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The management of a company forced to pull the plug on its initial public offering when the stock market goes cold often must deal with more than just disappointment. If the company planned to use the proceeds of the IPO to satisfy working capital needs or fund growth, management must find another way to satisfy those needs. Because many companies stretch their financial resources to the maximum while they go through the registration process, these needs are often pressing. Initially, management may believe that there is an easy solution to the financing problem: using the offering document it has already prepared, the company can do a quick private placement to some of the same investors who expressed interest when the company started planning for the IPO. But it’s not that easy — the securities laws place obstacles in the path of a company trying to raise capital immediately after pulling the plug on its initial public offering. The first obstacle is caused by the securities law concept known as the general solicitation doctrine. General solicitation is defined as the public dissemination of offering materials and the public promotion of an offering. Companies that have engaged in general solicitation are not eligible for the private placement exemption. This exemption, set forth in � 4(2) of the Securities Act of 1933, provides generally that offers and sale of securities on a nonpublic basis to a limited number of investors need not be registered. The SEC staff takes the position that a company engages in general solicitation when it files a registration statement with the SEC even if that company has not circulated the preliminary prospectus to prospective investors or engaged in other marketing efforts. The SEC staff has suggested that, to qualify for the private placement exemption, a company that filed a registration statement prior to canceling an IPO must wait at least six months before the impact of the filing dissipates. For companies in dire need of funding, six months might as well be an eternity. The second obstacle is caused by the securities law concept known as the integration doctrine. Under that doctrine, when two separate offerings meet certain criteria, the SEC will integrate them, that is, treat them as a single offering. When, pursuant to the integration doctrine, the SEC integrates a public offering with a private offering, the issuer’s failure to register the private offering will be treated as a violation of the securities laws. When determining whether or not to integrate separate offerings, the SEC staff will consider the following: � Whether the offerings are part of a single plan of financing; � Whether the offerings involve the issuance of the same class of security; � Whether the offerings will be made at about the same time; � Whether the issuer will receive the same type of consideration in the offerings; and � Whether the offerings are for the same general purpose. Because the staff has never provided guidance on what weight should be given to the five integration factors, determining whether particular offerings will be integrated is an uncertain exercise. It is fairly clear, however, that the integration risk is high if, to replace the capital that would have been raised in a terminated public offering, a company commences a private offering of common stock for cash immediately after the public offering’s cancellation. The good news is that these obstacles are surmountable. There are several ways in which a company can raise capital, within the confines of the securities laws, after canceling its IPO. First, it can sell securities to entities that are qualified institutional buyers (QIBs) within the meaning of Rule 144A (an exemption for sales to institutional investors) and sell securities to two or three entities that qualify as institutional accredited investors within the meaning of Regulation D (a safe harbor under the private placement exemption). In Black Box Incorporated(June 26, 1990) and Squadron, Ellenoff, Pleasent & Lehrer(Feb. 28, 1992), the SEC staff indicated that a sale of securities, made at the same time as a public offering, to investors in these categories will be treated as a good private placement. When choosing this option a company should do the following: � Sell only to QIBs or institutional accredited investors with which it had a relationship before the public offering or which it identified through sales efforts unrelated to the public offering; and � Prepare new offering materials for these investors rather than simply giving them copies of the public offering prospectus. A second solution is to structure a private placement so that the SEC will not integrate it with the public offering. There are several things that a company can do to reduce the risk of integration: � Withdraw the registration statement rather than leaving it on file; � Announce that the public offering has been cancelled; � Wait for 30 days, or at least a week or two, after the initial public offering terminates before commencing the private placement; � Use offering materials prepared specifically for the private placement rather than the public offering prospectus; � Contact only investors who have pre-existing relationships with the company so that the company can take the position that it did not identify the investors through the public offering; � Limit the offering to QIBs and institutional accredited investors; � Offer a security other than common stock. Debt securities and preferred stock that is not convertible into common stock will satisfy this requirement. Preferred stock that is immediately convertible into common stock will not since this security will be viewed as equivalent to common stock. Most practitioners would agree that preferred stock that is convertible after six months is acceptable. Whether a waiting period of less than six months is acceptable is less settled. As a third option, a company can go forward with a registered offering and sell to the same group of institutional investors it would have sold to in a private placement. The downside of this public offering approach is that it creates work in the long term: The company will have the burden of complying with the periodic reporting requirements of the Securities Exchange Act and the burdens associated with being a public company. The final alternative available is to offer securities overseas pursuant to Regulation S. The company should recognize, however, that if it does not already have foreign investor contacts it may not be able to complete the offering quickly. Raising money overseas on favorable terms is likely to require considerable marketing efforts and the assistance of a placement agent. Whichever approach a company trying to raise capital immediately after canceling an initial public offering chooses, it should enlist the help of expert securities counsel. The consequences of violating the Securities Act can be severe. Stephen I. Glover is a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher LLPand a member of the firm’s Corporate Transactions Practice Group.

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