Secondary Offerings In The COVID World

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With the COVID-19 pandemic continuing to overwhelm global economies and the uncertainty around the future and recovery timelines, many listed companies are recapitalizing through equity fundraising in the capital markets. Given the solid market recovery and valuations among med tech names, this has proven to be an opportunistic time for companies to finance. New equity has helped these companies shore up their balance sheets as they recover from recent COVID-related declines in medical procedures, in order to give them a cushion and financial flexibility for future uncertainty and to obtain liquidity.  Additionally, many of the larger cap companies have been very forthcoming in their intention to further capitalize to be prepared for potential strategic activities. Smaller companies are also contemplating a more conservative view of their balance sheet and are raising money earlier than they might normally consider, thus maintaining a larger cash runway “slush fund” compared to historical levels. As a result, in the last two months, over $5 billion has been raised in follow-on offerings by public medical technology companies alone.

While follow-on offerings have implications for dilution, particularly when a company already has a solid cash balance, recently companies have been rewarded for being conservative and adding to their coffers, despite the dilutive impact. In fact, offerings have been priced high and upsized as investor demand outpaces supply.

The downward pressure on stocks that is traditionally felt and feared around dilutive financings has been somewhat staved off, not just by the counter-balancing impact of investor demand, but also by the evolution and transformation over the past several years of alternative forms of follow-on transactions. Due to market developments, such as heightened volatility and concerns about investor front-running, fewer public offerings now involve traditional marketing. Additionally, in 2005, in conjunction with some regulatory reforms, a new category of issuer — the “well-known seasoned issuer” (WKSI) — was adopted, which enables WKSI-qualified issuers to benefit from some registration flexibilities including the ability to register their securities offerings on shelf registration statements that become effective automatically upon filing. As a result, a WKSI is not required to wait for a review period or to declare its registration statement effective before selling securities. Instead of the traditional publicly marketed deals, many of today’s follow-on transactions are executed in shortened windows, essentially making public offerings less public and allowing liquidity discounts to be minimized.  We will discuss a few of these alternative transactions below.

  • Confidentially Marketed Public Offering (CMPO). Sometimes referred to as a wall-crossed offering or pre-marketed offerings, a CMPO is an offering that is initially marketed only to specific institutional investors who may have an interest in purchasing the issuer’s securities. During this preliminary, confidential phase, no public announcement of the offering is made and no preliminary prospectus is used. Once the issuer and institutional investors agree on the basic deal terms, the offering is then “flipped to public” via a Form S-3 takedown shortly before pricing so that the underwriters can market the offering more broadly. Selling efforts may be completed over the next trading day but are often completed overnight, and final pricing and terms are announced before the market opens the next day.
    • Considerations: This type of offering, which requires an active shelf registration, does not benefit from the robust marketing efforts of a traditional marketed deal and therefore can involve a higher risk of execution given the need to generate demand in a short time frame; however, public “exposure” and market risk is limited, as is management time requirement, and overall costs to the company are lower.
  • Bought Deal.  Bought deals occur when an underwriter purchases securities directly from an issuer before a preliminary prospectus is filed. The underwriter acts as principal rather than agent and actually owns or “goes long” the company’s stock. The underwriter and the issuer negotiate a price that is usually at a discount to the current market price, and then the underwriter uses best efforts to sell the stock.
    • Considerations: Generally, a bought deal will only be feasible for a WKSI. There is no pre-marketing involved in a bought deal, and the amount of the deal is a certainty without execution or financing risk to the issuer – the risk is put on the shoulders of the underwriter. Subsequently, Bought Deals are usually priced at a larger discount to market than fully marketed deals, and therefore may be easier to sell. Additionally, because Bought Deals generally involve only one bank, the banking fees are often lower for the issuer.
  • PIPE Investments.  Private Investment in Public Equities (PIPEs) can provide an alternative source of funding for businesses that are trying to weather the current crisis. PIPEs allow private investors to purchase common stock or preferred stock in a public entity at a predetermined price. PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings. These transactions are done confidentially and allow issuers to raise capital quickly without public disclosure, thereby eliminating the potential impact of the deal announcement on the stock price.
    • Considerations: Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds for them more quickly. The discounted price of PIPE shares means less capital for the company, and their issuance effectively dilutes the current stockholders’ stake.
  • Block Trades.  A company may also sell secondary shares through a block trade, but most often these are used by sponsors, VCs, and other large stockholders (such as holders that acquired stock in an M&A transaction) to sell down their position. Block trades, which are effective for selling smaller amounts of stock, are cheaper than an underwritten transaction.

With the current COVID-19 pandemic, raising money efficiently and opportunistically has become even more relevant than ever for public companies. The traditional fully marketed transactions, however, have become somewhat archaic, replaced by faster and more nimble transactions. Coupled with a broad range of mitigating actions to manage the cost base and cash flow, there are several alternative transactions that can provide sufficient liquidity to deal with this challenging trading environment. Such alternatives provide increased balance sheet protection for companies raising extra cash as a way to shore up their balance sheets and provide increased comfort as they navigate through the crisis. Furthermore, existing investors seem to understand that being diluted by fundraising may be a worthwhile tradeoff to ensure the business can survive.

The team at Gilmartin is here to help navigate secondary offerings during the COVID pandemic. Contact us today.


Debbie Kaster, Managing Director

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