The birth of rule 144A equity offerings

UCLA Law Review

Volumn 56, Issue 2, 2008, Pages 409-448

  Sjostrom Jr , William K ^a  

^a NORTHERN KENTUCKY UNIVERSITY   (United States)

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EID: 58149296152     PISSN: 00415650     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (342)

1. See Moving the Market: Oahree Stock Sale Completed, WALL ST. J., May 23, 2007, at C2.
2. 17 C.F.R. § 230.144A (2008).
3. See Henry Sender, Oaktree to Try a New Twist for Share Sale; Use of Goldman Market Avoids Regulations, Doesn't Cede Control, WALL ST. J., May 10, 2007 (describing GSTrUE). It appears that GSTrUE has since merged into NASDAQ's PORTAL system.
4. See infra text accompanying notes 157-166, for a discussion of the PORTAL system.
5. See HAROLD S. BLOOMENTHAL, SECURITIES LAW HANDBOOK § 10:17 (2006) (describing private placements under Rule 144A).
6. See Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Securities Act Release No. 6806, 53 Fed. Reg. 44,016, 44,017 (Nov. 1,1988) [hereinafter Rule 144A 1988 Release].
7. See infra Part I.C, for a discussion of illiquidity discounts.
8. See Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Securities Act Release No. 6862, 55 Fed. Reg. 17,933, 17,934 (Apr. 23, 1990) [hereinafter Rule 144A Adopting Release].
9. See Lawrence R. Seidman, SEC Rule 144A: The Rule Heard Round the Globe-Or the Sounds of Silence?, 47 BUS. LAW. 333, 346 (1991) (noting the small dollar amount of Rule 144A offerings following the first eight months after its adoption).
10. Press Release, NASDAQ Stock Market, Inc., NASDAQ's Electronic Trading Platform for the 144A Private Placement Market Is Approved by the SEC; The PORTAL Market Trading System Will Begin Operating on August 15 (Aug. 1, 2007) [hereinafter PORTAL Press Release], available at http://www.nasdaq.com/ newsroom/news/newsroomnewsStory.aspx?textpath=pr2007% 5CACQPMZ200708010800PRIMZONEFULLFEED124065.htm.
11. See BLOOMENTHAL, supra note 4, § 10:14, at 654 ("For most reporting U.S. issuers, the exclusion of fungible securities limits the Rule 144A market to debt securities."). For a discussion of non-fungibility,
12. see infra Part III.A.2. It should be noted that a company with publicly traded common stock could undertake a Rule 144A offering of debt or other securities that are convertible into common stock so long as at the time of issuance the securities had an effective conversion premium of 10 percent or more over the market price of the common stock.
13. C.F.R. § 230.144A(d)(3)(i) (2008).
14. 15 U.S.C. §§ 78a-78nn (2006).
15. See PETER V. DARROW ET AL., U.S. EQUITY MARKETS FOR FOREIGN ISSUERS: PUBLIC OFFERINGS AND RULE 144A PLACEMENTS OF AMERICAN DEPOSITORY RECEIPTS 52 (2007), available at http://www.mayerbrown.com/saopaulo/article.asp?id=3404&nid=9860 (discussing the advantages of Rule 144A offerings for foreign companies).
16. Peter J. Wallison, Capital Complaints, WALL ST. J., Mar. 20, 2007, at A19. The $162 billion figure includes issuances by U.S. and foreign companies as well as issuances of debt convertible into equity. For additional data on Rule 144A offerings,
17. see Steven M. Davidoff, Paradigm Shift: Federal Securities Regulation in die New Millennium, 2 BROOK. J. CORP. FIN. & COM. L. 339,345(2008).
18. See William J. Carney, The Costs of Being Public After Sarbanes-Oxly: The Irony of "Going Private," 55 EMORY L.J. 141,144-47 (2006) (describing the costs of the Sarbanes-Oxley Act of 2002 (SOX) for a public company).
19. See Geraldine Lambe, Public Versus Private Equity Markets, BANKER, Sept. 2007, at 40 (noting a Goldman Sachs statement that there are additional Rule 144A equity offerings in the pipeline). It should be noted that in August 2007, Goldman Sachs managed a $ 828 million Rule 144A equity offering for Apollo Global Management, LLC, a renowned U.S. private equity firm, and Apollo's securities immediately started trading on GSTrUE
20. See Apollo Raises $ 828 Million, WALL ST. J., Aug. 7, 2007, at C6. Unlike Oaktree, however, as part of the offering Apollo entered into a registration rights agreement with investors in the deal. The registration rights agreement obligated Apollo to file with the Securities and Exchange Commission (SEC) a shelf registration statement covering resale of its shares within 240 days. Apollo filed this registration statement on April 8, 2008.
21. See Apollo Global Mgmt., LLC, Registration Statement Under the Securities Act of 1933 (Form S-l) (Apr. 8, 2008), available at http://www.sec.gov/Archives/edgar/data/1411494/000119312508077312/dsl.htm. Hence, Apollo's reason for pursuing a Rule 144A equity offering instead of an IPO obviously was not to avoid becoming a public company because they contractually bound themselves to do so.
22. Several finance-oriented articles about Rule 144A debt markets have been published during this timeframe. See, e.g., George W. Fenn, Speed of Issuance and the Adequacy of Disclosure in the 144A High-Yield Debt Market, 56 J. FIN. ECON. 383 (2000);
23. Miles Livingston & Lei Zhou, The Impact of Rule 144A Debt Offerings Upon Bond Yields and Underwriter Fees, 31 FIN. MGMT. 5 (2002);
24. Susan Chaplinsky & Latha Ramchand, The Impact of SEC Rule 144A on Corporate Debt Issuance by International Firms, 77 J. BUS. 1073 (2004).
25. Pub. L. No. 73-22, 48 Stat. 74 (codified as amended at 15 U.S.C. §§ 77a-77bbbb (2006)).
26. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976) (citing H.R. REP. NO. 73-85, at 1-5 (1933)).
27. See generally LOUIS LOSS ET AL., SECURITIES REGULATION § l-H-2 (3ded. 1989).
28. 15 U.S.C. § 77e. See generally LOSS ET AL., supra note 18, § 2-B.
29. H.R. Rep. No. 73-85, at 5; see also id. at 7, 15-16.
30. 15 U.S.C. § 77d(2). As adopted in 1933, what is now § 4(2) of the Securities Act was the second clause of § 4( 1) of the Securities Act. LOSS ET AL., supra note 18, § 3-C-7a n.383.
31. Transactions by an Issuer Deemed Not to Involve Any Public Offering, Securities Act Release No. 5487, 39 Fed. Reg. 15,261, 15,261 (Apr. 23, 1974) (noting that "the phrase 'transactions⋯ not involving any public offering' is not defined in the Act");
32. see also SEC v. Ralston Purina Co., 346 U.S. 119, 122 (1953) ("The Securities Act nowhere defines the scope of § 4(1 )'s private offering exemption.").
33. 346 U.S. 119(1953).
34. The case focused on shares offered by Ralston Purina to employees who "without any solicitation by the Company or its officers or employees, inquire[d] of any of them as to how to purchase common stock of the Ralston Purina Company."
35. Id. at 121.
36. Id. ("Among those responding to these offers were employees with the duties of artist, bakeshop foreman, chow loading foreman, clerical assistant, copywriter, electrician, stock clerk, mill office clerk, order credit trainee, production trainee, stenographer, and veterinarian.").
37. Id. at 120.
38. Id. at 119.
39. Id. at 127.
40. Id. at 124.
41. Id. at 125.
42. Id.
43. Id. at 126.
44. Id. at 127.
45. Id.
46. See J. WILLIAM HICKS, 7B EXEMPTED TRANSACTIONS UNDER THE SECURITIES ACT OF 1933, § 11.25, at 11-43 (2d ed. 2007) (describing questions left open by Ralston Purina).
47. See, e.g., Hill York Corp. v. Am. Int'l Franchises, Inc., 448 F.2d 680, 690 (5th Cir. 1971).
48. See, e.g., United States v. Hill, [1969-1970 Transfer Binder] Fed. Sec. L Rep. 92,461, 98,184- 85 (D. Conn. Apr. 10,1969).
49. See, e.g., SEC v. Continental Tobacco Co., 463 F.2d 137, 157 (5th Cir. 1972).
50. Ray Garrett, Jr., The Private Offering Exemption Today, in FOURTH ANN. INST. ON SEC. REG. 3, 10-11 (Robert H. Mundheim et al. eds., 1973).
51. See 7B HICKS, supra note 35, § 11:3, at 11-13.
52. For a description of the evolution of these rules, see William K. Sjostrom, Jr., Relaxing the Ban: It's Time to Allow General Solicitation and Advertising in Exempt Offerings, 32 FLA. ST. U. L. REV. 1,35-40 (2004).
53. Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Securities Act Release No. 6389, 47 Fed. Reg. 11,251 11,258 (Mar. 8, 1982). Regulation D contains two additional exemptions (Rule 504 and Rule 505), both of which were promulgated under Section 3(b) of the Securities Act.
54. See id. at 11,252. Section 3(b) empowers the SEC to adopt rules exempting offerings of certain classes of securities up to $5 million "if it finds that the enforcement of [the Securities Act]⋯ is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering."
55. U.S.C. § 77c(b) (2006).
56. See 17 C.F.R. § 230.506(a) (2008) ("Offers and sales of securities by an issuer that satisfy the conditions in paragraph (b) of [Rule 506] shall be deemed to be transactions not involving any public offering within the meaning of Section 4(2) of the [Securities] Act."). Note that compliance with Rule 506 is a nonexclusive means by which an offering falls within Section 4(2). As Preliminary Note 3 to Regulation D explains "an issuer's failure to satisfy all the terms and conditions of Rule 506 shall not raise any presumption that the exemption provided by Section 4(2) of the Act is not available." 17 C.F.R. § 735, Regulation D, Preliminary Note 3.
57. Id. §§ 230.501(e), 506(b)(2)(i). Technically, there could be more than thirty-five nonaccredited investors so long as the issuer reasonably believes that there are no more than thirty-five.
58. See id. § 230.506(b)(2)(i).
59. Id. § 230.501(a)(1).
60. See id. §230.501 (a).
61. Id. § 230.506(b)(2)(ii).
62. Id. See id. § 230.501(h), for the definition of "purchaser representative."
63. Proposed Revision of Certain Exemptions From the Registration Provisions of the Securities Act of 1933 for Transactions Involving Limited Offers and Sales, Securities Act Release No. 6339, 46 Fed. Reg. 41,791, 41,802 (Aug. 18, 1981).
64. See 17 C.F.R. § 230.502(b)(1).
65. Rule 502(b)(1) includes a note that provides as follows: "When an issuer provides information to investors pursuant to paragraph (b)(1), it should consider providing such information to accredited investors as well, in view of the anti-fraud provisions of the federal securities laws." Id.
66. Id. § 230.502(b)(2)(v).
67. Id. § 230.502(c).
68. See Sjostrom, supra note 41, at 13-14.
69. Integration of Abandoned Offerings, Securities Act Release No. 33-7943, 66 Fed. Reg. 8887, 8889 (Mar. 7, 2001).
70. U.S. GEN. ACCOUNTING OFFICE, REPORT TO THE CHAIRMAN, COMMITTEE ON SMALL BUSINESS, U.S. SENATE, SMALL BUSINESS: EFFORTS TO FACILITATE EQUITY CAPITAL FORMATION 30 (2000), available at. http://www.gao.gov/archive/ 2000/gg00190.pdf [hereinafter GAO REPORT].
71. See infra text accompanying notes 67-68.
72. See 7 HICKS, supra note 35, § 1.3.
73. At one time, the presumption could be overcome under the so-called presumptive underwriter doctrine. Under this doctrine, the resale of securities issued in a registered offering was considered a distribution if the seller purchased ten percent or more of the securities issued in the registered offering and resold these in the public market. Rutherford B. Campbell, Jr., Resales of Securities Under the Securities Act of 1933, 52 WASH. & LEE L. REV. 1333, 1347 (1995). The Commission has since abandoned the doctrine and replaced it with the rule that the resale by a nonaffiliate of the issuer of securities issued in a registered offering does not constitute a distribution so long as the seller acquired the securities "in the ordinary course of business" and the seller has '"no arrangement with [the issuer or] any person to participate in the distribution of such securities.'"
74. Id. at 1349 (alteration in original) (quoting Exxon Capital Holdings Corp., SEC No-Action Letter, 1988 WL 234336, at *1 (Apr. 13,1988)).
75. Under SEC rules, a person is considered an affiliate of an issuer if the person "directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer."
76. C.F.R. § 230.144(a)(1) (2008).
77. See 7 HICKS, supra note 35, § 1:3.
78. See l5 U.S.C.§ 77e (2006).
79. See 17 C.F.R, § 230.144, Preliminary Note 1 ("If any person sells a non-exempt security to any other person, the sale must be registered unless an exemption can be found for the transaction.").
80. See l5 U.S.C.§ 77d(l).
81. Id.
82. 15 U.S.C. §77b(a)(11).
83. 17 C.F.R.§ 230.144(b).
84. See id. § 230.144(b)(l)(i), (d)(l)(i)-(ii). In some situations, Rule 144 allows an investor to include the holding period of previous investors in determining when her holding period ends.
85. See id. § 230.144(d). Rule 144 imposes additional conditions for the resale of restricted stock by an affiliate of an issuer.
86. See, e.g., § 230.144(c), (e), (h).
87. See 7A HICKS, supra note 35, § 10:12, at 10-24. Regulation D states that "[t]he issuer shall exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(a)(11) of the [Securities] Act." 17 C.F.R. § 230.502(d) (2008). The reasonable steps requirement stems from the SEC's view that a resale in violation of Section 5 jeopardizes the exempt status of an issuer's private placement because the reseller may be viewed as a conduit for a wider distribution of the issuer's offering.
88. See Commission's Statement Setting Forth Its Policy on Use of Legends and Stop-Transfer Instructions as Evidence of Nonpublic Offering, Securities Act Release No. 5121, 1970 SEC LEXIS 1463, *l-2 (Dec. 30, 1970). In such an event, the resale will be considered part of the original offering by the issuer. This, in turn, could destroy the issuer's Section 4(2)/Rule 506 exemption, if, for example, resales were made to nonaccredited investors without providing any information about the issuer or through general solicitation.
89. See JAMES D. COX ET AL., Securities Regulation Cases and Materials 400 (3d ed. 2001) (noting that issuers are "vitally concerned with the effect of resales, for a determination that supposed investors were actually acting as conduits in a public offering will retroactively negate the validity of the original transaction as a private placement").
90. See LOSS ETAL, supra note 18, §3-D-1.
91. See generally ARNOLD S. JACOBS, 8B OPINION LETTERS IN SECURITIES MATTERS § 58:2 (2007) (describing the formalities associated with selling restricted stock);
92. see also 17 C.F.R. § 230.502(d) (listing measures the issuer can take to ensure investors are not underwriters).
93. 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(1-1/2) exemption).
94. Id.
95. See 7A HICKS, supra note 35, § 9:109.
96. See id. §9:110.
97. See Aswath Damodaran, Marketability and Value: Measuring the Illiquidity Discount 3 (July 30, 2005) (unpublished manuscript), http://pages.stern.nyu.edu/-adamodar/pdfiles/papers/liquidity.pdf (noting that "[y]ou can sell any asset, no matter how illiquid it is perceived to be, if you are willing to accept a lower price for it").
98. Rule 144A 1988 Release, supra note 5, at 44,020 n.44 ("Restricted securities typically sell at a discount to securities that are freely tradeable in the public market.");
99. see also Investment Company Act Release No. 5847, 35 Fed. Reg. 19,989, 19,990 (Oct. 21, 1969) ("Restricted securities are often purchased at a discount, frequently substantial, from the market price of outstanding unrestricted securities of the same class. This reflects the fact that securities which cannot be readily sold in the public market place are less valuable than securities which can be sold⋯.").
100. See William P. Dukes, Business Valuation Basics for Attorneys, J. BUS. VALUATION & ECON. LOSS ANALYSIS, Jan. 2006, at 16 tbl.1, available at http://www.bepress.com/cgi/viewcontent.cgi?article=10086&context=jbvela (providing a summary table of eleven restricted stock studies).
101. Id. at 7.
102. See Damodaran, supra note 76, at 28 (noting that "the difference can be viewed as a discount for illiquidity").
103. Dukes, supra note 78, at 16 tbl.1. See Damodaran, supra note 76, at 28-29, for a discussion of additional studies. Damodaran notes several limitations to "two of the earliest and most quoted studies" (Maher and Silber, both of which are included in Dukes's aggregation), including small sample sizes, long time periods, selection bias skewing, and factors other than illiquidity reflected in the discount. Id. at 28.
104. See Damodaran, supra note 76, at 3 (noting that "[o]ne way of capturing the cost of illiquidity is through transaction costs").
105. See supra text accompanying notes 69-71. It should be noted that the cost, time for completing, and number of steps will vary depending on whether the investor is selling in compliance with Rule 144. If, for example, the investor is selling outside of the Rule in reliance on the 4(1-1/2) exemption, the legal opinion of seller's counsel referenced above will undoubtedly be more complicated and time consuming for counsel to prepare, more risky to provide, and therefore more expensive for the investor.
106. See Damodaran, supra note 76, at 4 (describing the opportunity cost resulting from waiting to trade). Of course, instead of waiting, an investor could attempt to sell under the 4(1-1/2) exemption, but as discussed above, doing so is viewed as imprudent.
107. Id. An issuer can diminish the segment of discount resulting from expected trade delay costs by granting investors registration rights.
108. See Livingston & Zhou, supra note 16, at 22 (finding that the yield premium for high-yield Rule 144A debt offerings is greater than that of offerings with registration rights).
109. See generally ROBERT J. HAFT, 2 VENTURE CAPITAL AND SMALL BUSINESS FINANCING § 1:22 (2007), for a description of registration rights. The extent the grant of registration rights will decrease the discount depends on issuer characteristics. For example, it is much quicker and cheaper for an issuer to register a resale of restricted stock if the issuer is already public and is eligible to register the transaction on Form S-3. Conversely, registration rights are of little value in reducing trade delay costs if they are granted by a private company that is years away from an IPO.
110. See Damodaran, supra note 76, at 18.
111. Rule 144A Adopting Release, supra note 7, at 17,934; see also id. at 17,943 ("It appears⋯ that Rule 144A will provide various benefits, including increased liquidity of restricted securities and greater certainty as to the registration requirements of the Securities Act.").
112. Id. at 17,935-36.
113. Rule 144A 1988 Release, supra note 5, at 44,022. Increased liquidity also potentially opens up the market for investments by regulated institutions such as banks that can only invest in marketable securities.
114. See Jeanne M. Campanelli & Peter Castellon, The Mechanics of Rule 144A/Regulation S Underwritings, in SECURITIES OFFERINGS 2006: OPERATING UNDER THE NEW RULES 387, 426 (2006). In a similar vein, the SEC has taken the position that the Investment Company Act of 1940 "prudent[ly] limits" open-end investment companies from investing more than 10 percent of their portfolios in restricted securities or other assets lacking readily available market quotations.
115. See Investment Company Act Release No. 5847, supra note 77, at 19,991. However, in the Rule 144A adopting release, the SEC modified its position with respect to Rule 144A securities essentially allowing an investment company's board to determine whether the security is liquid enough not to count against the 10 percent limitation. Rule 144A Adopting Release, supra note 7, at 17,940.
116. 17 C.F.R. § 230.144A(b) (2008).
117. Rule 144A 1988 Release, supra note 5, at 44,026.
118. See supra text accompanying note 75.
119. See Rule 144A 1988 Release, supra note 5, at 44,026;
120. see also Rule 144A Adopting Release, supra note 7, at 17,934.
121. Rule 144A 1988 Release, supra note 5, at 44,026.
122. 17 C.F.R. § 230.144A(d)(l).
123. The list of entities that qualify as qualified institutional buyers (QIBs), provided they meet the $100 million test, is comprised of business development companies, business trusts, corporations (other than banks or savings and loans associations), ERISA employee benefit plans, insurance companies, licensed small business investment companies, organizations described in Section 501(c)(3) of the Internal Revenue Code, partnerships, public employee benefit plans, registered investment advisers, registered investment companies, and trust funds whose trustees are banks or trust companies and whose participants include only public ERISA employee benefit plans (other than individual retirement accounts or H.R. 10 plans). Id. § 230.144A(a)(l)(i). It should be noted that a registered investment company also qualifies as a QIB if "acting for its own account or for the accounts of other qualified institutional buyers⋯ [it] is part of a family of investment companies which own in the aggregate at least $100 million in securities of issuers, other than issuers that are affiliated with the investment company or are part of such family of investment companies."
124. Id. § 230.144A(a)(l)(iv). Additionally, limited liability companies as well as U.S. states and their incorporated political subdivisions are viewed as qualifying as "corporations" for purposes of the QIB definition.
125. See CHARLES J. JOHNSON, JR. & JOSEPH MCLAUGHLIN, CORPORATE FINANCE AND THE SECURITIES LAWS § 7.08{A}, at 7-40 n. 79.
126. 17 C.F.R.§230.144A(a)(l)(i).
127. Id. § 230.144A(a)(l)(v).
128. Rule 144A 1988 Release, supra note 5, at 44,028.
129. Id.
130. 346 U.S. 119(1953).
131. See supra text accompanying notes 24-33.
132. 17 C.F.R. § 230.144A(a)(l)(vi).
133. Rule 144A Adopting Release, supra note 7, at 17,936.
134. Id.
135. 17 C.F.R. § 230.144A(a)(l)(ii).
136. Id. § 230.144A(a)(l)(iii). Rule 144A defines a "riskless principal transaction" as "a transaction in which a dealer buys a security from any person and makes a simultaneous offsetting sale of such security to a qualified institutional buyer, including another dealer acting as riskless principal for a qualified institutional buyer."
137. Id. § 230.144A(a)(5).
138. Id. § 230.144A(a)(l)(iii).
139. Rule 144A Adopting Release, supra note 7, at 17,936.
140. Id.
141. 17 C.F.R.§230.144A(d)(l)(i).
142. Id. § 230.144A(d)(l)(ii). The adopting release notes that "[t]he seller and any person acting on its behalf would be able to rely on the foregoing information notwithstanding the existence of other, more current, information that may show a lower amount of securities owned by the prospective purchaser." Rule 144A Adopting Release, supra note 7, at 17,938.
143. 17 C.F.R. § 230.144A(d)(l)(iii).
144. Id. § 230.144A(d)(l)(iv).
145. Id. § 230.144A(d)(l)(i), (ii), (iii).
146. CommScan LLC, SEC No-Action Letter, 1999 WL 46707 (Feb. 3, 1999) [hereinafter CommScan Letter].
147. Communicator Inc., SEC No-Action Letter, 2002 WL 31626913 (Sept. 20, 2002).
148. For a certification form used by Communicator Inc., see Certificate of Rule 144A Qualified Institutional Buyer and Section 3(c)(7) Qualified Purchaser (2004), https://www.compliancehub.com/html/Form-QIB-QP-Certification.pdf. See also CommScan Letter, supra note 116, at *2.
149. See CommScan Letter, supra note 116, at *2. Commscan noted in its letter that it would delete companies from the list as follows: Institutions will be deleted from the QIB List if their most recent questionnaire becomes stale or if it is learned that such institution is no longer a qualified institutional buyer. CommScan will automatically delete an institution from the list if the most recent questionnaire provided by such institution is more than 16 months old in the case of a domestic institution or 18 months old in the case of a foreign institution. CommScan will also delete institutions from the list promptly upon the employees of CommScan responsible for the QIB List learning that such institution is no longer a qualified institutional buyer.
150. Id. at *2-3.
151. Id. at *1 ("[I]t is the position of the [Commission] that a seller and any person acting on its behalf may rely on the QIB List as a method for establishing a reasonable belief that a prospective purchaser is a qualified institutional buyer.").
152. 17 C.F.R. § 230.144A(d)(3)(i) (2008).
153. BLOOMENTHAL, supra note 4, § 10:14.
154. See Resale of Restricted Securities International Series-104; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Securities Act Release No. 6839, 54 Fed. Reg. 30,076, 30,081 (July 18,1989).
155. Id.
156. Id.
157. Id. at 30,077.
158. This view was based on "information currently available to the Commission [which] suggests that it would not be financially advantageous for companies generally to sell securities in a market that was limited in its depth and liquidity compared to an existing public market for the same securities." Id. at 30,078.
159. 17 C.F.R. § 230.144A(d)(2) (2008).
160. DARROW ET. AL., supra note 12, at 48 ("The way in which Rule 144A placements are conducted, from an issuer's standpoint, is very similar to traditional underwritten public offerings.").
161. See 17 C.F.R. § 230.502(d).
162. See Rule 144A 1988 Release, supra note 5, at 44,028.
163. Id.
164. Id. at 44,029.
165. 17 C.F.R. § 230.144A(d)(4)(i). Rule 12g3-2(b) under the Exchange Act, 17 C.F.R. § 240.12g3-2(b), provides an exemption from the reporting requirements of the Exchange Act for a foreign private issuer provided it files with the SEC information required by its home-country regulator or exchange and meets certain other conditions. See BLOOMENTHAL, supra note 4, § 22:11, for a discussion of these conditions.
166. 17 C.F.R. § 230.144A(d)(4)(i).
167. Id. Section (d)(4)(ii) provides various parameters for how old the information can be and still be deemed reasonably current.
168. Id. § 230.144A(d)(4)(i).
169. Rule 144A Adopting Release, supra note 7, at 17,939.
170. See JOHNSON & MCLAUGHLIN, supra note 96, § 7.09[A][1], at 7-48.7;
171. see also Campanelli & Castellon, supra note 89, at 391;
172. ARROW ET. AL., supra note 12, at 46; BLOOMENTHAL, supra note 4, § 10:17.
173. See Campanelli & Castellon, supra note 89, at 448.
174. See id.;
175. see also BLOOMENTHAL, supra note 4, § 10:17.
176. See supra note 65.
177. The release provides: In the case of securities originally offered and sold under Regulation D of the Securities Act, a person that purchases securities from an issuer and immediately offers and sells such securities in accordance with the Rule is not an "underwriter" within the meaning of Rule 502(d) of Regulation D. Issuers making a Regulation D offering, who generally must exercise reasonable care to assure that purchasers are not underwriters, therefore would not be required to preclude resales under Rule 144A. Similarly, the fact that purchasers of securities from the issuer may purchase such securities with a view to reselling such securities pursuant to the Rule will not affect the availability to such issuer of an exemption under Section 4(2) of the Securities Act from the registration requirements of the Securities Act.
178. Rule 144A Adopting Release, supra note 7, at 19,735.
179. See 17 C.RR. § 230.144A, Preliminary Note 7., (e) (2008).
180. See JOHNSON & MCLAUGHLIN, supra note 96, § 7.08, at 7-39.
181. fs40 146. 17 C.F.R. § 230.144(a)(3)(iii).
182. See Campanelli & Castellon, supra note 89, at 428.
183. See, e.g., Catlin Insurance Company LTD., Offering Memorandum 119-20 (Jan. 11, 2007) (describing transfer restrictions applicable to shares issued in Catlin's January 2007 Rule 144A offering of preferred stock).
184. See, e.g., supra text accompanying note 71 (describing the process for transferring restricted securities).
185. See Campanelli & Castellon, supra note 89, at 391.
186. BLOOMENTHAL, supra note 4, § 10:16. Note that Rule 144(d)(1) allows an owner of restricted securities to add to its holding period the holding periods of prior owners unaffiliated with the issuer.
187. See 17 C.F.R. § 230.144(d)(1).
188. See Sender, supra note 3.
189. See id.
190. Lynn Cowan, Rival Bankers Teaming Up in Private Securities Sales, WALL. ST. J., Oct. 29, 2007, at A14.
191. See Wall Street Firms to Launch Electronic-Trading Platform, WALL ST. J., Jul. 24, 2007, at C6.
192. Cowan, supra note 154.
193. See Press Release, NASDAQ Stock Market, Inc., The PORTAL Alliance to Create Industry-Standard Facility for 144A Equity Securities (Nov. 12, 2007), http://ir.nasdaq.com/releasedetail.cfm?ReleaseID=275224. Firms involved at the time included Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, and Wachovia.
194. Id.
195. See Self Regulatory Organizations; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendments to Proposed Rule Change of the National Association of Securities Dealers, Inc., Relating to the Operation of the PORTAL Market, Exchange Act Release No. 34-27956, 1990 SEC LEXIS 815 (Apr. 27, 1990) [hereinafter PORTAL Adopting Release]. Specifically, PORTAL was designed as a computer and communications system to be used to disseminate quotes and transaction information concerning Rule 144A-eligible securities as well as clear and settle trades.
196. Id. at *1. Note that initially PORTAL was an acronym for "Private Offering, Resale and Trading through Automated Linkages."
197. Seidman, supra note 8, at 344 n.97. The National Association of Securities Dealers, however, dropped the title but kept "PORTAL" as the nonacronym name for the platform.
198. Id.
199. Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change as Modified by Amendments No. 1, 3, and 4 Thereto to Reestablish a Quotation and Trading System, The PORTAL(R) Market, for Securities That Are Designated by Nasdaq as PORTAL Securities, Exchange Act Release No. 56172, 2007 SEC LEXIS 1714, at *4 (Jul. 31, 2007) [hereinafter PORTAL Reestablishment Release]. NASDAQ believes the failure "is, in part, because PORTAL securities could only be traded in the PORTAL Market and the original PORTAL rules imposed trade reporting for all transactions in PORTAL securities at a time when there were no trade reporting requirements for privately-placed securities. In addition, NASDAQ believes PORTAL did not develop because it required use of cumbersome technology for access to the PORTAL Market computer system for reporting purposes, which was a stand-alone computer system."
200. Id.
201. Id. at *5. It should be noted that issuers do nonetheless typically register Rule 144A-eligible securities as PORTAL securities. This is because, with exception of investment grade rated debt securities, PORTAL designation is required for a security to be assigned a CUSIP identification number and eligible for book-entry delivery services of The Depository Trust Company (DTC), both of which are critical for attracting investors and facilitating trading in the securities. NASDAQ Stock Market LLC, SEC No-Action Letter, 2007 SEC No-Act. LEXIS 553, at *11 (July 31, 2007) [hereinafter NASDAQ No-Action Letter]. In fact, up until its relaunch, PORTAL has served as little more than a gatekeeper for CUSIP and DTC eligibility for Rule 144A securities.
202. See PORTAL Reestablishment Release, supra note 159, at *5.
203. See Press Release, NASDAQ Stock Market, Inc., NASDAQ's Electronic Trading Platform for the 144A Private Placement Market Is Approved by the SEC (Aug. 1, 2007), http://www.nasdaq.con/newsroom/news/newsroomnewsStory.aspx? textpath=pr2007%5CACQPMZ 200708010800PRIMZONEFULLFEED124065.htm (noting that the new and improved PORTAL system would go live on August 15, 2007).
204. Id.
205. PORTAL Reestablishment Release, supra note 159, at *1.
206. See id. at *6-10.
207. Id. at *6.
208. Id. at *6-7.
209. The Oaktree deal raised $880 million. See supra note 1.
210. For a description of the New York Stock Exchange's (NYSE) and NASDAQ's listing requirements, see BLOOMENTHAL, supra note 4, ch.11.
211. Insider sales are subject to any applicable lock-up agreement and various securities regulations. See JOHNSON & MCLAUGHLIN, supra note 96, at 2-34 (discussing lock-up agreements);
212. BLOOMENTHAL, supra note 4, ch.14 (discussing reporting and short-swing profit liability under Section 16 of the Securities Exchange Act of 1934).
213. See Bernard S. Black & Ronald J. Gilson, Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets, 47 J. FIN. ECON. 243, 256 (1998).
214. See NASDAQ, GOING PUBLIC: A GUIDE FOR NORTH AMERICAN COMPANIES TO LISTING ON THE U.S. SECURITIES MARKETS 15-16 (Nicole Lew ed., 2005) [hereinafter GOING PUBLIC GUIDE].
215. See id. at 15.
216. See Ronald J. Gilson & Charles K. Whitehead, Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets, 108 COLUM. L. REV. 231, 256 (2008) ("[T]he informational efficiency of public company share prices provides an important management tool-a company receives virtually instant feedback through prices and periodic feedback through analyst reports, concerning its strategy and performance and that of its competitors⋯");
217. see also Vojislav Maksimovic & Pegaret Pichler, Technological Innovation and Initial Public Offerings, 14 REV. FIN. STUD. 459, 461 (2001).
218. See James C. Brau et. al., The Choice of IPO Versus Takeover: Empirical Evidence, 76 J. BUS. 583, 590 (2003).
219. see 11 SIMON M. LORNE, ACQUISITIONS AND MERGERS: NEGOTIATED AND CONTESTED TRANSACTIONS § 3:4 (2008).
220. Andrew Ross Sorkin & Michael j. de la Merced, Buyout Firms Said to Seek a Private Market Offering, N.Y. TIMES, July 18, 2007, at C3.
221. I mention a phantom stock plan because the 500 record holder trigger for Exchange Act reporting, discussed infra text accompanying note 203, essentially limits the number of employees to whom a company can issue stock or stock options.
222. See supra note 166 and accompanying text.
223. See GOING PUBLIC GUIDE, supra note 171, at 15;
224. James C. Brau & Stanley E. Fawcett, Evidence on What CFOs Think About the IPO Process: Practice, Theory, and Managerial Implications, J. APPLIED CORP. FIN., Summer 2006, at 107, 108;
225. Richard A. Mann et al., Starting From Scratch: A lawyers Guide to Representing a Start-Up Company, 56 ARK. L. REV. 773, 840-41 (2004).
226. See Stacy J. Kanter, Deciding Whether to Go Public: Certain Basic Considerations, in HOW TO PREPARE AN INITIAL PUBLIC OFFERING 9, 24-25 (2002);
227. William K. Sjostrom, Jr., Going Public Through an Internet Direct Public Offering: A Sensible Alternative for Small Companies?, 53 FLA. L. REV. 529, 575 (2001);
228. sources cited supra note 179.
229. See GOING PUBLIC GUIDE, supra note 171, at 15.
230. See Gilson & Whitehead, supra note 173, at 257;
231. Sjostrom, supra note 180, at 575.
232. See GOING PUBLIC GUIDE, supra note 171, at 16.
233. GAO REPORT, supra note 56, at 23.
234. See id. at 23-24. The rate is "generally lower for large issues than for small issues because large issues involve less risk and work per dollar of offering."
235. Id. at 24.
236. See id. at 24.
237. See id.
238. See Sjostrom, supra note 180, at 575-76;
239. see also John F. Olson & Daniel W. Nelson, What Makes a Company a Good Candidate for Going Public? Criteria, Advantages and Disadvantages Related to Going Public, in POSTGRADUATE COURSE IN FEDERAL SECURITIES LAW 240 (2001).
240. See TIM JENKINSON & ALEXANDER LJUNGQVIST, GOING PUBLIC 24 (2d ed. 2001);
241. Jay R. Ritter, Investment Banking and Securities Issuance, in 1A HANDBOOK OF THE ECONOMICS OF FINANCE 255, 281 (2003).
242. See JENKINSON & LJUNGQVIST, supra note 189, at 4. For a discussion of various theories of the new issues underpricing phenomenon, see Ritter, supra note 189, at 286-91.
243. See JENKINSON & LJUNGQVIST, supra note 189, at 5.
244. For example, a study comparing gross underwriter spreads between Rule 144A and public debt offerings found that these costs were not statistically different. Livingston & Zhou, supra note 16, at 24.
245. See DARROW ET. AL., supra note 12, at II-1 to -3 (setting forth an illustrative time schedule for a Rule 144A placement).
246. GOING PUBLIC GUIDE, supra note 171, at 18.
247. Lambe, supra note 15, at 40-41.
248. 15 U.S.C. §§ 78a-78nn (2006).
249. See generally BLOOMENTHAL, supra note 4, §§ 12:26, 12:31, 12:33, 12:52, for a description of annual, quarterly, and current reports.
250. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.) (SOX).
251. See generally HENRY N. BUTLER & LARRY E. RIBSTEIN, THE SARBANES-O XLEY DEBACLE: WHAT WE'VE LEARNED; HOW TO FIX IT 37-42 (2006)(describing the direct compliance costs of SOX). One estimate puts the cost of complying with SOX at $4.36 million per company.
252. See id. at 40.
253. A company typically has to register securities pursuant to Section 12 of the Exchange Act concurrently with its IPO. Section 12 registration triggers proxy regulation compliance. In narrow circumstances, it is possible to go public and not be required to register under Section 12.
254. See THOMAS l HAZEN, THE LAW OF SECURITIES REGULATION § 9.2[l] (5th ed. 2005).
255. See GOING PUBLIC GUIDE, supra note 171, at 16.
256. See 15 U.S.C. § 78o(d) (2006).
257. See Id. § 78l(a).
258. See Id. § 78l(g)(1);
259. C.F.R. § 240.12g-1 (2008).
260. See PORTAL Press Release, supra note 9.
261. See HAZEN, supra note 199, §7.3.
262. See id. § 12.4.
263. See id. § 10.3.
264. See BUTLER & RIBSTEIN, supra note 198, at 75-76 (describing liability threats resulting from the SOX requirement that officers certify as to various aspects of a company's internal controls).
265. See BLOOMENTHAL, supra note 4, § 27:27.
266. See HAZEN, supra note 199, § 12.17.
267. See id. § 13.2.
268. See BUTLER & RIBSTEIN, supra note 198, at 45.
269. 15 U.S.C. § 77k(2006).
270. Id. § 77l(a)(2). At one time, many commentators and courts believed that Section 12(a)(2) applied to private offerings. However, in a 1992 decision, the Supreme Court limited application of Section 12(a)(2) to public offerings by an issuer or controlling person.
271. See Gustafson v. Alloyd Co., 513 U.S. 561, 569 (1995).
272. 17 C.F.R. § 240.10b-5 (2007).
273. COX ET AL., supra note 69, at 629-30.
274. See 17 C.F.R. § 240.10b-5(b) (2007).
275. See HAZEN, supra note 199, § 12.4.
276. See id. § 7.3[4], [7], [8].
277. It should be noted, however, that a "controlled company," that is, a company of which a majority of voting power is held by an individual, company, or group, is exempt from the requirement to have a majority of independent directors, a nominating/corporate governance committee, and a compensation committee. See NYSE, Inc., Listed Company Manual § 303A (2008) [hereinafter NYSE Manual];
278. NASDAQ Stock Market Rules § 4350(c)(5) (2008), available at http://www.nasdaqtrader.com/trader.aspx?id=rules [hereinafter NASDAQ Rules]. Hence, a company can preserve some flexibility in this regard by selling only a minority of voting power in its IPO.
279. See NYSE Manual, supra note 220, §§ 303A.01, .04-.06.
280. See id. § 303A.07(a).
281. See id. § 303A.03.
282. See NASDAQ Rules, supra note 220, § 4350(c)-(e).
283. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 202, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
284. See id. § 201.
285. See id. § 203.
286. See id. § 402.
287. See GOING PUBLIC GUIDE, supra note 171, at 16 ("As a matter of practical necessity, the management of a public company must consider the likely impact of business decisions on the price of the company's shares.").
288. See id.
289. See Jeremy C. Stein, Agency, Information and Corporate Investment, in HANDBOOK OF THE ECONOMICS OF FINANCE 111, 131 (2003). Basically, management with aspirations to climb the corporate ladder in the short-term have an incentive to focus on the short-term.
290. See GOING PUBLIC GUIDE, supra note 171, at 16.
291. See 17 C.F.R. §§ 229.402-.404, .506 (2007).
292. See BLOOMENTHAL, supra note 4, § 27:27.
293. See Maksimovic & Pichler, supra note 173, at 460.
294. See supra Part II.A.4, for a description of Rule 144A's information requirements.
295. NASDAQ No-Action Letter, supra note 160, at *5-6;
296. see also 17 C.F.R. § 240.15c2-11 (2007). Required information includes the nature of the issuers business, products or services offered, and facilities; the name of the issuer's chief executive officer and members of its board of directors; and the issuer's most recent balance sheet and profit and loss and retained earnings statement.
297. See id. § 240.15c2-11(a)(5).
298. See Edmund W. Kitch, Regulation of the Securities Markets, in 3 ENCYCLOPEDIA OF LAW AND ECONOMICS 813, 822 (2000) ("The most commonly asserted objective of securities regulation is the protection of investors.").
299. See generally, e.g., Robert Prentice, Sarbanes-Oxley: The Evidence Regarding the Impact of SOX 404, 29 CARDOZO L. REV. 703 (2007) (describing and challenging criticisms of SOX § 404).
300. Lambe, supra note 15, at 40.
301. COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION, at xi (2006), available at http://www.capmktsreg.org/pdfs/11.30CICommittee-Interim-ReportREV2.pdf.
302. See BUTLER & RIBSTEIN, supra note 198, at 86-93;
303. see also Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521, 1544-94(2005).
304. 346 U.S. 119 (1953).
305. Id. at 125.
306. Rule 144A 1988 Release, supra note 5, at 44,027.
307. ROBERT CLARK, CORPORATE LAW 730 (1986).
308. See, e.g., Luis F. Moreno Treviño, Access to U.S. Capital Markets for Foreign Issuers: Rule 144A Private Placements, 16 HOUS. J. INT'L L. 159, 206 (1993);
309. Kellye Y. Testy, Note, The Capital Markets in Transition: A Response to New SEC Rule 144A, 66 IND. L.J. 233, 260 (1990).
310. Proposed Revision of Certain Exemptions From the Registration Provisions of the Securities Act of 1933 for Transactions Involving Limited Offers and Sales, Release No. 33-6339, 46 Fed. Reg. 41,791, 41,801 (Aug. 18, 1981).
311. See Defining the Term "Qualified Purchaser" Under the Securities Act of 1933, Exchange Act Release No. 33-8041, 76 SEC Docket 1035 (Dec. 19, 2001).
312. See supra text accompanying note 46, for these proxies.
313. See Stephen Choi, Regulating Investors Not Issuers: A Market-Based Proposal, 88 CAL. L. REV. 279, 305 (2000).
314. Rule 144A 1988 Release, supra note 5, at 44,028 (emphasis added).
315. See supra text accompanying note 50.
316. See supra text accompanying notes 42-47, for an overview of Regulation D. Note that the underwriter could not rely on Regulation D for a sale to a non-QIB because the Regulation D exemptions are only available to issuers of the securities.
317. See 17 C.F.R. § 230.501, Regulation D, Preliminary Note 4 ("These rules are available only to the issuer of the securities and not to any affiliate of that issuer or to any other person for resales of the issuer's securities.").
318. See John C. Cocchiarella et. al., Private Placements, Resales and Rule 144A and Regulation S Offerings, in SECURITIES OFFERINGS 2007: OPERATING UNDER THE NEW RULES 181, 237 (2007).
319. See Many Investors Fume Over Hedge-Fund Rule, N.Y. TIMES, Feb. 12, 2007, http://dealbook.blogs.nytimes.com/2007/02/12/many-investors- fume-over-hedge-fund-rule (describing various comments filed with the SEC that are critical of the proposal). The proposed rules include amendments to Regulation D that change the definition of accredited investor to be applied to a natural person with respect to an investment in a "private investment vehicle" (for example, a hedge fund). Under the proposal, for a natural person hedge fund investor to be considered accredited (what the release refers to as an "accredited natural person"), he or she would need to meet the existing definition of accredited investor under Rule 501(a)(5) or (6) (that is, a net worth of at least $1,000,000, annual income of at least $200,000, or joint annual income of at least $300,000) and own at least $2.5 million in investments.
320. See Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles; Accredited Investors in Certain Private Investment Vehicles, Securities Act Release No. 33-8766, 72 Fed. Reg. 400, 405-408 (Jan. 27, 2007).
321. See supra text accompanying notes 53-56.
322. See 7A HICKS, supra note 35, § 10A:46, at 10A-61.
323. See id.
324. See id. § 10A:46, at 10A-62.
325. Section 28 provides: The [SEC], by rule or regulation, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this subchapter or of any rule or regulation issued under this subchapter, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors. 15 U.S.C. § 77z-3 (2006).
326. See Revisions of Limited Offering Exemptions in Regulation D, Securities Act Release No. 33-8828, 72 Fed. Reg. 45,116, 45,117 (Aug. 3, 2007) (proposing Rule 507 under the general exemptive authority provided by Section 28 of the Securities Act).
327. See 17 C.F.R. § 230.144(b)(1)(i).
328. For a brief description of the Pink Sheets, see Sjostrom, supra note 180, at 568.
329. See id.;
330. see also Michael K. Molitor, Will More Sunlight Fade the Pink Sheets? Increasing Public Information About Non-Reporting Issuers With Quoted Securities, 39 IND. L. REV. 309, 331 (2006).
331. See supra Part III.A.
332. See Molitor, supra note 265, at 311.
333. SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953).
334. In recommending the scope of Section 12(g)(1) to Congress, the SEC recognized that the recordholder cutoff had to be set at a level that was "manageable from the regulatory standpoint and not disproportionately burdensome on issuers in relation to the national public interest to be served." SEC. & EXCH. COMM'N REPORT OF SPECIAL STUDY OF SECURITIES MARKETS, H.R. DOC. NO. 95, pt. 3, at 17 (1963).
335. "Street name" means that the shares are held of record in the name of a depository company used by the brokerage house and not the name of the beneficial owner.
336. See Troy A. Paredes, Blinded by the Light: Information Overload and Its Consequences for Securities Regulation, 81 WASH. U. L.Q. 417, 421-22 (2003) ("Critics of mandatory disclosure argue that a company will voluntarily disclose information that investors demand in order to reduce its cost of capital and avoid any discount that the market might apply to the company's stock price if investors think that they have too little information to evaluate the company and its securities properly or, worse yet, if investors think that the company is hiding something.").
337. See Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 714-15 (1984).
338. See Paredes, supra note 271, at 421 ("Supporters of mandatory disclosure counter that because information has public good aspects, voluntary disclosure will result in too little disclosure."). The details of this debate have been discussed at length elsewhere and are beyond the scope of this Article.
339. See, for example, id. at 485 n.11, for cites to some of the leading works in the area.
340. See, e.g., BUTLER & RIBSTEIN, supra note 198, at 3 ("Both logic and evidence make it clear that SOX was a costly mistake.");
341. Robert A. Prentice & David B. Spence, Sarbanes-Oxley as Quack Corporate Governance: How Wise Is the Received Wisdom?, 95 GEO. L.J. 1843, 1908 (2007) (challenging the characterization of SOX as "quack corporate governance" and arguing in favor of some of its provisions);
342. Romano, supra note 242, at 1602 (arguing that substantive corporate governance provisions of SOX "were seriously misconceived, because they are not likely to improve audit quality or otherwise enhance firm performance and thereby benefit investors as Congress intended").