Tapping U.S. Markets: Confidentially Marketed Public Offerings

This article was republished in Thomson Reuters’ Practical Law legal resources website on November 28, 2016, and is available to subscribers here.

For companies seeking to raise capital in the United States, volatile market conditions can prove to be challenging. One common method issuers use to mitigate this volatility in the Canadian markets is a bought deal, whereby the market risk is shifted from the issuer to the underwriter. However, not all issuers, especially those whose stock is thinly traded, are able to raise capital through a bought deal.

One attractive alternative for Canadian, United States or other foreign issuers publicly listed in the U.S. is to conduct a confidentially marketed public offering (CMPO). CMPOs provide issuers and underwriters with flexibility to gauge market interest on a confidential basis prior to making a deal public. For the right issuer, CMPOs can be an effective alternative to the more conventional marketed underwritten public offering.

Why Conduct a CMPO?

There are a number of benefits to conducting a CMPO:

• it allows issuers and underwriters to gauge market interest for a particular offering prior to making a deal public, thus avoiding the negative impact of a failed public offering should the confidential marketing not be successful; and
• because the public marketing period is conducted over a relatively short period of time (generally on an overnight basis), a CMPO may help an issuer avoid downward pressure on its stock price between the public announcement and the pricing of the offering.

How is a CMPO Typically Structured?

The deal timeline for a CMPO can be subdivided into a series of distinct phases.

Phase 1

Phase 1 looks very similar to a standard underwritten deal. Offering documents, including the prospectus supplement, underwriting agreement and opinions of counsel, will be prepared and negotiated, and underwriters will perform due diligence, including preparation of the auditor comfort letter.

Phase 2

During Phase 2, the underwriters will market the deal on a confidential basis to a targeted group of sophisticated investors. Once the underwriters are confident that there is enough interest in the offering, the deal will be “flipped” to public in Phase 3.

Phase 3

This typically takes place after the markets close on the day the offering is formally launched. At that time, the preliminary prospectus supplement is filed with the Securities and Exchange Commission (the SEC) and the public offering is announced. During this public marketing phase, the underwriters will continue to market the securities on an expedited (usually overnight) basis to a broader group of investors.

Phase 4

The deal will generally be priced the following morning before the markets open in Phase 4, but sometimes a longer public marketing period is required. At pricing, the underwriting agreement is executed and the auditor comfort letter is delivered, and subsequently the final prospectus supplement is filed with pricing terms.

Phase 5

Finally, Phase 5 is the period from pricing to closing and is conducted in the same way as closings for standard underwritten public offerings.

CMPOs are largely marketed using existing public disclosure and a “bare-bones” prospectus supplement, thereby eliminating the costs and delays associated with lengthy drafting sessions.

To conduct a CMPO, an issuer must have an effective shelf registration statement on file with the SEC (typically Form S-3 for U.S. companies, Form F-10 for MJDSeligible Canadian companies and Form F-3 for other non-U.S. foreign private issuers).

CMPOs are generally more time and cost efficient for issuers than conventionally marketed deals because the offering is largely marketed using existing public disclosure and a “bare-bones” prospectus supplement, thereby eliminating the costs and delays associated with lengthy drafting sessions.

How Does the Confidential Marketing Period Work?

The confidential marketing period that defines CMPOs results in a particular focus for issuers and underwriters on ensuring compliance with selective disclosure issues and rules related to trading on the basis of material non-public information.

Bringing Investors “Over the Wall”

Before the confidential marketing period begins, underwriters will initiate communication with targeted sophisticated investors. This is usually done orally and via a script that has been pre-approved by both issuer and underwriter counsel. This initial solicitation gives notice to the targeted investors of a potential offering, but does not provide them with any specific details, such as the issuer’s identity, prior to obtaining certain confidentiality and other undertakings from the investors. These undertakings are typically obtained orally during the initial solicitation, followed by confirmation of the undertakings via email, and will often prohibit the investors from trading for a certain period of time. This is done (i) to ensure that investors that have been “brought over the wall” during the confidential marketing period do not trade on material non-public information and (ii) to deal with other selective disclosure concerns. In addition to the above procedure, some underwriters also require their investor base to sign general confidentiality agreements that apply to any CMPO that will come to an investor’s attention in order to avoid the delay associated with attempting to obtain signed agreements once a CMPO has been initiated.

“Cleansing” Statements

Potential investors that are solicited during the confidential marketing period may require that an issuer make a “cleansing” statement to make public any material non-public information provided to investors during the confidential marketing period if the offering does not proceed within a specified period of time. In the case of such a request, the issuer will enter into a written agreement with the underwriters, committing to make such a “cleansing” statement if the offering does not proceed. The underwriters, however, generally only use marketing materials that are based on information that is otherwise publicly available so as to avoid the need to file any of the non-public information publicly if the offering does not proceed.

What Other Key Issues Arise During CMPOs?

Given that one of the goals of a CMPO is to get to market on an expedited basis, special care must be taken to ensure that every issue is fully considered in advance of the launch of the transaction.

Preparation of Documentation

Because the length of the confidential marketing period is unknown, it is important to have all documentation negotiated and finalized prior to commencing any marketing efforts. The reason for this is so that the offering can be “flipped” to public very quickly to avoid losing any momentum in the book-building of the deal. This includes the prospectus supplement, underwriting agreement, opinions and comfort letters. It is also important to finalize all material due diligence items prior to the confidential marketing.

FINRA

A shelf takedown, regardless of whether it is a CMPO or not, generally has to receive Financial Industry Regulatory Authority (FINRA) clearance (subject to certain exceptions). FINRA has a review and clearance process that allows for receipt of FINRA clearance the same day that the application is submitted, which is particularly useful in the context of the CMPO’s expedited timeline. It is important to ensure that the base shelf was pre-cleared with FINRA prior to the commencement of the offering to avoid any delays.

Shelf Capacity

Prior to undertaking the confidential marketing, issuers must also be mindful of whether the contemplated offering size (or any potential upsize if market conditions are favourable) is permitted based on the capacity available under their shelf registration statement.

Material Information

Issuers and underwriters should consider any material information that may be disclosed in the imminent future. Earnings results, acquisitions and other events could make marketing difficult or require further disclosure than what is in the public record.

Dual-listed Companies

For issuers that have securities listed on a non-U.S. exchange (such as the Toronto Stock Exchange) in addition to a U.S. listing, it is particularly important to coordinate with both the relevant U.S. and non-U.S. exchanges to ensure that there are no trading-related issues for the issuer’s securities in connection with the CMPO. In general, the laws of the non-U.S. jurisdiction must be examined to ensure that the CMPO procedures comport with local law.

With respect to securities listed on an exchange in a jurisdiction that is in a different time zone, an issuer may need to work with that exchange to halt trading of those securities from the time that the deal is made public to the time when the underwriters confirm orders with investors. Since the marketing period will generally take place when the markets are closed in the United States, both issuers and underwriters want to avoid any significant price fluctuations of the securities on a foreign exchange during that time.

Conclusion

For the right issuer, CMPOs can be a useful alternative to the standard underwritten public offering. U.S., Canadian and foreign companies with effective shelf registration statements on file with the SEC should keep CMPOs in mind as another potential way to access the U.S. capital markets.