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Since the Nasdaq started to drop early last year, a host of Internet companies have decided to pull their initial public offerings. On Wednesday, a new Securities and Exchange Commission rule will make doing so less financially straining, by making it easier for such companies to get funding quickly from private sources. “The new rule enables issuers to more effectively take advantage of market conditions,” wrote Michael Littenberg, a partner at the law firm Schulte Roth & Zabel. “In the face of weak demand, an issuer will be able to switch from a public to a private offering.” The law could be a boon at a time when the IPO market is slow, and desperate companies need to raise cash right away. A company that planned to go public but found market conditions inhospitable used to have to wait six months before pursuing a private placement. Firms with high burn rates and little cash have found it difficult or impossible to wait another half year to raise money. “This kind of thing is important when there is a market meltdown — like this year — and companies that were counting on an IPO to get their balance sheet back in balance have the rug pulled out from them,” says Samuel Hayes, a professor of finance at Harvard Business School. There are no records as to how many pulled IPOs become private placements, but 46 IPOs have been withdrawn so far this year, according to IPO.com. Under Rule 155, firms that pull their IPOs will have to wait only 30 days before raising private funding, provided that they meet a few conditions. For example, the firm cannot have sold any securities to the public if it wants to replace the IPO with a private offering. Conversely, a company wanting to convert a private placement into a public offering needs to stop all offering activity before filing the registration statement for the public offering, Littenberg says. Such restrictions are in line with earlier SEC regulations aimed at ensuring a clear distinction between IPOs — which have strict registration requirements — and private offerings. They were enacted to prevent firms from evading public-offering regulations by doing a slew of small offerings instead. The new rule has gotten little attention, but it might get more notice once it takes effect. Bankers say they are pleased with the rule because it should make things easier for companies to raise money. Because the IPO market is so weak, however, neither converting to an IPO nor abandoning one are much more than interesting ideas at the moment. “Before, people said, ‘Let’s get the IPO paperwork done,’ and if it fell apart, they would start thinking about a private placement,” says Henry Barratt, managing director of venture capital firm Blue Water Capital. “Now people are saying, ‘Why bother to do an IPO to begin with?’ “ Related articles from The Industry Standard: IPO Weekly: Not Many Tech Companies in the Pipeline The Day the IPO Died IPO Market Unravels Copyright (c)2001 The Industry Standard

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