NEW YORK (April 13, 2009) — On April 1, 2009, McDermott Will & Emery LLP sponsored a webinar on "Raising Capital in a Changed World." Members of McDermott's Corporate Department, along with representatives from leading investment banks, explained that in the current troubled economic climate, issuers must explore alternative ways to raise equity capital. Participants in the webinar learned about the current market for raising capital via traditional and structured PIPEs (Private Investment in Pubic Equity), rights offerings, and at-the-market (ATM) offering programs (or dribble programs). "With less money available and more time required to raise it, a careful assessment of each issuer's unique situation is essential to achieving success in this market," cautioned Joel Rubinstein, a partner in McDermott's New York office.
According to Stephen Older, also a partner in the New York office, "Issuers who in the past would not consider PIPEs, are doing so now." Whereas PIPE transactions had been dominated in the past by mid and small cap companies, Mr. Older noted as a "new phenomenon this year" that PIPEs were becoming increasingly popular with investors taking larger stakes in larger companies.
Mr. Older explained that although PIPEs offer benefits to issuers, such as speed and lower transaction costs, restrictive covenants may create operating limitations on the issuer. Webinar participants learned that PIPEs are advantageous because investors, such as VC firms, are able to buy a significant stake in an issuer at a discount with warrant coverage, and can negotiate and customize terms. "PIPE investors are demanding more onerous terms as protection in the event of a possible bankruptcy by the issuer," explained Mr. Older. These include greater warrant coverage, higher coupon or interest rates on debt or preferred stock, and a reduction in the price-to-earnings multiple used to value a company.
Mr. Rubinstein explained that companies often need to turn to insiders to raise the needed funds in a private PIPE transaction. "In this circumstance, careful planning and execution is crucial to ensure company directors fulfill their fiduciary duties in connection with an insider transaction," cautioned Mr. Rubinstein. One possible strategy is to conduct a rights offering to all shareholders that can be "backstopped" by the inside investors.
Participants also learned how ATM offerings, or dribble programs, can allow public company issuers to raise capital with limited advance disclosure. This strategy allows the issuer to dribble shares into the market on a registered basis over an extended period of time and at varying prices. Instead of a normal follow-on, dribbling out shares over time can result in raising capital at higher prices.
McDermott Will & Emery is a premier international law firm with a diversified business practice. Numbering more than 1,100 lawyers, we have offices in Boston, Brussels, Chicago, Düsseldorf, Houston, London, Los Angeles, Miami, Milan, Munich, New York, Orange County, Rome, San Diego, Silicon Valley and Washington, D.C. Extending our reach to Asia, we have a strategic alliance with MWE China Law Offices in Shanghai.