The Business Counselor Blog™

General Capital Raising Activities

Companies must usually consider a number of different sources for capital--venture capitalists, private individual investors, commercial lenders and public offerings--and the negotiations with each of these sources raise unique issues.  However, there are certain general activities that must be completed in every fund raising situation and this report details some of them including preparation of disclosure documents, using financial advisors, presentations to prospective investors and lenders, due diligence, offer letters and deal documents.

Pledging Ownership Interests in Subsidiary Entities

Many firms conduct business activities through the use of one or more subsidiaries that are responsible for a wide range of operational initiatives including research and development, manufacturing, sales and extending credit to customers.  In addition, subsidiaries may be created to put all of the functional activities associated with a specific product line into one entity.  Since the net asset value of these subsidiaries can be significant it is not surprising the lenders advancing credit to the parent company will seek a pledge of the ownership interests in key subsidiaries as additional collateral for repayment of the obligations of the parent company.  In this report I provide an overview of this type of transaction and a sample collateral pledge agreement.

Limited Guarantees of Collectability

Given the current economic difficulties it can be expected that vendors will seek additional security before they extend credit to their customers. Traditionally vendors have sought guarantees from the owners of customers including parent companies when the customer was a subsidiary.  Most guarantees are guaranties of payment that allow the vendor to proceed directly against the guarantor if there is a default by the customer; however, guarantors may want to bargain for a guaranty of collection that provides that the guarantor will only be liable after the vendor has reduced its claim against the actual customer to judgment and judgment has been returned unsatisfied or the customer has become insolvent or it is otherwise apparent that it is useless to proceed against the customer.  The attached report includes more details as well as a form of Limited Guaranty of Collectability of Indebtedness.

Model Form of Forbearance Agreement

In my last post I provided a report that discussed the issues that arise when negotiating and finalizing a forbearance agreement.  This week I've attached a model form of forbearance agreement  that can be used as a reference for these types of arrangements.  The summary to the form highlights the key issues that need to be considered in the drafting process including the length of the forbearance, modifications to the underlying credit arrangements and covenants from the borrower as to actions it will take during the forbearance period to keep the lender informed and cure the causes of the default that led to the agreement in the first place.

Forbearance Agreements

While the parties to any credit arrangement certainly anticipate that the borrower will fulfill its obligations with respect to timely repayment of amounts borrowed under the credit agreement and compliance with the various covenents and conditions included in the credit agreement it is not uncommon for problems to arise during the course of the relationship that lead to the borrower being in default.  At that point the the lender can obviously exercise its rights and remedies under the law including foreclosure and other legal actions; however, another alternative is for the lender to refrain, or forbear, from exercising its rights for a specified period of time to allow the borrower to fix any problems that may have led to the default.  The attached  report discusses the issues that arise when negotiating and finalizing a forbearance agreement.  In my next post I'll provide a model form of forbearance agreement.

Model Form of Deposit Account Control Agreement

Last week I published a report on the rules and procedures mandated by the Uniform Commercial Code in order for secured parties to create and perfect a security interest in the debtor's deposit accounts.  This week I'm presenting a model form of deposit account control agreement that will illustrate how some of the issues can be handled.

Deposit Account Control Agreements

A valuable source of collateral for any secured commercial lender is the money in the deposit accounts maintained by the borrower with any bank.  This week our report discusses the rules and procedures mandated by the Uniform Commercial Code in order for secured parties to create and perfect a security interest in the debtor's deposit accounts.  A form of deposit account control agreement will appear in next week's edition of The Business Counselor Blog.

Describing the Issuer's Business in Offering Documents

Preparing a description of the issuer's business for a disclosure document in a securities offering can be a challenging, yet satisfying, exercise for issuer's counsel.  Review some of the issues in the report on drafting the business description for an offering memorandum.

Organizing and Managing the Activities for Completion of an Initial Public Offering

One of the most challenging tasks for any securities lawyer is organizing and managing all of the activities that need to be completed in order for a company to achieve its highly desire goal of “going public”.  The first step in this process should be an organizational meeting that brings together all of the necessary participants in the process—representatives of the issuer and the underwriters, counsel for the issuer and the underwriters, the accountants and the financial printer.  A typical agenda for an organizational meeting will address a number of possible items, depending upon the time available and the degree of preparation to date.  Special note will be taken of the following points:

• The timing of the offering, anticipated size and offering price, and the degree of participation of selling shareholders;
• The schedule for the remaining drafting and due diligence sessions and the responsibilities of each of the participants for various portions of the registration statement;
• Pre-filing modifications to the company's capital structure and other corporate arrangements that may be necessary to properly price the offering and to eliminate potential Blue Sky concerns;
• Substantive disclosure items to be addressed in the registration statement drafting process, including litigation, insider transactions, potential acquisitions, new products, and any other major developments with respect to the competitive environment of the company that may influence the timing of the offering;
• The timing of receipt of appropriate financial statements for filing as part of the registration statement, and any accounting issues relating to off-balance sheet financing or recent acquisitions of other businesses for which audited financial statements will need to be prepared; and
• The desirability of reincorporating in a jurisdiction that provides officers and directors with the greatest amount of personal protection from liability to the shareholders for monetary damages for breaches of their duty of care.

The managing underwriter and its counsel should also prepare a timetable and list of responsibilities for distribution to all of the parties at the organizational meeting. This document sets forth a schedule for the basic steps in the registration process.  It fixes key deadlines, which often turn on the assumptions of the company and the managing underwriter regarding the proper timing for the offering.  A separate document circulated with the timetable will assign responsibility for completion of particular tasks, and facilitate the requisite coordination. Experience has shown that listing each of the important items is far more important than settling upon an exact timetable, since it is often difficult to predict each of the items with absolute certainty.

Among the important milestones which should be established in the initial timetable are the following:

• The availability of the initial draft of the registration statement, including any required financial information;
• The scheduling of meetings with officers and key employees of the company;
• Board and shareholder actions regarding any housekeeping matters and approval of the offering;
• Filing of the registration statement with the SEC and the other regulators and the anticipated period of review;
• Scheduling of post-filing marketing activities, including the "roadshow" presentations;
• Preparation and filing of any anticipated material amendments to the registration statement which may be required in order to address comments from the SEC and the other regulators;
• Effectiveness of the registration statement, execution of the underwriting agreement and commencement of the sale of the offered securities; and
• Closing of the sale and purchase of the offered securities.

Traditionally the participants waited until the completion of the organizational meeting to begin drafting the registration statement and did not circulate the first draft of the registration statement until 10 to 14 days after the organizational meeting.  In addition, the “roadshow” presentations were held during the waiting period after the registration was filed and before comments were received from the SEC.  However, a slightly different approach is now often taken that would lead to important changes in the sequence of events in the timetable.  For example, the participants frequently begin serious preparation of the registration statement several weeks before the organizational meeting and wait until the SEC has cleared all of the company’s responses to their comments before launching the “roadshow.”    It should also be recognized that the period required to complete all of the activities described in the timetable will vary depending on a number of factors, some of which are out of the control of the participants.  For example, the participants may decide to proceed at a more leisurely pace in drafting the registration statement if they believe it may be necessary to wait until market conditions are suitable for the offering to proceed and be accepted strongly by investors. Delays may also be caused by regulators who are unable to review the documents due to a high volume of other activities.

The content in this post has been adapted from material that will appear in Business Counsel Update (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

SEC Begins Implementing Electronic Filing Procedures for Form D

An issuer offering or selling securities in reliance on Rules 504, 505 or 506 must file with the SEC a notice of sales containing the information required by Form D (17 CFR 239.500) for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering, unless the end of that period falls on a Saturday, Sunday or holiday, in which case the due date would be the first business day following.  The SEC has mandated the electronic filing of information required by Form D and has substantially revised Form D in an effort to simplify and restructure the Form and update and revise its information requirements.  The information required by Form D would be filed with the SEC electronically by means of the SEC’s Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) in accordance with EDGAR rules set forth in Regulation S-T (17 CFR Part 232).  This new online filing system will be accessible from any computer with Internet access. The data filed would be available on the SEC Web site and would be interactive and easily searchable by regulators and members of the public who choose to access it.

The mandatory electronic filing requirements take effect on March 16, 2009.  However, the new online system is expected to be available to receive filings on a voluntary basis on September 15, 2008.  The SEC is treating the period between September 15, 2008 and March 16, 2009 as a transition period during which electronic filing of Form D information with us using the new online filing system will be voluntary. Issuers may also file a paper version of the new Form D with the SEC during the transition period, without using the online filing system.  In order to facilitate the transition from paper to electronic filings the SEC has promulgated a special temporary section, Rule 503T, that applies instead of the procedures described below only to issuers that file with the SEC a notice on Temporary Form D or Form D or an amendment to such a notice in paper format on or after September 15, 2008 but before March 16, 2009.  This temporary Rule 503T will expire on March 16, 2009. The discussion below is based on the rules and procedures that will apply to online filings and which are set out in the version of Rule 503 that will become effective on September 15, 2008.

An issuer may file an amendment to a previously filed notice of sales on Form D at any time. An issuer must file an amendment to a previously filed notice of sales on Form D for an offering to correct a material mistake of fact or error in the previously filed notice of sales on Form D, as soon as practicable after discovery of the mistake or error. 

In addition, an amendment must be filed to reflect a change in the information provided in the previously filed notice of sales on Form D, as soon as practicable after the change, except that no amendment is required to reflect a change that occurs after the offering terminates or a change that occurs solely in the following information:

• The address or relationship to the issuer of a related person identified in response to Item 3 of the notice of sales on Form D;
• An issuer’s revenues or aggregate net asset value;
• The minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in a decrease of more than 10%;
• Any address or state(s) of solicitation shown in response to Item 12 of the notice of sales on Form D;
• The total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in an increase of more than 10%;
• The amount of securities sold in the offering or the amount remaining to be sold;
• The number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
• The total number of investors who have invested in the offering; or
• The amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice of sales on Form D, does not result in an increase of more than 10%.

Finally, an issuer must file an amendment to a previously filed notice of sales on Form D for an offering annually, on or before the first anniversary of the filing of the notice of sales on Form D or the filing of the most recent amendment to the notice of sales on Form D, if the offering is continuing at that time.

An issuer that files an amendment to a previously filed notice of sales on Form D must provide current information in response to all requirements of the notice of sales on Form D regardless of why the amendment is filed. 

The content in this post has been adapted from material that will appear in Business Counsel Update (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.