An SEC comment letter exchange recently made public serves as a helpful reminder to consider Section 5 of the Securities Act when structuring a PIPE (private investments in public equity) transaction. In a PIPE, a public company issues securities to one or more accredited investors in a private placement exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, or the safe harbor thereunder provided by Regulation D. Since the securities in a PIPE offering are initially “restricted securities” within the meaning of the Securities Act, investors cannot freely resell their securities until a holding period under Rule 144 has lapsed or a registration statement has been filed.
PIPE transactions often include registration rights whereby the issuer agrees to file a resale registration statement with the SEC within an agreed-upon period. The crux of the Section 5 issue in PIPEs often hinges on the timing of the investment decision in the private offering, including whether commitments are in place from all investors, subject only to conditions outside their control so that there is no further investment decision after the filing of the registration statement, and the investors have market risk at the time that the resale registration statement is filed. In other words, the “sale” in the private offering is completed prior to filing the registration statement. As discussed in the comment letter exchange below, other related factors include whether the private offering closes prior to, or after, the filing of the registration statement and when the shares to be resold were actually issued to the purchaser.