Not true. The underwriter may include co-managers or syndicate members
in the second stage of the distribution.
• Fiction: From the investment bank’s perspective, additional attention
must be given to whom will be involved in the marketing effort.
• Fact: Yes. Investment banks should implement “Best Practices.”
47
Compliance concerns • The SEC remains quite focused on the policies and procedures that
investment banks have developed to handle “unannounced deals”
(such as PIPE transactions, registered direct offerings, and CMPOs)
• The SEC’s Office of Compliance, Inspection and Examinations
(OCIE) published a report assessing information wall practices at
investment banks
• The report noted heightened concerns with communications relating to
unannounced deals
• As a result, investment banks should continue to review and refine their practices
for wall crossing investors
• Similar concerns also have been surfaced in connection with the
SEC’s recent enforcement actions related to Reg M Rule 105
48
Cuban case Mark Cuban SEC enforcement (N.D. Tex.):
• Issuer’s CEO informed Cuban – major stockholder – of a proposed PIPE offering.
• Later that day, Cuban sold his entire holding in the company, avoiding a $750 loss.
• 5th Circuit Court of Appeals:
• Liability for insider trading can exist independent of a formal relationship where
sophisticated parties enter into an agreement (1) to maintain confidentiality and
(2) to abstain from trading.
• Jury Trial:
• No illegal insider trading, as the SEC failed to prove that Cuban (1) undertook a
duty of confidentiality with respect to the planned PIPE or (2) agreed to abstain
from trading.
• Absent these limitations, Cuban was free to trade on the information.
• Takeaway:
• When discussing planned PIPEs with investors, issuers should insure that the
investors agree both to maintain confidentiality and to refrain from trading on the
information.
F R E Q U E N T L Y A S K E D Q U E S T I O N S
A B O U T B O U G H T D E A L S A N D B L O C K T R A D E S
Bought Deals
What is a “bought deal”?
In a typical underwritten offering of securities, the
underwriters will engage in a confidential (in the case of
a wall-crossed or pre-marketed offering) and/or a public
marketing period (which may be quite abbreviated) to
build a “book” and price the offering of securities. In a
traditional underwritten offering, the underwriters will
have an opportunity to market the offering and obtain
indications of interest from investors before the
underwriters enter into the underwriting agreement
with the issuer.
By contrast, in a “bought deal” (sometimes also
referred to as an “overnight deal”), the issuer usually
will establish a competitive “bid” process and solicit
bids from multiple underwriters familiar with the issuer
and its business. The bidding underwriters will be
given a short period of time in which to bid a price at
which they are willing to purchase the issuer’s
securities. A bidder in a bought deal will not have had
an opportunity to conduct any marketing effort before it
provides the bid price and agrees to enter into a firm
commitment to purchase the securities from the issuer.
The securities will be issued in a registered public
offering and may be offered by the issuer (primary
shares) and/or selling stockholder(s) (often affiliate(s))
of the issuer (secondary shares). The bought deal
process will be substantially the same in either case.
Given that the underwriters must agree to a price in
advance of conducting any marketing, a bought deal
entails significant principal risk. As a result,
underwriters in bought deals will negotiate a significant
discount, to offset the risk when purchasing the
securities from the issuer or selling stockholder(s).
Underwriters also may form a syndicate for a bought
deal so that each firm bears only a portion of the risk.
What happens if the underwriters do not sell the
securities?
If the underwriters cannot sell the securities, they must
hold them and sell them over time. This is usually the
result of the market price of the securities falling below
their public offering price, resulting in the underwriters
losing money. Furthermore, having to hold the
securities will often also use up a portion or all of the
underwriters’ available regulatory capital, which could
probably otherwise be put to better use, as most
underwriters are not typically in the business of
purchasing new issues of securities.
2
If an underwriter does not sell the securities and holds
them in a proprietary account, it will not be limited to
the passive market making allowed under Section 103 of
Regulation M. However, it may be subject to further
prospectus delivery requirements along with potential
liability under Section 11 of the Securities Act of 1933, as
amended (the “Securities Act”), upon the resale of such
securities.
Why would an issuer choose to pursue a bought deal
over a typical underwritten offering?
An issuer may choose a bought deal because it can be
accomplished quickly. The issuer does not publicly
announce its intention to offer securities until it receives
a definitive commitment from the underwriters to
purchase the securities. As a result, in a bought deal,
there is little possibility for investor front-running and,
as a result, an issuer may believe that it will obtain
better pricing. An issuer may prefer a bought deal over
a confidentially marketed public offering because it may
not be inclined to bear price risk and may need certainty
of execution. However, the issuer typically will be
asked to accept a significant discount to the prevailing
closing price of its securities in a bought deal, and
bought deals generally are only feasible for issuers that
are well-known seasoned issuers (“WKSIs”), as defined
in Rule 405 under the Securities Act, with highly liquid
stocks. Otherwise, underwriters likely will not feel
comfortable quoting a fixed price.
Bidding underwriters may be somewhat aggressive in
bidding, but, given the risks, the bidding underwriters
will still bid at a discount to the prevailing market price
for the stock in order to mitigate their execution risk.
In the case of secondary shares, a selling stockholder
with a substantial position may choose to liquidate its
position through a bought deal in order to mitigate its
risk and obtain a set price. Also, a significant
stockholder, such as a financial or private equity
sponsor, may want to dispense with its position through
an underwritten offering as the other liquidity
alternatives may provide less certainty.
What does an issuer need to do in order to execute a
bought deal?
Generally, in order to execute a bought deal, an issuer
must have an effective shelf registration statement. If
the issuer does not have an effective shelf registration
statement, it may still be able to execute a bought deal,
provided that it is a WKSI, since a WKSI can file an
immediately effective automatic shelf registration
statement on Form S-3 without review by the Staff of
the Securities and Exchange Commission (the “SEC”).
Non-WKSI issuers without an effective shelf registration
statement, by contrast, will not be in a position to
consider a registered bought deal because they will not
typically have the time to wait for a new Form S-3
registration statement to become effective. However, an
unregistered Rule 144A-type offering might be executed
as a bought deal, although this option usually will be
considered only by foreign (non-U.S.) issuers. For more
information, see our Frequently Asked Questions About
Shelf Offerings, available at:
http://www.mofo.com/files/Uploads/Images/FAQShelf
Offerings.pdf.
Next, the issuer must ensure that it has sufficient
capacity under its shelf registration statement to execute
the bought deal. Again, qualifying as a WKSI here will
prove convenient as a WKSI does not need to specify an
aggregate dollar amount or number of securities when
filing a shelf registration statement, as a WKSI can rely
3
on the “pay-as-you-go” provisions of Rules 456(b) and
457(r) under the Securities Act to pay fees at the time the
final prospectus supplement for the offering is filed
under Rule 424(b) under the Securities Act. Even if the
WKSI shelf registration statement specifies a maximum
deal size and there is insufficient remaining capacity, a
WKSI can simply file a new, immediately effective
automatic shelf registration statement. An issuer that is
not a WKSI but is still Form S-3 eligible can upsize its
existing shelf registration statement if there is
insufficient capacity using the immediately effective
short-form registration statement pursuant to Rule
462(b) under the Securities Act. However, this option
can only be used once per shelf registration statement
though, and also is limited to 20% of the unused
capacity of the original shelf registration statement.
An issuer should prepare, with the assistance of
counsel, a prospectus supplement (to the base
prospectus included in the shelf registration statement)
that can be shared with bidding underwriters. Counsel
will work with the issuer to ensure that the issuer’s
public disclosures are current and that no updating of
risk factors or other information is necessary in
connection with the proposed offering. The issuer also
will need to contact its auditors in advance so that the
auditors are well aware of the issuer’s plans and can be
in a position to deliver a comfort letter to the
underwriters at pricing. Execution will be simplified if
the issuer has designated underwriters’ counsel.
Designated underwriters’ counsel may be contacted in
advance by the issuer and its counsel in advance of any
contact having been made with the potential
underwriters so that designated underwriters’ counsel
can update its due diligence and work with the issuer
and its counsel on the underwriting agreement, the
prospectus supplement and the comfort letter.
Can a bought deal be executed if no registration
statement is available?
While most bought deals are conducted on a registered
basis using an effective shelf registration statement, it is
possible for U.S. issuers to execute a bought deal on an
exempt basis when an effective registration statement is
not available. The mechanics of the bought deal will
generally remain the same. Due to the nature of the
exempt offering, the universe of available purchasers for
an exempt bought deal will be limited to accredited
investors (for Regulation D private placements),
qualified institutional buyers (for Rule 144A offerings),
and “non-U.S. persons” (for Regulation S offerings).
Furthermore, as with any other unregistered offering,
the securities will be “restricted securities” subject to
restrictions on transfers and resales. This may force the
issuer to provide a bigger discount due to the lack of
liquidity.
Are there times when it is easier to execute a bought
deal?
Generally, it is easier to undertake a bought deal
immediately or shortly after an issuer’s earnings
announcement and the filing of its latest quarterly
report on Form 10-Q or annual report on Form 10-K in
order to coincide with a trading window in the issuer’s
insider trading policy (in the case of a secondary trade),
and to avoid the need to update disclosure prior to
launch, as the issuer’s disclosures will be current.
Waiting until the issuer's earnings announcements and
the filing of the Forms 10-K or 10-Q will also make it
easier for the underwriters to conduct due diligence and
4
for the underwriters to obtain a comfort letter from the
issuer’s auditors.
Documentation for Bought Deals
What is included in an issuer’s bid package?
When contacting potential underwriters to solicit bids
for a bought deal, an issuer will provide a bid letter
specifying the terms of the transaction and specifying
the deadline for bid submissions. An issuer also will
provide:
a copy of the proposed underwriting
agreement;
a draft of the comfort letter from the issuer’s
auditors (or assurance that a comfort letter in
the customary form will be provided); and
a draft of the prospectus supplement.
The bid package may also include a current investor
presentation, as well as a “launch” press release. Along
with the bid package, the issuer should reassure the
bidding underwriters that it is not providing or sharing
any material non-public information with the
underwriters (other than the fact that the issuer may
undertake a bought deal).
What documents are used to execute a bought deal?
The documentation for a bought deal is very similar to
that used in any underwritten offering. The issuer
and/or the selling stockholder(s), as applicable, will
enter into an underwriting agreement with the
underwriters. As discussed above, due to the
accelerated timing of a bought deal, the issuer must
have an effective shelf registration statement. The
issuer and its counsel will prepare a preliminary
prospectus supplement and a launch press release.
After launch, the press release will be filed or furnished
on Form 8-K. After the transaction prices, the final
prospectus supplement will be filed as well, and the
underwriting agreement will be filed as an exhibit to a
Form 8-K.
In connection with the offering, the underwriters will
receive a standard comfort letter from the issuer’s
auditors, standard legal opinions from issuer’s (and, if
applicable, selling stockholders’) counsel, and a 10b-5
negative assurance letter from issuer’s counsel and from
underwriters’ counsel. If the selling stockholders are
affiliates, they will often provide to the underwriters a
representation letter to the effect that the selling
stockholders are not in possession of any material non-
public information that they are using to make their
decision to execute the bought deal.
In a variable price re-offer transaction, there are a few
specialized changes to the documentation that
underwriters should keep in mind. First, the cover page
of the preliminary prospectus supplement will not be
set up to disclose the gross proceeds of the offering,
minus the underwriters’ discounts and commissions.
The table that is included in the prospectus supplement
for a typical underwritten offering to show these
amounts both on an aggregate and per-share basis is
omitted. Instead, the issuer generally discloses (1) the
per share price due to it from the underwriters, and (2)
the fact that the underwriters will re-offer the securities
to the market at a range of varying prices. A longer
explanation of variable price re-offer also is included in
the underwriting section of the prospectus supplement.
If the underwriters convey final pricing terms in
writing when they confirm final orders (through what is
often referred to as a “Rule 134 release”), then that
5
release should also disclose the variable price nature of
the transaction and the highest clearing price to the
market. The transaction will typically close like most
transactions, on a T+3 or T+4 basis.
Due Diligence for Bought Deals
How is due diligence conducted in a bought deal?
A bought deal is subject to the same disclosure and
liability concerns as any traditional underwritten
offering. Therefore, despite the time pressure imposed
on the offering process, the issuer and the underwriters
will need to ensure the accuracy and completeness of
the disclosure prior to pricing the offering.
Generally, underwriters will only participate in
bought deals for issuers with which they are (as an
institution) quite familiar. The underwriters may
provide research coverage on the issuer, may have
participated in prior offerings by the issuer, or may
have conducted non-deal roadshows for the issuer. This
familiarity will be essential in order for the underwriters
to participate in the process and complete their due
diligence quickly and efficiently.
As soon as an underwriter becomes aware of the
potential offering and decides to submit a bid to the
issuer, then that underwriter should commence its due
diligence. The issuer will make its management
available for a standard business due diligence call, and
the auditors make themselves available for an auditors’
due diligence call. Designated underwriters’ counsel
will have conducted periodic legal due diligence or may
be in the midst of conducting their legal due diligence.
Underwriters’ counsel generally will undertake
standard “shelf” or periodic due diligence, which
typically consists of reviewing the issuer’s public filings,
reviewing exhibits to the public filings, reviewing press
releases, determining whether there have been any
changes to the issuer’s ratings, conducting a due
diligence call covering regulatory and litigation matters
with the issuer or its counsel, and reviewing minutes
and other corporate documents.
What materials should a bidding underwriter review?
A bidding underwriter should review carefully all of
the materials in the bid package, and should consult
with either designated underwriters’ counsel or, if
counsel is not designated, issuer’s counsel, to verify that
the underwriting agreement is in customary form, that
there are no exceptions or qualifications in the comfort
letter, and that issuer’s counsel and designated
underwriter’s counsel both will provide standard legal
opinions and 10b-5 negative assurance letters. The
bidding underwriter will also want to confirm that the
issuer’s public disclosures are current.
Marketing for Bought Deals
Do bought deals entail any marketing before launch?
It depends. In the conventional bought deal, the issuer
will set out the bid process, the bidders will submit their
information, business and accounting due diligence
calls will take place, and the winning underwriters will
be chosen. Promptly thereafter, the issuer and the
underwriters will sign the underwriting agreement.
Sometimes, the underwriters may conclude that better
execution requires some measure of pre-marketing. In
this case, the issuer and the underwriters will agree that
the underwriters can conduct limited pre-marketing to
investors that have been “wall-crossed.” There are
6
various ways in which the underwriters can gauge the
market to determine whether certain investors will
participate in the offering. If the underwriters do not
wish to restrict investors with whom they speak, they
can take a no-names approach, and just talk to investors
about securities of an issuer in a particular industry or
sector having a certain market capitalization. There will
be no specific references made to the issuer of the
specific deal the underwriters have bought or intend to
buy.
If the underwriters wish to obtain a more concrete
indication of interest from investors about the particular
bought deal, the underwriters will have to “wall-cross”
the investor. If the investor agrees to be taken “over the
wall,” the underwriters will send the investor an email
confirming its willingness to keep any information
conveyed strictly confidential and the investor will be
required to send a return email acknowledging the
confidentiality agreement. In some cases, formal
confidentially agreements or non-disclosure agreements
may be signed for the benefit of the issuer and the
underwriters.
The length of this pre-marketing period may vary.
Once the issuer has chosen the underwriters, it may
agree that the underwriters may reach out to investors
for a few hours prior to the issuance of the launch press
release. The underwriters should follow their typical
approach for wall-crossing investors.
How is a bought deal launched?
A bought deal usually will be announced promptly after
market close through the issuance of a launch press
release. The launch press release is intended to comply
with Rule 134 under the Securities Act. Rule 134
enables an issuer with an effective registration
statement to issue a press release that includes certain
limited information related to an offering without the
communication being deemed to be a prospectus or an
issuer free writing prospectus. This Rule 134 release
also simultaneously satisfies the requirements of
Regulation FD, which requires an issuer to publicly
disclose any material, non-public information
simultaneously with its intentional disclosure to the
financial community at large. A bought deal may or
may not on its own constitute a material development.
An issuer would be wise to satisfy Regulation FD with a
press release, particularly one concurrently filed on a
current report on Form 8-K, rather than assume that the
bought deal is not material.
Sometimes an issuer will use an issuer free writing
prospectus under Rule 433 under the Securities Act to
launch a bought deal, though this is less common. The
issuer should ensure that whatever approach taken
properly conveys all of the information required to be
disclosed to investors under the federal securities laws.
The issuer and the underwriters may agree to use a
preliminary prospectus supplement (to the base
prospectus included in the shelf registration statement).
A preliminary prospectus supplement is not required,
but it may be useful in order to convey recent
developments or provide new or additional information
about the issuer. The preliminary prospectus
supplement will not contain pricing information;
however, it may state whether the offering is structured
as a fixed-price deal or a variable re-offer deal. The
preliminary prospectus supplement must be filed
within 48 hours of first use.
After the launch of the transaction, it remains critical
to maintain the confidentiality of the price the
underwriters have agreed to pay the issuer and/or
7
selling stockholder(s) for the securities. If an investor
obtains this price information, the investor might
attempt to extract better pricing from the underwriting
syndicate, which may affect deal execution. For this
reason, the price paid by the underwriters should not
appear in any press release at launch or in the
preliminary prospectus supplement.
Pricing for Bought Deals
What is a fixed-price offering?
When filing its shelf registration statement, it is
impossible for an issuer to know the exact method of
distribution that will be used by underwriters in future
takedowns. Therefore, the issuer should include broad
language in the base prospectus (included in the shelf
registration statement) so that at the time of a takedown
there will be no need to update this information.
Issuers typically use the following language for this
purpose:
We may sell the securities covered by this
prospectus in any of three ways (or in any
combination): (1) to or through underwriters or
dealers; (2) directly to one or more purchasers;
or (3) through agents.
We may distribute the securities covered by
this prospectus from time to time in one or
more transactions: (1) at a fixed price or prices,
which may be changed from time to time; (2) at
market prices prevailing at the time of sale; (3)
at prices related to the prevailing market
prices; or (4) at negotiated prices.
In a fixed-price offering, the underwriters purchase
the shares from the issuer and re-offer the securities to
the public at one fixed price, also referred to as a
“clearing price.” While the underwriters expect to sell
the entire offering at the fixed-price, the plan of
distribution for the offering will often contain language
allowing the underwriters to change the pricing at any
time without notice, in case the underwriters find
themselves with securities they cannot sell at the
clearing price. This situation, where the underwriters
expect to encounter difficulties selling all of the
securities, is often referred to as a “sticky deal.”
What is a variable price re-offer?
In a variable price re-offer, the issuer discloses that the
underwriters may vary the price at which the securities
are offered to the public and sell the securities, from
time to time, in various types of transactions. In a
variable price re-offer, there is no announcement at
pricing of a single price paid to the issuer because the
underwriters may still be “long” the securities at that
point.
The underwriters may vary the price at which they
offer the securities, take the securities into a proprietary
account (unlikely), or place them in managed accounts.
Because of the proprietary risk taken by the
underwriters, these transactions present significant deal
and pricing risk for underwriters. Pre-announcement, it
is important that precautionary measures are taken to
prevent information leaks that can lead to shorting
activity and harm the transaction. Participants should
be advised and reminded of their obligations to keep
matters confidential.
8
Are there any restrictions on the issuer once the bought
deal is launched?
Typically, in order to assist the underwriters in
distributing the securities they purchased in the bought
deal, the issuer, along with certain company insiders
and any selling stockholder(s), will agree not to sell any
of the issuer’s securities for a certain period of time after
the offering, usually ranging from 30 to 90 days.
When is pricing information for a bought deal disclosed
to the public?
After the end of the overnight (or otherwise agreed-
upon) marketing period, underwriters often will
express confidence that they have allocated the entire
block of securities to investors (or close to it), in which
case the issuer will be eager to announce the “pricing”
of the transaction. However, announcement of pricing
should not be made until investor orders have been
confirmed (after which the underwriters’ risk is greatly
reduced).
How is pricing information shared with the public?
Issuers are not specifically required by rule to publicly
announce the results of an offering prior to filing the
final prospectus supplement. However, there may be
Regulation FD concerns if the clearing price is known
only to a limited number of market participants.
Including the clearing price in a pricing press release
will address any Regulation FD concerns.
Furthermore, the New York Stock Exchange (the
“NYSE”) requires a pricing press release if certain of the
pricing terms are considered to be material
information.1 Therefore, an issuer should issue a
pricing press release to ensure that the NYSE does not
raise issues after the fact.
Underwriters often will want to withhold pricing
information as long as possible, particularly if they have
not yet sold their entire position. If an issuer presses to
disclose the proceeds of the offering, a compromise may
be reached by including in a pricing press release the
amount of gross proceeds before deducting
underwriting discounts and commissions and offering
expenses. This amount would be calculated based on
the closing trading price on the launch date and the
number of shares sold, but would not inform the market
of the price paid by the underwriters.
Counsel generally will take the view that the
underwriting discounts and commissions and the fixed
price are not in and of themselves material, and that the
issuer has shared with the market all of the information
that may be deemed material (e.g., the size of the deal,
certainty regarding the deal, timing of the deal, and,
possibly, gross proceeds).
When will the final prospectus supplement be filed?
While in a typical underwritten offering, the final
prospectus supplement is filed within a day of pricing,
in a bought deal, the filing of the final prospectus
supplement usually is delayed as long as possible. The
final prospectus supplement must be filed within two
1 Section 202.05 of the NYSE’s Listed Company Manual states:
“A listed company is expected to release quickly to the
public any news or information which might reasonably be
expected to materially affect the market for its securities.
This is one of the most important and fundamental purposes
of the listing agreement which the company enters into with
the Exchange.”
However, the NYSE usually leaves the ultimate determination
of materiality with the company itself.
9
business days of first use, in which case the deal team
will have 48 hours during which the market may still be
unaware of the pricing details.
In the case of a variable price re-offer, the final
prospectus supplement also will contain the amount
paid by the underwriters, and filing also may be
delayed (in this case, it should be filed within two
business days of the pricing of the offering, but not
before).
Block Trades
What is a block trade?
A block trade is defined as an order or trade submitted
for sale or purchase of a large quantity of securities:
generally 10,000 shares or more (not including penny
stocks) or a total market value of $200,000 or more in
bonds. The shares “traded” may be restricted securities
or control shares, or may be sold off of an effective shelf
registration statement. Certain types of block trades
need to be reported to the Financial Industry Regulatory
Authority, Inc. (“FINRA”) and the securities exchanges.
For more information, see our Frequently Asked
Questions About Block Trade Reporting Requirements.
Who is likely to pursue a block trade?
An issuer may sell its securities through a block trade;
however, that is an unlikely and uncommon scenario.
Institutional investors, including mutual funds and
pension funds, often execute block trades, while
individual investors usually do not. Block trades also
are typically used by financial or private equity
sponsors, venture capitalists, and other large
stockholders who may have acquired large quantities of
securities in an M&A or other transaction and wish to
sell down their position.
An investment bank may execute a block trade on an
agency or best efforts basis, or on a principal basis.
Often an affiliate of the issuer may choose to sell
securities through a block trade as it may not be able to
meet the requirements of Rule 144 under the Securities
Act (“Rule 144”) for the public resale of its securities
(e.g., one-year holding period, volume limitation, etc.).
Unlike Rule 144, there is no volume limitation or
prohibition on soliciting buyers applicable to a block
trade, making it an enticing option for an affiliate that
cannot use Rule 144 for resales.
Why would one pursue a block trade?
A block trade offers certain advantages to the selling
stockholder. Many securities exchanges permit large
block trades to be privately negotiated and transacted
off-exchange. Upon being reported to the relevant
exchange, the transaction becomes centrally cleared,
and the parties to the transaction no longer have to
worry about other parties affecting the trade. A block
trade also allows a party with a desire to engage in a
large-sized transaction to access a different and often
larger investor base than regular electronic trading. In
addition, block trades are often cheaper than standard
underwritten transactions, and are fast and effective for
smaller amounts of stock than are typically offered in an
underwritten transaction.
10
“Distributions” for Block Trade Purposes
Are block trades considered to be “distributions” under
the securities laws?
Block trades that are considered “distributions” under
the securities laws must be reported under the trade
reporting rules of FINRA and could subject the broker-
dealer executing the trade to liability as a statutory
underwriter under the Securities Act.
Section 2(a)(11) of the Securities Act defines an
underwriter as “any person who offers or sells for an
issuer in connection with the distribution of any
security” (emphasis added). For purposes of this
definition, the SEC has defined “issuer” broadly to
include any person directly or indirectly controlling or
controlled by the issuer or under common control with
the issuer. As a result, activities undertaken by a broker-
dealer on behalf of affiliates of an issuer (e.g., officers,
directors and 5% stockholders) may raise the same
concerns as those taken on behalf of the issuer.
Furthermore, one does not need to be engaged formally
as an underwriter or placement agent in order to incur
this potential liability. The broker-dealer’s relationship
to the transaction, the extent of its activities and its fees
determine whether it may be considered to be acting as
a statutory underwriter.
While this broad definition of an “underwriter” is fact-
specific, the SEC has routinely refused to make
determinations on specific cases, explaining that the
individual or entity in question is in a better position
than the SEC to determine its status. In addition, the
SEC has not included definitions in the Securities Act
for certain of the other terms used in Section 2(a)(11),
particularly, the term “distribution.” It is clear that only
when a “distribution” occurs can an underwriter be
involved.
Generally, the marketing and related activities
surrounding a block trade may not rise to the level
generally associated with a “distribution” under the
federal securities laws. The shares purchased and sold
often are placed quickly for a standard dealers’ fee,
without the use of sales documents and with little sales
effort by the broker-dealer. Further, these shares also
often are sold to relatively few institutional buyers who
already may have expressed an interest in obtaining
stock. However, under certain circumstances, block
trades may be considered a “distribution,” which has
the effect of exposing the broker-dealer to potential
liability as an underwriter.
The nature of the party for whom the broker-dealer is
executing the block trade may effect whether the
transaction is deemed a “distribution” of securities for
an issuer. A “distribution” may include a private
transaction as well as a public (pursuant to a
registration statement) transaction. As used in the
Securities Act, an “issuer” is defined to include the
issuer itself and its affiliates or control persons. In
executing a block trade on behalf of an issuer or on
behalf of an affiliate, a broker-dealer should consider
the factors discussed below and may wish to structure
its activities in a manner intended not to constitute a
“distribution.” However, if a broker-dealer is executing
a block trade on behalf of a third party (unrelated to the
issuer and not an affiliate or control person), depending
on the facts and circumstances, it may be more likely
than not that the transaction is not deemed to constitute
a “distribution.”
11
Does Regulation M provide any helpful guidance?
Regulation M, adopted by the SEC to curtail
manipulative practices by distribution participants,
provides some guidance for determining whether a
“distribution” exists. This guidance helps narrow the
broad scope of the definition of an underwriter by
limiting the situations in which that definition is
implicated.
Regulation M defines a “distribution” as “an offering
of securities, whether or not subject to registration
under the Securities Act, that is distinguished from
ordinary trading transactions by the magnitude of the
offering and the presence of special selling efforts and
selling methods.” This definition sets forth two criteria
to consider in determining whether activities give rise to
a distribution: (1) the magnitude of the offering and (2)
whether special selling efforts and selling methods are
used in connection with the offering. Presumably, if
these factors are absent, the transaction would be
considered an ordinary trading transaction and not a
“distribution.”
How does the magnitude of an offering help determine
whether a “distribution” exists?
In determining the magnitude of an offering, the SEC
looks to:
the number of shares being registered or sold;
the percentage that these shares represent of
the total outstanding shares of that issuer;
the issuer’s public float; and
the average trading volume of the issuer’s
securities.
All of these factors must be taken in context and it is
important to note that what may be a problematic fact
pattern for one issuer may not raise concerns with
respect to another issuer.
What are “special selling efforts” that a trading desk
may use in executing block trades?
Activities that may constitute special selling efforts and
selling methods might include a broker-dealer receiving
higher compensation than it ordinarily would receive
for normal trading transactions (or dealer activity), the
use by such broker-dealer of sales documents,
conducting a road show in connection with the
transaction, or holding investor meetings. Presumably,
if these factors are absent, the transaction would be
considered an ordinary trading transaction and not a
“distribution.”
The definition of a “distribution,” because it is based
on facts and circumstances, can lead to the same facts
being considered a “distribution” in one case but not in
another. Certain activities may constitute special selling
efforts or methods for one broker-dealer while for
another larger, established broker-dealer with an active
block trading desk, such activities may be in keeping
with its regular trading activities. For this reason, a
broker-dealer must analyze each situation not only on
its merits, but also in the context of the broker-dealer’s
regular activities.
Documentation and Marketing for Block Trades
What documentation is required for the execution of a
block trade?
Not all block trades will require the same
documentation. In cases where the broker-dealer is
executing the block trade on an agency or best efforts
basis, it may want a sales agency agreement or, in
12
certain cases, an underwriting agreement. This is less
common in cases where the broker-dealer is executing
the block trade on a principal basis. The underwriting
or sales agency agreement will contain certain stripped
down representations from the seller (including as to
valid title, no encumbrances and compliance with
securities laws). The underwriting or sales agency
agreement also will contain pricing and settlement
provisions and will likely contain an indemnity from
the seller to the broker-dealer.
If the block trade is considered a “distribution” for
purposes of the federal securities laws, then the broker-
dealer will want to have a due diligence defense
available to it to offset its potential liability as an
underwriter. If that is the case, then the broker-dealer
will need time to review the issuer’s public disclosures
and may ask the issuer to provide it with other
materials it wishes to review.
Sometimes law firms will be asked to provide legal
opinions, usually covering the seller’s corporate
authority, authority to sell the securities and valid title
to the securities. A broker-dealer also may request a no-
registration opinion, confirming that the block trade
does not need to be registered with the SEC. In
addition, investors in the block trade may be asked to
sign representation letters acknowledging, among other
things, the absence of offering documents, their
financial sophistication and any selling restrictions
applicable to the securities.
If the broker-dealer engages in marketing efforts for
the block trade, then it may become necessary for the
issuer to issue a press release to satisfy Regulation FD
requirements if the trade is considered material, or if
some market participants have been provided
information that others may not have.
Is there any marketing period for a block trade?
No. Generally there is no marketing for block trades, as
these trades are not usually considered “distributions”
and are not typically underwritten deals. Furthermore,
there is no traditional “road show” for a block trade and
any selling efforts would be targeted directly at a few
institutional investors. However, the disclosure
obligations for sales made through block trades are just
as rigorous as they would be in any typical
underwritten offering and the potential for liability
exists in block trades as well.
Block Trades and the Section 4(a)(1½) Exemption
What is the Section 4(a)(1½) exemption?
The Section 4(a)(1½) exemption provides a specific
exemption for the private resale of restricted or control
securities, and can be used to execute block trades. The
Section 4(a)(1½) exemption is useful for and popular
with investors because it permits the private sale of
restricted or control securities without having to rely on
the exemption from registration provided under Rule
144. Under Rule 144, a non-affiliate investor would
have to satisfy a six-month holding period and an
affiliate investor would have to satisfy a one-year
holding period and would be subject to certain volume
limitations and manner of sale requirements. However,
the Section 4(a)(1½) exemption does not impose such
holding period requirements, volume limitations or
manner of sale requirements.
The Section 4(a)(1½) exemption is a hybrid exemption
consisting of:
the exemption under Section 4(a)(1) of the
Securities Act (“Section 4(a)(1)”), which
13
exempts transactions by anyone other than an
“issuer, underwriter, or dealer,” and
the analysis under Section 4(a)(2) of the
Securities Act (“Section 4(a)(2)”) to determine
whether the seller is an “underwriter” (in other
words, whether the seller purchased the
securities with a view towards a
“distribution”).
Note that the exemption from registration under
Section 4(a)(1) is not available because it applies solely
to open market or public transactions by individual
security holders who hold neither restricted securities or
control securities. The exemption from registration
under Section 4(a)(2) is not available because it only
applies to transactions by an issuer not involving a
public offering (and not a selling stockholder).
In 1980, the SEC recognized the Section 4(a)(1½)
exemption, which, although not specifically provided
for in the Securities Act, clearly was within the intended
purpose of the Securities Act, provided that the
established criteria for sales under both Section 4(a)(1)
and Section 4(a)(2) are satisfied.2 However, the SEC has
since declined to provide further guidance through no-
action letter relief.
What types of investors can use the Section 4(a)(1½)
exemption?
Section 4(a)(1½) offerings can be used by a variety of
investors. The Section 4(a)(1½) exemption can be used
by institutional investors (typically sponsors, venture
capitalists and other large securityholders, who
2 See Employee Benefit Plans, Securities Act Release No. 6188,
19 SEC Docket 465, 496 n.178 (Feb. 1, 1980) (acknowledging the
existence of the Section 4(a)(1-1/2) exemption), available at:
http://www.sec.gov/rules/interp/33-6188.pdf.
acquired their securities in connection with M&A
transactions) to resell their restricted securities or
control securities. The Section 4(a)(1½) exemption also
can be used by affiliates to sell control securities when
the exemption under Rule 144 is not available. In
addition, the Section 4(a)(1½) exemption can be used for
resales to accredited investors.
How are sales utilizing the Section 4(a)(1½) exemption
structured?
In a Section 4(a)(1½) transaction (1) the seller must sell
in a “private” offering to an investor that satisfies the
qualifications of an investor in a Section 4(a)(2) private
offering,3 and (2) the investor must agree to be subject
to the same restrictions imposed on the seller in relation
to the securities (for example, receiving securities with a
restricted legend), in order to demonstrate that the seller
is not making the sale with a view towards distribution.
However, the investor would still be able to “tack” the
holding period of the seller for purposes of satisfying
the holding period requirement under Rule 144, if the
investor chooses to use the exemption from registration
under Rule 144 for a subsequent sale of the securities.
If a purchaser buys securities in a private placement
with the intent to resell the securities or serve as a
conduit from the issuer to other buyers, Section 4(a)(2)
would be violated, and the purchaser will be deemed to
have acted as an underwriter. If this occurs, the offering
may be deemed a public offering. Deeming the offering
to be public would require the issuer to register the
3 An investor in a Section 4(a)(2) offering must meet the
qualifications laid out by the U.S. Supreme Court in SEC v.
Ralston Purina, 346 U.S. 119 (1953). Under Ralston Purina,
purchasers must (1) be sophisticated and (2) have access to the
same information as would be available if the securities were
registered.
14
offering of the securities with the SEC and each and
every state into which it sold its securities.
Section 4(a)(1½) offerings are often structured in the
form of a block trade, where the seller engages a
financial intermediary to help sell the securities as
agent. Because the Section 4(a)(1½) exemption seeks to
recreate the conditions that enabled the original private
placement, a number of common practices have
emerged among practitioners in connection with Section
4(a)(1½) transactions, similar to those typically
applicable to Section 4(a)(2) or Regulation D private
placements, including:
the purchaser agreeing to resale restrictions
and making representations and warranties
regarding its sophistication and investment
intent;
inquiring into the identity of the purchaser,
including its financial condition, in order to
assess the likelihood that the purchaser will be
able to hold the securities for investment and
not resell prematurely;
requiring legal opinions confirming the view
that no registration is required for the offering;
including restrictive legends on the securities
to alert the purchaser to the restricted nature of
the securities;4
requiring stop transfer instructions from the
4 If the seller is an affiliate, the legend should clearly indicate
that the securities are restricted securities within the meaning
of Rule 144(a)(3) under the Securities Act and cannot be resold
publicly under Rule 144 until the purchaser meets the holding
period requirement of Rule 144(d), which restarts upon the
acquisition of the securities from an affiliate.
issuer;5 and
using a large minimum investment to bolster
the purchaser’s claims regarding its
sophistication and investment intent.
These common practices are typically memorialized in
provisions contained in a securities purchase agreement
entered into between the seller and the purchaser or, if
the Section 4(a)(1½) transaction is structured in the form
of a block trade, a sales agency agreement (if the
financial intermediary is acting as agent). In the case of
a block trade, the financial intermediary also may want
to conduct due diligence on the issuer and have the
issuer issue a press release regarding the completion of
the offering.
_____________________
By, Ze’-ev D. Eiger, Partner, and Michael J. Rosenberg,
Associate, Morrison & Foerster LLP
© Morrison & Foerster LLP, 2013
5 The seller will often arrange to have the issuer issue a stop
transfer order to the transfer agent for the restricted securities
to prevent the purchaser from reselling the securities
purchased in the Section 4(a)(1½) offering without obtaining a
legal opinion with respect to the legality of the resale.
F R E Q U E N T L Y A S K E D Q U E S T I O N S
A B O U T B L O C K T R A D E R E P O R T I N G
R E Q U I R E M E N T S
Block Trades and Distributions
What is a block trade?
Many people use the term “block trade” colloquially.
Technically, a block trade is an order or trade submitted
for the sale or purchase of a large quantity of securities.
Although the term is not defined under the securities
laws, Rule 10b-18 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), refers to a
“block” as a quantity of shares with a purchase price of
$200,000 or more or a quantity of shares of at least 5,000
with a purchase price of at least $50,000. Block trades
are typically executed by institutional investors
(including mutual funds and pension funds), financial
or private equity sponsors, venture capitalists and other
large stockholders who may have acquired large
quantities of securities in a merger, acquisition or other
transaction and wish to sell down their position.
Block trades offer a number of advantages to selling
shareholders. For instance, many securities exchanges
permit large block trades to be privately negotiated and
transacted off-exchange. In addition, a block trade
allows a party to access a different and often larger
investor base than regular electronic trading. Finally,
block trades are often cheaper than standard
underwritten transactions, and are fast and effective for
smaller amounts of stock than are typically offered in an
underwritten transaction.
When must a block trade be reported for FINRA
purposes?
The execution of a block trade may vary. A block trade
may be offered and sold in a manner that would render
it a “distribution.” A “distribution” must be reported
under the trade reporting rules of the Financial Industry
Regulatory Authority, Inc. (“FINRA”).
Is there any helpful guidance under Regulation M for
determining when a “distribution” exists?
Regulation M was adopted by the Securities and
Exchange Commission (the “SEC”) in order to curtail
manipulative practices by distribution participants and
provides some guidance for determining whether a
distribution exists. Under Regulation M, a
“distribution” is defined as “an offering of securities,
whether or not subject to registration under the
Securities Act, that is distinguished from ordinary
trading transactions by the magnitude of the offering
and the presence of special selling efforts and selling
methods.”
2
Magnitude of the offering
In determining the “magnitude of the offering,” the SEC
will look at the number of shares being sold, the
percentage that these shares represent of the total shares
outstanding of that issuer, the issuer’s public float and
the average trading volume of the issuer’s securities.
The SEC has provided guidance regarding trading
volumes, as it relates to determining whether a
transaction is deemed a “distribution.” For example,
Rule 144 (“Rule 144”) under the Securities Act of 1933,
as amended (the “Securities Act”), imposes a volume
limitation requirement which provides a safe harbor for
sales of securities that would otherwise be deemed a
“distribution.” Similarly, the block repurchase
limitations under Rule 10b-18 under the Exchange Act
provides a safe harbor from liability for market
manipulation when an issuer or its affiliated purchaser
engages in a block repurchase of shares of the issuer’s
common stock.
Special selling efforts and selling methods
Activities that may constitute “special selling efforts and
selling methods” might include a broker-dealer
receiving higher compensation than it ordinarily would
receive for normal trading transactions or dealer
activity, using sales documents, conducting a road show
in connection with a transaction or holding investor
meetings.
The guidance under Regulation M is useful because it
narrows the broad scope of the definition of an
underwriter by limiting the situations in which that
definition is implicated. The definition of a distribution
is based on facts and circumstances, and can lead to the
same facts being considered a distribution in one case
but not in another. For this reason, a broker-dealer
must analyze each situation not only on its merits, but
also in the context of its regular activities. If a broker-
dealer is concerned about whether its activities
constitute a “distribution,” the broker-dealer may find it
prudent to conduct diligence activities and enter into an
agreement with its client, providing for the making of
representations and warranties and requiring the
delivery of opinions of counsel.
What is a “distribution” in the context of a block trade?
Generally, trading activities for a block may not rise to
the level associated with a “distribution” under federal
securities laws. Shares that are purchased and sold in a
block trade are often placed quickly by an investment
bank’s block trade desk and executed for a standard
“dealers’ fee,” without the use of sales documents and
without special selling efforts. Further, these shares
often are sold to relatively few institutional buyers who
already may have expressed an interest in acquiring
stock should a block become available. However, under
certain circumstances, block trades may be considered a
distribution, which has the effect of exposing the
broker-dealer to potential liability as a statutory
underwriter.
Under Section 2(a)(11) of the Securities Act, an
“underwriter” is defined as “any person who offers or
sells for an issuer in connection with the distribution of
any security” (emphasis added). The SEC has defined
“issuer” broadly to include any person directly or
indirectly controlling or controlled by the issuer or
under common control with the issuer. As a result,
activities undertaken by a broker-dealer on behalf of
affiliates of an issuer (officers, directors or 10%
stockholders) may raise the same concerns as those
taken on behalf of the issuer. Further, a broker-dealer
does not need to be engaged formally as an underwriter
3
or placement agent in order to incur this potential
liability. The broker-dealer’s relationship to the
transaction, the extent of its activities, and its fees, taken
as a whole, will determine whether it may be
considered to be acting as a statutory underwriter.
The nature of the party for whom the broker-dealer is
executing the block trade also may implicate the broker-
dealer as a potential underwriter. A broker-dealer will
be considered a statutory underwriter if the broker-
dealer participates in a distribution of securities for an
issuer. A “distribution” may include a private
transaction as well as a public (pursuant to a
registration statement) transaction. As used in the
Securities Act, an “issuer” is defined to include the
issuer itself and its affiliates or control persons. In
executing a block trade on behalf of an issuer or on
behalf of an affiliate, a broker-dealer should consider
the factors discussed above and may wish to structure
its activities in a manner intended not to be a
distribution. However, if a broker-dealer is executing a
block trade on behalf of a third party (unrelated to the
issuer and not an affiliate or control person), depending
on the facts and circumstances, the transaction will
more likely than not be deemed to constitute a
distribution.
This broad definition of a “distribution” is fact-specific
and the SEC has routinely refused to make
determinations on specific cases, explaining that the
individual or entity in question is in a better position to
determine its status than the SEC. In addition, the
Securities Act does not contain definitions for certain of
the other terms used in Section 2(a)(11), including the
term “distribution.” It is clear that only when a
distribution occurs can an underwriter be involved.
Reporting Requirements
What are the reporting requirements for block trades
under the exchanges?
In general, the transaction reporting requirements for
the New York Stock Exchange (the “NYSE”) and
NASDAQ are similar. The NYSE has a general reporting
rule specifying that transactions must be reported
promptly. In particular, NYSE Rule 131 specifies that
trades must be reported within an hour after the close of
business on the day the trade was made.
The NASDAQ rules provide more detail as to the
types of information a broker-dealer must provide for
equity trades. A broker-dealer must specify the
following information:
the symbol of the stock;
the number of shares bought or sold;
the price paid or received for such shares;
the type of transaction for the reporting party
(buy, sell, or cross); and
the time of execution.
How long after a block trade is executed must a broker-
dealer report the trade?
Under FINRA Rule 6380B, trades executed during
normal market hours (i.e., between 9:30 a.m. and 4:00
p.m. ET) must be reported to the Consolidated Tape (the
“tape”) within 30 seconds of execution (unless the
transaction involves restricted equity securities, in
which case the trade must be reported no later than 8:00
p.m. ET on the following business day). Trades
executed outside normal market hours and during the
hours the relevant reporting facility is open must still be
reported within 30 seconds of execution. Trades
4
executed during the hours the relevant reporting facility
is closed are not subject to the 30-second reporting
requirement. Specifically, trades executed between
midnight and 8:00 a.m. ET must be reported by 8:15
a.m. ET on the trade date, and trades executed between
the close of the relevant reporting facility and midnight
must be reported on an “as/of” basis by 8:15 a.m. ET on
the following business day.
It is important to note that all transactions reported
after 30 seconds will be considered reported late.
Which party is responsible for reporting a block trade?
The answer depends on the parties involved. In
transactions between two market makers, only the
FINRA member (“member”) on the sell-side must
report. In transactions between a market maker and a
non-market maker, the market maker is obligated to
report. If the transaction involves two non-market
makers, the member on the sell-side is obligated to
report. In a transaction between a member and
customer, the member is required to report. Finally, in a
transaction between two members, the “executing
party” must report.
How is the “executing party” defined?
The “executing party,” for purposes of FINRA trade
reporting, is defined as the member that (1) receives an
order for handling or execution or is presented with an
order against its quote, (2) does not subsequently re-
route the order, and (3) executes the transaction. For
transactions between two members, where both
members could reasonably maintain that they satisfy
the definition of executing party (e.g., manually
negotiated trades via the telephone), the member
representing the sell-side must report the transaction to
FINRA, unless the parties agree otherwise and the
member representing the sell-side contemporaneously
documents such agreement.
What types of transactions are excluded from the
reporting requirements?
A broker-dealer is not required to report to the tape the
following transactions:
transactions reported on or through an
exchange, such as the NYSE or NASDAQ;
transactions that are part of a primary
distribution by an issuer, a registered
secondary distribution (other than shelf
distributions), or an unregistered secondary
distribution such as a selling shareholder block
trade or PIPE;1
transactions made in reliance on Section 4(a)(2)
of the Securities Act;
the acquisition of securities by a member as
principal in anticipation of making an
immediate exchange distribution or exchange
offering on an exchange; and
purchases of securities off the floor of an
exchange pursuant to a tender offer.
Unfortunately, self-regulatory organizations, such as
FINRA, do not provide a definition for many of the
terms referenced above. As a matter of practice, broker-
dealers and their counsel should refer to the rules and
regulations promulgated under the Securities Act and
the Exchange Act for further guidance.
1 In the case of a transaction that consists of both a primary
distribution and a secondary distribution, each type of
distribution would be analyzed separately.
5
What information must a broker-dealer relying on an
unregistered secondary distribution provide to FINRA?
A member that would otherwise have the trade
reporting obligation must provide notice to FINRA that
it is relying on the exception for transactions that are
part of an unregistered secondary distribution. A
member relying on the unregistered secondary
distribution exception must provide the following
information to FINRA:
security name and symbol;
execution date;
execution time;
number of shares;
trade price; and
FINRA member firms that are parties to the
transaction.
Notice and information regarding the unregistered
secondary distribution must be provided to FINRA no
later than three business days following the trade date.
If the trade executions occur over multiple days, then
the initial notice and available information must be
provided no later than three business days following the
first trade date and the final notice and information
must be provided no later than three business days
following the last trade date.
Must a broker-dealer report a transaction made
pursuant to an asset purchase agreement?
Securities that are transferred pursuant to an asset
purchase agreement (“APA”) are not reportable if:
(1) the APA is subject to the jurisdiction and approval of
a court of competent jurisdiction in insolvency matters;
and (2) the purchase price under the APA is not based
on, and cannot be adjusted to reflect, the current market
prices of the securities on or following the effective date
of the APA.
Must a broker-dealer report block trades made for the
purpose of creating or redeeming an instrument that
shows ownership of or otherwise tracks the underlying
securities transferred?
Transfer of equity securities for the sole purpose of
creating or redeeming an instrument that shows
ownership of or otherwise tracks the underlying
securities transferred (e.g., American Depositary
Receipts and exchange-traded funds) are not considered
over-the-counter (“OTC”) transactions for purposes of
the trade reporting rules. Such trades are not reportable
events, and therefore are not required to be reported to
the tape.
Must a broker-dealer report block trades in foreign
equity securities?
A broker-dealer is not obligated to report transactions in
foreign equity securities if: (1) the transaction is
executed on and reported to a foreign securities
exchange; or (2) the transaction is executed OTC in a
foreign country and is reported to the regulator of
securities markets for that country. FINRA members
must also have policies and procedures and internal
controls in place to determine whether a transaction
qualifies for an exception under the trade reporting rule.
Must a cancellation or reversal of a trade be reported?
Yes. A cancellation (if made on the trade date) or
reversal (if made on a date after the trade date) must be
reported by the same party responsible for reporting the
initial block trade.
6
Must a broker-dealer report unregistered block trades?
Unregistered block trades executed on behalf of an issuer
A block trade executed on an issuer’s behalf on an
agency or best efforts basis in a transaction exempt from
registration under Section 4(a)(2) of the Securities Act
does not need to be reported to the tape regardless of
whether the transaction is considered a “distribution.”
Unregistered block trades executed on behalf of an affiliate
A block trade executed on behalf of an affiliate or
control person on an agency or best efforts basis in a
transaction exempt from registration under Section
4(a)(1½)2 or a sale effected pursuant to Rule 144 does
not need to be reported to the tape if the transaction is
considered a “distribution.” If the unregistered
transaction does not constitute a “distribution,” then the
transaction must be reported to the tape following the
procedures outlined in the relevant exchange
regulations for reporting agency trades, unless the block
trade is effected off the floor of the relevant exchange,
which would be the case in a Section 4(a)(1½)
transaction.
Unregistered block trades executed on behalf of a non-affiliate
A block trade executed on behalf of a non-affiliate or
non-control person in a transaction exempt from
registration under Section 4(a)(1½) or a sale effected
pursuant to Rule 144 does not need to be reported to the
tape if the transaction is considered a “distribution.” If
2 Section 4(a)(1½), although not specifically provided for in the
Securities Act, has been recognized by the SEC and provides a
hybrid exemption from registration. Section 4(a)(1½) consists
of (1) the exemption under Section 4(a)(1) of the Securities Act,
which exempts transactions by anyone other than an “issuer,
underwriter or dealer.” and (2) the analysis under Section
4(a)(2) of the Securities Act to determine whether the seller is
an “underwriter.” For more information, see our Frequently
Asked Questions About Bought Deals and Block Trades,
available at http://www.mofo.com/files/Uploads/Images/FAQs-
Bought-Deals-Block-Trades.pdf.
the unregistered transaction does not constitute a
“distribution,” then the transaction must be reported to
the tape following the procedures outlined in the
relevant exchange regulations for reporting agency
trades, unless the block trade is effected off the floor of
the relevant exchange, which would typically be the
case in a Section 4(a)(1½) transaction.
For a helpful summary, see the “Summary Table” at
the end of these Frequently Asked Questions.
Must a broker-dealer report registered block trades?
A block trade executed either on behalf of an affiliate or
control person (or on behalf of a non-affiliate holding
restricted shares if such shares were issued in a private
offering and the non-affiliate holding the restricted
shares has not satisfied the six-month holding period
under Rule 144) may be executed in a registered
transaction, such as a “takedown” off of an existing
shelf registration statement (including at-the-market
sales) or a new stand-alone registration statement
covering resales.
Registered block trades executed on behalf of an issuer
A block trade executed on an issuer’s behalf on an
agency or best efforts basis in a registered transaction
does not need to be reported to the tape if the
transaction is considered a “distribution.” If the
registered transaction does not constitute a
“distribution,” then the transaction must be reported to
the tape following the procedures outlined in the
relevant exchange regulations for reporting agency
trades.
Registered block trades executed on behalf of an affiliate
A block trade executed on behalf of an affiliate or
control person in a registered transaction does not need
to be reported to the tape if the transaction (1) does not
7
involve a shelf takedown and (2) is considered a
“distribution.” If the registered transaction involves a
shelf takedown and does not constitute a “distribution,”
then the transaction must be reported to the tape
following the procedures outlined in the relevant
exchange regulations for reporting agency trades, unless
the shares are sold to or through a market maker.
Registered block trades executed on behalf of a non-affiliate
A block trade executed on behalf of a non-affiliate or
non-control person in a registered transaction does not
need to be reported to the tape if the transaction (1) does
not involve a shelf takedown and (2) is considered a
“distribution.” If the registered transaction involves a
shelf takedown and does not constitute a “distribution,”
then the transaction must be reported to the tape
following the procedures outlined in the relevant
exchange regulations for reporting agency trades, unless
the shares are sold to or through a market maker.
For a helpful summary, see the “Summary Table” at
the end of these Frequently Asked Questions.
Impact of FINRA Rules and Interpretive Memos
What rules must a broker-dealer consider with respect
to prices and commissions earned in connection with
block trades?
Generally, markups, markdowns, and commissions are
required to be “fair” under the circumstances. FINRA
IM-2440-1 expands on this general policy by
establishing a 5% guideline for markups and
markdowns, and lists various circumstances that would
affect (or not affect) the reasonableness of a markup,
including the following:
The markup or markdown is based on the
prevailing market price of the security. If the
broker-dealer is selling from inventory, the
original cost of the security to the broker-dealer
is not to be taken into consideration (see
FINRA IM-2440-1(a)(3)).
If the trade is done on a “riskless principal”
basis, which is the functional equivalent of an
agency trade, the level of markup/markdown
would normally be measured by what would
be a fair commission on an agency trade (see
FINRA IM-2440-1(c)(1)).
A higher markup may be more acceptable in a
transaction in equity securities than for fixed
income securities, e.g., government securities
(see FINRA IM-2440-1(b)(1)).
A higher markup may be more justified in a
transaction in inactive securities than for very
liquid securities (see FINRA IM-2440-1(b)(2)).
Although there is no direct correlation between
the price of the security and the appropriate
level of markup, the fact that the security is
low priced, so that the block trade involves a
smaller amount of money, could justify a
higher percentage markup than for a block of
the same number of shares in which the
individual securities are higher priced and
therefore the total price of the block is higher.
Correspondingly, a block consisting of a larger
number of shares might justify a higher
markup that a block at the same aggregate
price comprised of a smaller number of more
8
expensive shares (see FINRA IM-2440-1(b)(3)
and (4)).
If the broker-dealer and its customer agree on
the amount of commission or
markup/markdown in advance of the
transaction, this may affect the fairness of the
actual commission/markup/markdown
charged. However, the broker-dealer would
still have to deal fairly with its customer. If the
customer is an institutional investor, as is more
likely the case in a block trade, more weight
would probably be given to the customer’s
agreement to pay a relatively high commission
or markup (see FINRA IM-2440-1(b)(5)).
If the customer is liquidating one parcel of
securities to use the proceeds to purchase
another parcel of securities, the fairness of the
markup on the second transaction could be
evaluated taking into account the broker-
dealer’s profit or commission on the first
(liquidating) transaction (see FINRA IM-2440-
1(c)(5)).
Which rules must a broker-dealer consider with respect
to “best execution” of block trades?
Under FINRA Rule 5310, a broker-dealer has a duty to
effect a “best execution” for its customers at the best
price, under the circumstances. The subject of what is
“best execution” and how to achieve it is frequently a
complex question, inasmuch as customers can put more
or less weight on the importance of speed,
confidentiality, willingness of a broker-dealer to
position securities, skill in handling a “not held” order,
or other factors apart from a simple question of the
lowest price for the first 100 shares of a block to be
bought or the highest price for the first 100 shares of a
block to be sold. In the case of block trades, the skill
and resources of the broker-dealer are more likely to be
a factor in the determination of best execution than in
the case of a retail trade for a single round lot.
Must a broker-dealer consider whether a particular
transaction is suitable for its client?
Pursuant to FINRA Rule 2111(a), a member must obtain
certain information about its customers as part of its
obligation to determine customer suitability. However,
there are certain exceptions to the suitability
requirements for institutional customers. Typically,
block trades are executed for institutional customers,
and under FINRA Rule 2111(b), a member is not
required to conduct a suitability analysis if (1) the
member or associated person has a reasonable basis to
believe that the institutional customer is capable of
evaluating investment risks independently, both in
general and with regard to particular transactions and
investment strategies involving a security or securities,
and (2) the institutional customer affirmatively indicates
that it is exercising independent judgment in evaluating
the member’s or associated person’s recommendations.
In order to facilitate compliance with FINRA Rule
2111(b), some third-party distributors have created
institutional suitability certificates to be provided by
institutional customers, indicating that the institutional
customer is familiar with the transaction and is not
relying on recommendations from broker-dealers.
However, it is important to note that FINRA has not
approved or endorsed these certificates, and that the use
of such certificates does not constitute a safe harbor
from FINRA Rule 2111(b).
9
Must a broker-dealer avoid trading ahead of a
customer’s limit order?
Yes. Under FINRA Rule 5320, a member that accepts
and holds an order in an equity security from its own
customers, or a customer of another broker-dealer,
without immediately executing the order is prohibited
from trading that security on the same side of the
market for its own account. The prohibition under Rule
5320 does not apply if the member, immediately after
accepting the customer’s order, executes the customer
order up to the size and at the same (or better) prices at
which it traded for its own accounts.
With respect to large-sized orders (i.e., orders of 10,000
shares or more and greater than $100,000 in value) or
orders from institutional accounts, FINRA Rule 5320.01
generally permits members to negotiate terms and
conditions that would permit them to trade ahead of, or
along with, such orders. Under FINRA Rule 5320.01, a
member must provide a clear and comprehensive
written disclosure to the customer at the time of the
account’s opening and annually thereafter that:
discloses that the member may trade
proprietarily at prices that would satisfy the
customer order and
provides the customer with a meaningful
opportunity to opt in to the protections of
FINRA Rule 5320 with respect to all or any
portion of its order.
FINRA Rule 5320.01 also permits members to provide
clear and comprehensive oral disclosure to, and obtain
consent from, the customer on an order-by-order basis,
in lieu of the written disclosure requirement. In order to
avail themselves of such requirements, members must
keep records of who provided such consent and that the
consent evidences the customer’s understanding of the
terms and conditions of the order.
_____________________
By, Ze’-ev D. Eiger, Partner, and Neeraj Kumar,
Associate, Morrison & Foerster LLP
© Morrison & Foerster LLP, 2013
10
SUMMARY TABLE
The following table provides a summary of the various reporting requirements discussed above for different types of block trades,
including unregistered block trades that may or may not qualify as “distributions” under Regulation M. If a block trade must be
reported, the report must generally include (1) the symbol of the stock, (2) the number of shares bought or sold, (3) the price paid or
received for such shares (for the relevant trade), (4) whether, for the reporting party, the trade was a buy, sell, or cross- transaction, and
(5) the time of execution. The table is not a complete discussion of all applicable requirements and should be read in conjunction with the
Frequently Asked Questions and the applicable rules.
SUMMARY REPORTING BY DEAL TYPE
Type of Block Trade Does the Block Trade
Involve a “Distribution”?
Does the Block Trade Need to be
Reported?
Section 4(a)(2):
Issuer Shares -Yes
-No
- No
- No
Section 4(a)(1½):
Affiliate Shares -Yes
-No
- No
- No
Non-affiliate Shares -Yes
-No
- No
- No
Rule 144:
Affiliate Shares -Yes
-No
- No
- Yes
Non-affiliate Shares -Yes
-No
- No
- Yes
Shelf Takedown:
Issuer Shares -Yes
-No
-No
-Yes
Affiliate Shares -Yes
-No
-Yes3
-Yes3
Non-affiliate Shares -Yes
-No
-Yes3
-Yes3
ATM Sale:
Issuer Shares -Yes
-No
-No
-No
Affiliate Shares -Yes
-No
-No
-No
Non-affiliate Shares -Yes
-No
-No
-No
Registered Sale (Non-shelf):
Issuer Shares -Yes
-No
-No
-Yes
Affiliate Shares -Yes
-No
-No
-Yes3
Non-affiliate Shares -Yes
-No
-No
-Yes3
Clean Shares:4
(not being sold pursuant to
registration statement)
-Yes5
-No
-No
-Yes
3 Unless the shares are sold to or through a market maker, in which case the block trade does not need to be reported. 4 Clean shares held by an affiliate will no longer be unrestricted. 5 However, in practice this would be highly unlikely.