Integration of Public and Private Offerings

The Securities and Exchange Commission has adopted a new rule which provides a new regulatory safe harbor for issuers who abandon a public offering for a private offering or a private offering for a public offering. The new rule, Rule 155, is designed to strengthen an issuer’s ability to shift from a private offering to a registered offering, or vice-versa, in response to the rapidly shifting market environment.

Traditionally,the SEC has applied the "integration" doctrine to determine whether multiple securities transactions should be considered part of the same offering. The SEC adopted the integration doctrine to prevent issuers from separating what were really public offerings into a series of smaller transactions in order to qualify for exemptions from registration that would not otherwise be available. In the 1960's, the SEC identified five factors to consider in determining whether separate issuances of securities are really part of one offering. These five factors are:

whether the sales are part of a single plan of financing;
whether the sales involve the issuance of the same class of securities;
whether the sales have been made at or about the same time;
whether the same type of consideration is being received; and
whether the sales are made for the same general purpose.

However, rapidly changing market conditions have caused numerous issuers to abandon planned public offerings after they filed a registration statement with the SEC. These issuers, however, frequently need to raise additional capital quickly and looked to private sources of funds for that capital. However, they were concerned that the filed registration statement would render a private offering unavailable. Conversely,some issuers have started private offerings, only to find that a public offering is more favorable. These issuers have had to worry about whether their private offerings would no longer be"private" because of the possible integration of the abandoned private offering into the public offering. Consequently, before Rule 155 was adopted, issuers in either situation were frequently required wait six months following the withdrawal of the abandoned offering before starting the new offering.

Rule 155 provides a safe harbor from the integration doctrine for abandoned public offerings that are followed by a private offering and abandoned private offerings that are followed by a public offering if they meet the requirements of the rule.

Issuers who abandon a registered public offering before any securities are sold may conduct a private offering if they:

(a) withdraw the registration statement;

(b) wait 30 days after the withdrawal date from the registration statement before commencing the private offering;

(c) notify every offeree in the private offering that (i) the offering is not registered under the Securities Act; (ii) the securities will be "restricted securities" as defined in Rule 144 and cannot be resold without registration unless an exemption from registration is available; (iii) purchasers do not have the protection of Section 11 of the Securities Act; and (iv) a registration statement for the abandoned offering was filed and withdrawn, specifying the effective date of the withdrawal; and

(d) include in any disclosure document used in the private offering any changes in the issuer's business or financial condition that occurred after the issuer filed the registration statement that are material to the investment decision in the private offering.

An issuer who abandons a private offering before any securities are sold may conduct a public offering if the issuer:

(a) terminate all offering activity in the private offering before they file the registration statement;

(b) include in the prospectus filed as part of the registration statement information about the private offering including (i) the size and nature of the private offering, (ii) the date on which the issuer terminated all offering activity in the private offering (iii) a statement that any offers to buy or indications of interest in the private offering were rejected or otherwise not accepted, and (iv) a statement that the prospectus delivered in the public offering supersedes any selling material used in the private offering; and

(c) does not file the registration statement until at least 30 calendar days after termination of all offering activity in the private offering unless theissuer and any person acting on its behalf offered securities in the privateoffering only to persons who were (or who the issuer reasonably believes were) accredited investors or sophisticated.

"New Developments" are presented for informational purposes only and cannot substitute for advice of counsel. No legal advice or suggestions are presented in those articles. If you would like additional information regarding any of the topics discussed in "New Developments,"please send us an e-mail.

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