| PIPE nightmare: Issuers face major stock dump New SEC rule means more than $35 billion in small-company shares could be unloaded Friday. "A shock to the system,' one expert predicts. |
February 11, 2008
| Smaller companies that issued unregistered securities last year may be in for a bumpy ride this week. That's because on Friday, changes that the Securities and Exchange Commission made to Rule 144, which governs unregistered securities, go into effect, which could lead investors to dump billions of dollars worth of shares and send some companies' daily trading volumes to never-before-seen levels. Last December, the SEC halved the period that investors must hold securities issued under Rule 144 before they can sell, from one year to six months. On Friday, any unregistered security issued last year between Feb. 15 and Aug. 15 becomes eligible for resale. That means more than $35 billion in shares could suddenly become available on Friday, estimates Barry Silbert, founder and CEO of Restricted Stock Partners, which manages the Restricted Securities Trading Network, the largest online marketplace for restricted securities in the country. In all of 2006 (the last year for which data are available), the total value of Rule 144 issuance amounted to $71 billion. “I think there will be a shock to the system in quite a few companies,” Mr. Silbert said, adding “but ultimately it will lead to some buying opportunities.” The companies most likely to be affected by the rule change, said Mr. Silbert, will be smaller companies with market caps of less than $1 billion that issued restricted stock through PIPE, or private investment in public equity, transactions. Mr. Silbert examined 300 PIPE deals that occurred last year in which companies issued unregistered stock. Of those companies, 66% will have securities equal to more than three months of their average daily trading volume becoming salable on Friday. Some of those companies could see 100 or more times their average daily trading volume potentially available for sale in one day, he predicted. Industry watchers expect many investors to head for the exits come Friday—simply because they can. “Stockholders who held shares are going to go ahead and sell,” said Anna Pinedo, a partner at Morrison & Foerster who specializes in securities law. “They are going to watch the market, but they will sell if they can.” Aside from any volatility come Friday, Ms. Pinedo and others believe the changes the SEC made last December ultimately are positive for smaller companies, since the relaxed holding rules will make it easier for them to raise capital. Ms. Pinedo, who sat on the advisory committee that the SEC convened prior to the rule changes, said one motivation for the changes was the perception that Sarbanes-Oxley compliance had made capital-raising especially onerous for smaller companies. One of the principal ways in which smaller companies raise capital is through private placements and PIPE transactions, she said, and reducing the holding period for restricted securities makes them more liquid, and therefore more attractive to institutional investors. In addition to the changes to Rule 144, in December the SEC also made it easier for smaller companies to register securities through a so-called S-3 filing, which allows for less stringent disclosure than a typical S-1 registration. Previously, companies had to have at least a $75 million float to register as an S-3. “Some small companies have a reason to do a private registration, and some a public registration,” said Michael Littenberg, a partner at Schulte Roth & Zabel. “Taken together, the changes support capital formation.” FW | ||||
