The Internet is limiting the financing options open to companies pulling out of the initial public offering market, a lawyer says.
Thanks to the Internet, a registration for an IPO is available to the public minutes after it is filed with the Securities and Exchange Commission.
That effectively bars a company that has made such a filing from switching gears to place securities with investors privately.
"When a company files a registration statement today at 3:15 p.m. it is on the wire at 3:22 p.m., which is in effect a general solicitation," said Marc H. Morgenstern, a managing partner at the Cincinnati law firm Kahn, Kleinman, Yanowitz & Arnson Co.
"And general solicitations and private placements simply don't mix," said Mr. Morgenstern, who recently advised clients against private placements.
The SEC requires companies privately placing securities to refrain from general solicitations for the prior six months.
Mr. Morgenstern said companies that withdraw from the IPO market and then seek a private placement may put themselves at risk for lawsuits based on claims that they violated this rule.
Calling the situation an unintended consequence of the language of the regulation, Mr. Morgenstern said the SEC should change the rule to exempt companies withdrawing an IPO offering.
The issue is becoming more pressing as companies increasingly turn away from the IPO market and look for other sources of financing. In August, 38 companies pulled IPOs valued at $4.4 billion. In September, 14 IPOs worth $309 million were pulled. And this month 18 IPOs worth $312 million were pulled as of Oct. 19, according to Securities Data Co.
Meanwhile, the U.S. private placement market continues to boom. U.S. companies privately placed $265 billion in debt and equity during the first half, according to Securities Data.
A private placement of stocks or bonds directly with institutional investors or a limited partnership does not have to be registered with the SEC if the securities are not intended for resale.
Most at risk for lawsuits are start-up companies that do not have large pools of investors to turn to after pulling plans to do an IPO. For example, Healtheon Corp., Santa Clara, Calif., which pulled an IPO this week, was able to skirt the issue by tapping its original backers for another $40 million.
But companies without a large pool of backers do not have this option. Instead, they can ask their commercial bankers for a bridge loan until a sufficient amount of time passes to establish a "quiet period."