©ZAG/S&W LLP 2010 An International Joint Venture Law Firm Raising Capital in 2010 – What Israeli...

©ZAG/S&W LLP 2010 An International Joint Venture Law Firmwww.zag-sw.com

Raising Capital in 2010 – What Israeli Companies Listed on Nasdaq Need to be Aware of

ACC Israel Annual Conference June 16, 2010

Presented by:Howard E. Berkenblit (Boston)Oded Har-Even (New York)

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• SEC’s 2008 regulatory changes affecting fund raising process› Short-form S-3/F-3 registration statement now

available for Nasdaq companies without $75 million in public float

• Can now do primary securities offerings on Form S-3 within limits

• Can now do “shelf registrations” that greatly facilitate fund raising

Raising Capital in 2010

ZAG/S&W LLP, An International Joint Venture Law Firm

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• SEC’s 2008 regulatory changes affecting fund raising process (cont’d)

› Shorter holding periods under Rule 144 for resales of restricted securities

Effect: Adds liquidity

Takes some pressure off re-saleregistration statements



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• Overview of Financing Techniques for Companies Public in the United States› “Firm commitment” underwritten public offering,

non-shelf› “Registered direct” (best efforts) underwriting,

non-shelf› PIPE transactions› Regulation S


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• Overview of Financing Techniques for Companies Public in the United States (cont’d)

› Rule 144A offerings to qualified institutional buyers (QIBs)

› Rights offerings to existing shareholders› Shelf registrations

• Direct company sale• Firm commitment or best efforts underwriting


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• Recent Trends› IPO markets improved in 2009 compared to

2008 but is still slow and unpredictable› Significant decrease in traditional

unregistered PIPE transactions in 2008 and 2009

› 2009 – Good year for Shelf Registrations• Registered Direct Offerings [25% of broader

PIPE transactions in 2009]


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• Firm Commitment Underwritten Public Offering (Non-shelf)› Advantages

• Usually accompanied by significant marketing efforts, including “road show” by the investment bankers

› Creates interest in the stock and therefore better pricing



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• Firm Commitment Underwritten Public Offering (Non-shelf) (cont’d)

› Advantages• Syndicate mechanics “condition the market”

› Syndicate “books” orders substantially in excess of shares to be sold in the deal

› Syndicate books sales substantially in excess of shares to be sold in the deal – i.e., syndicate short position

› Sometimes syndicate stabilization of the after-market



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› Disadvantages• Usually not available to smaller issuers –

perceived risk to underwriters in the firm commitment process

• Delay – wait for SEC review (unpredictable)



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› Disadvantages• The offering is announced in advance to the

markets by the filing of a registration statement› Often adverse market reaction because of

prospective dilution

› “Game playing” by traders in creating short positions and arbitrage



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• Registered Direct Offering (Non-Shelf)› What is it? Fancy name for a registered best

efforts underwriting› Advantages

• Significant marketing efforts by the investment banker› Creates interest in the stock› As compared to PIPES, investors get

registered/freely salable stock – no/lower liquidity discount

• Broadens range of potential buyers



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• Registered Direct Offering (Non-Shelf) (cont’d)

› What is it? Fancy name for a registered best efforts underwriting

› Advantages• Significant marketing efforts by the investment

banker› Simplified/no documentation – the buyers get the

benefit of issuer SEC liability on the registration statement

› May be able to avoid Nasdaq “20% Rule” (for non-FPIs) if a “public offering”



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• Registered Direct Offering (Non-Shelf) (cont’d)

› Disadvantages• No syndicate marketing conditioning• The offering is announced in advance to the markets

by the filing of a registration statement› Possible adverse market reaction from dilution


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• PIPE Transactions› Advantages

• Speed – no pre-deal SEC filing/review as in a registered direct or firm commitment offering

• Privacy – usually no announcement of deal prior to pricing


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• PIPE Transactions (cont’d)

› Disadvantages• KEY – LIMITED UNIVERSE OF POTENTIAL BUYERS

› Limited group of institutions that will buy› Hedge funds limited because of organizational

restrictions

› Liquidity discount

› Penalties if late subsequent SEC registration

› Ugly documentation

› Limitations of Nasdaq “20% Rule” for non-FPIs because not a “public offering”


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• Changes in PIPEs› SEC guidance on percentage limits

• SEC’s focus on quasi-primary offerings

• Demise of “death spiral” securities

• Limits are not entirely clear and may again be easing

› 144 changes may impact PIPEs because of enhanced ability to resell

• Less pressure on registration rights• Smaller discounts



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• Reg. S Offering› Advantages

• For foreign private issuers selling in home country, securities are effectively unrestricted

› Disadvantages• For U.S issuers, shares are “restricted securities”

(but now can be resold after only 6 months)• Restriction of “no direct selling efforts” in the U.S.

may restrict publication of research in the U.S.

• No sales in the U.S. or to “U.S. Persons”



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• Shelf Registration› How does it work?

• Filing a shelf registration statement on formS-3 or F-3

• Incorporation by reference – past and future• Universal shelf vs shelf with more limited

securities• $ Amount vs Number of shares• Often limited or no review by the SEC on

form S-3/F-3• Key - No SEC review at time of actual offering



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• Base Shelf Requirements› Available to smaller companies without $75

million in public float if• Meets eligibility requirements for S-3/F-3

› Class of securities registered under the Exchange Act

› Subject to section 12 or 15(d) and timely filed all required reports for at least 12 months

› No recent defaults on debt or material leases or failure to pay preferred dividends

• Not a shell company for at least 12 months



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• Base Shelf Requirements (cont’d)

› Available to smaller companies without $75 million in public float if

• Shares traded on national exchange [NASDAQ/NYSE]

• Does not sell in a 12-month period more than 1/3 of its non affiliate public float

› Price per share for purpose of calculating the float is equal to the price at which stock was last sold or the average of bid and ask price in the market as of a date within 60 days prior to date of sale

› Derivative securities [e.g., warrants] are also included in the calculation of aggregate market value of securities sold



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• Shelf› Big Advantages

• Speed – no SEC review once shelf effective

• Significantly broadens range of potential investors

• Low cost – no investor purchase documentation to prepare

• Privacy – possibly no announcement of deal prior to pricing – no downward pressure on stock price (but not for traditional firm commitment)

• No or lower liquidity discount since the shares are liquid



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• Shelf (cont’d)

› Disadvantages – None, but• 20% rule may be applicable if no “public offering”

under Nasdaq definition and price is below market› Not a “public offering” unless distribution process

resembles a traditional public offering› Smaller companies limited to 1/3 of their public float

in any 12-month period



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• Wall Crossed Deals› Confidential marketing to a group of selected

investors – sharing of non public info – investors commit to refrain from trading

› Once indication of interest is obtained, filings are made [PR, preliminary prospectus supplement, 8-K] and underwriters engage in widespread marketing



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• Wall Crossed Deals (cont’d)

› Second stage is typically completed between market closing time and market open the day after

› Starts with small group, but prices and closes like firm commitment offering for a larger group



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TraditionalFirm Commitment

Reg Direct Wall-Crossed

Smallest discount Short supplement Larger group of investors than reg direct

Raise the most $ Very quick Very quick

No 20% Nasdaq risk No publicity No publicity until after market-no chance for price impact

Good for reputation Easier to act w/o an underwriter

Underwritten


Types of Shelf Offerings – Comparison of Pros


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Traditional Reg Direct Wall-Crossed

Slower Small group of investors

Likely smaller than traditional firm commitment both in number of investors and $

Largest discount

More risk to stock price before pricing

Best efforts only May be 20% Nasdaqrisk – won’t know until too late

Long supplement 20% Nasdaq risk Risks if confidentiality agreements breached or premature disclosure to market of non-offering information


Types of Shelf Offerings – Comparison of Cons


©ZAG/S&W LLP 2010

• Shelf-FINRA and NASDAQ Issues › Base shelf clearance requirements by FINRA if

less than $150 million public float ($300 million for FPI) or public less than 3 years

› 20% Nasdaq shareholders approval – Exemption for FPIs under certain conditions



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• Shelf-FINRA and NASDAQ Issues (cont’d) › Nasdaq notices

• Listing of additional shares - 10% of shares or more or change of control – 15 calendar day advance notice› Warrants are accounted as a discount of $0.0125

per share

• Change in number of shares outstanding - 5% or more – 10 calendar days after occurrence



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• SEC Review› Though shelf takedowns are not reviewed,

SEC continuously reviews periodic filings that are incorporated by reference (e.g., 20-F)

› SEC also now looking at other sources as part of its review (e.g., websites, analyst calls, press releases)

› Remember: all SEC comment letters and issuer responses now publicly disclosed (though confidentially can be sought on a limited basis)



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• Frequent areas for comment› Non-GAAP financial measures› MD&A› Risk factors› Accounting disclosures: impairments, fair

values, revenue recognition, contingencies, income taxes

› Internal controls and disclosure controls and procedures

› Climate change› Executive compensation (for non-FPIs)› Exhibits› Undertakings



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• Other Shelf-Specific Concerns› Communications before and during offering› What securities to offer› Restatements before offerings› Citing to expert reports› Safe harbor language› Upfront costs – SEC fees,

legal and accounting, trustee (if debt is registered)



©ZAG/S&W LLP 2010

Thank You

• Howard [email protected] 338 2979

› Partner Howard E. Berkenblit is a co-leader of ZAG/S&W’s securities and corporate finance group. He focuses on counseling both public and private companies involved in equity and debt financings, and ongoing corporate governance and disclosure matters, stock exchange listing standards and Sarbanes-Oxley Act compliance. He also advises Israeli and other international companies that seek to have their securities traded in the United States, as well as real estate investment trusts that engage in securities offerings and governance initiatives.

For further information, please contact:

• Oded [email protected] 660 5002

› Oded Har-Even serves as Managing Director of ZAG/S&W LLP. His practice focuses on mergers and acquisitions, debt and equity financing, and securities matters in both domestic and transborder transactions. He specializes in counseling Israeli companies traded in the U.S. on financings and ongoing corporate governance, disclosure and compliance matters. He also guides and assists Israeli start up companies in their various legal needs while establishing presence in the U.S.


©ZAG/S&W LLP 2010 An International Joint Venture Law Firmwww.zag-sw.com

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