Glossary of PIPEs Terms

These terms and definitions are extracted from the book PIPEs: A Guide to Private Investments in Public Equity, Revised and Updated Edition and appear here courtesy of Bloomberg Press.

accredited investors. A person or institution who meets certain net worth and income tests pursuant to SEC Regulation D, Rule 501(a) under the Securities Act of 1933, as amended. See also Securities Act of 1933, as amended.

additional investment rights. Additional investment rights, or AIRs, represent an option, similar to a warrant, that entitles the holder to purchase additional equity securities or convertible securities. See also convertible security; equity securities; option; warrants.

antidilution protection. Distinct from basic antidilution rights. Negotiated contractual rights that provide investors with the ability to protect the value of each common share that is purchased (or issuable upon conversion, exchange, or exercise of another security) relative to the value of common shares that are subsequently issued by the company. Antidilution protection is triggered only if there are subsequent issuances of the company’s common stock (or equivalents) below a negotiated threshold price (e.g., conversion price). For example, if an investor has purchased a security (with antidilution protection) that is convertible into the company’s common stock at a conversion price equal to $1 per share and the company subsequently issues common shares (or equivalents) at a per-share price which is less than the $1 conversion price, the $1 conversion price will be adjusted lower based on the price at which the subsequent common shares (or equivalents) were issued. The magnitude of the adjustment depends on the type of antidilution protection negotiated (a single transaction may involve several types of antidilution protection that are applicable under varying circumstances). See also basic antidilution rights; value-based antidilution rights.

at-the-market offerings. An offering made by selling securities into existing open-market demand at the bid price of the security, rather than to identified buyers at a negotiated, fixed price. See also Rule 415 of the Securities Act of 1933, as amended.

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base prospectus. Part of the initial filing of a shelf registration statement with the SEC. Includes information about the types of securities that may be offered, a summary of the company’s business, and a plan of distribution for the securities. See also primary registration statement; prospectus; prospectus supplement; registration statement; resale registration statement; SEC Form S-3.

basic antidilution rights. Distinct from value-based antidilution rights. Contractual rights that provide investors with the ability to maintain the value of each common share that is purchased (or issuable upon conversion, exchange, or exercise of another security), relative to all outstanding shares of the company’s common stock, in the event of certain corporate events such as a stock dividend, stock split, reorganization, recapitalization, or reclassification of the issuer’s securities. For example, assume that a company has 10 million shares of common stock outstanding. An investor that purchases a $1 million security (with basic antidilution rights) that is convertible into the company’s common stock at a conversion price equal to $1 per share would have the right to convert into 1 million common shares, or a 10 percent ownership position. If the security purchased provides for basic antidilution rights and the company subsequently executes a 2-for-1 stock split (doubling the number of outstanding common shares to 20 million), the $1 conversion price of the security would be reduced to $0.50 per share in order for the investor to be able to maintain its ownership percentage ($1 million divided by $0.50 is equal to 2 million common shares or 10 percent of the new 20 million shares outstanding). See also antidilution protection; value-based anti-dilution rights.

blank check. A public shell initially formed for the purpose of merging or otherwise combining with a private business enterprise. Blank checks generally go public without any business operations. See also public shell; reverse merger.

blank check preferred stock. Preferred stock that has been authorized, but not yet issued, by a public corporation, with a grant of discretion to the corporation’s board of directors. Specific rights and preferences of the preferred stock being issued, including liquidation preferences, dividend rates, and voting rights, are established by the board of directors during completion of an -equity financing. The existence of blank check preferred stock lets a company’s board of directors structure and negotiate terms directly with investors without additional stockholder authorization.

burn rate. A measure of the net usage of cash from operations for a given time period (cash outflow exceeds cash inflow). Typically expressed in terms of a monthly, quarterly, or annual metric.

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certificate of designations. Establishes the designations, preferences, and rights of a specific series of preferred stock (e.g., series A convertible preferred stock). A certificate must be filed with the Secretary of State of the corporation’s state of incorporation, where it becomes a publicly available document. See also certificate of incorporation.

certificate of incorporation. A corporation’s basic organizational document, filed with the secretary of state in the state of incorporation. Includes the name, location, and purpose of a company; the number, classification, rights, and preferences of an issuer’s authorized capital stock; and may contain provisions relating to the voting authority of the directors with respect to related-party transactions and redemptions, corporate takeovers, and other governance items. Also referred to as the articles of incorporation.

conversion price. The price at which a company’s convertible security can be converted or exchanged into another capital security of the company. See also conversion ratio; convertible security.

conversion ratio. The ratio, in terms of numbers of shares, at which a company’s convertible security can be converted or exchanged into another capital security of the company. See also conversion price; convertible security.

convertible arbitrage. The practice of buying a convertible security and shorting the underlying common stock of the same issuer. See also hedging.

convertible debt. Debt that can be converted into an equity security of the company (usually at the option of the debt holder) at a pre-negotiated conversion price or ratio. Convertible debt is similar to convertible preferred stock, but it ranks senior to preferred stock in the event of a liquidation of the company. See also conversion price; conversion ratio.

convertible preferred stock. A form of preferred stock that grants an investor the right (but not the obligation) to convert the preferred stock into the underlying common stock of the company at a pre-negotiated conversion price or ratio. Convertible preferred stock is similar to convertible debt, but it ranks junior to debt in the event of a liquidation of the company. See also conversion price; conversion ratio.

convertible security. Securities that permit the holder to acquire an equity interest in a company by converting or exchanging the original security for another security, typically the company’s common stock. Examples of convertible securities include convertible preferred stock, convertible debt, warrants, and options. See also convertible debt; convertible preferred stock; option; warrants.

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death spiral. A structured transaction in which (i) the conversion price of a convertible security (or the effective purchase price of common stock) fluctuates in relation to the stock price of the company following the closing of the transaction and (ii) there is no negotiated minimum conversion/purchase price (floor price). Also referred to as toxic convertibles. See also pricing floor; variable pricing.

demand registration rights. Negotiated contractual provision that provides an investor with the right to require that the issuing company file a resale registration statement covering the resale of securities purchased (or convertible, exchangeable, or exercisable into) in an equity private placement. The company is required to file a resale registration statement upon request by the investor. See also mandatory registration rights; registration rights agreement; registration statement; resale registration statement.

dilution. A reduction in the percentage ownership represented by a single share of a company’s common stock. For example, investors in a -company with two outstanding shares of common stock that issues one additional share would suffer dilution (each share would represent 33 percent owner-ship versus 50 percent ownership prior to the issuance of the additional share).

direct investment. A negotiated investment in which an investor purchases securities of a company directly from such company (distinct from purchasing the company’s securities via open market transactions).

downside protection. Contractual provisions that allow an investor to protect the original value of the investment in the event of a decline in the market price of a company’s common stock over time. Downside protection is implemented typically either through principal protection or price protection and may be incorporated into a variety of security types including common stock, convertible preferred stock, convertible notes, and equity line transactions. See also mandatory repayment of principal rights; price protection; principal protection.

drawdowns. Periodic sales of a company’s securities (at the option of the company) pursuant to an equity line agreement. The amount of any particular draw down (against the aggregate dollar commitment of the -equity line) is equal to the gross proceeds received from each such periodic sale. See also equity line.

due diligence. Comprehensive review of a company’s strategic, operational, and financial matters for the purpose of aiding a potential investor in making a decision regarding an investment in that company.

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equity line. A financing structure that allows a company to "draw down" on a pre-determined amount of capital committed to by a purchaser during a specified time period (typically twenty-four to thirty-six months). The issuer "draws down" on the equity line by making periodic sales of its securities (typically common stock) to the purchaser. Also referred to as an equity line of credit. See also drawdowns.

equity securities. Securities sold by an issuer to investors that provide a direct ownership stake in the company via either common stock or preferred stock. See also equity-linked securities.

equity-linked securities. Securities sold by a company to investors that provide an ownership stake in the company based upon conversion, exchange, or exercise of the security into the common stock of the issuer. See also convertible security; warrants.

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five-factor test. The SEC in a release published in 1962 announced a five-factor test to determine whether separate offerings should be integrated and considered part of a single offering. The five factors are: (1) whether the offerings are part of a single plan of financing; (2) whether the offerings involve issuance of the same class of security; (3) whether the offerings are made at the same time or about the same time; (4) whether the same type of consideration is to be received; and (5) whether the offerings are for the same general purpose. See also integration.

floor price. See pricing floor.

follow-on offering. Sale of a company’s securities to the public after the company is already public (distinct from an initial public offering).

Form 10-SB shell. A blank check formed by voluntarily becoming a reporting company through filing Form 10-SB under the Securities Exchange Act of 1934. The restrictions of Rule 419 do not apply because the Form 10-SB filing is not under the Securities Act of 1933, under which Rule 419 was passed. See also blank check; Rule 419 of the Securities Act of 1933.

future-priced securities. Securities with a purchase or conversion price that is dependent on the market price of the company’s stock at a point in time (or over a period of time) following the closing date of a transaction. See also pricing period; reset pricing; variable pricing.

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greenshoe. An option granted to investors to purchase additional securities from the issuer during a specified period. The type of securities and purchase price or conversion price of such securities under the greenshoe is identical to the securities initially purchased by investors. See also conversion price; option.

gun-jumping. Gun-jumping is a concept that applies to activities before or during the registration process that violate the registration requirements of the Securities Act of 1933. Typically, gun-jumping has been applied to impermissible publicity during the prefiling or waiting periods. However, it also is used to describe any offer prior to the filing of a registration statement that violates Section 5(c) of the Securities Act. See also Section 5 of the Securities Act of 1933.

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hedge funds. Private partnerships of pooled investments among sophisticated investors. Hedge funds are subject to restrictions on the number and type of investors. Not all hedge funds engage in hedging activities. See also accredited investors; hedging.

hedging. Financial transactions executed by investors that are intended to reduce and control the risks associated with securities purchased. Hedging transactions typically include (but are not limited to) short sales of a com-pany’s publicly traded common shares or debt or the use of options contracts. Hedging transactions may or may not involve the securities of the company in which investors have established a long investment position. Hedging is a risk-management strategy designed to limit fluctuations of overall investment returns.

holding periods. Negotiated time periods during which the securities purchased (or the securities into which they can be converted) in a private placement are unable to be sold by an investor—that is, neither through private nor open market transactions.

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indenture. A formal agreement stating the conditions under which securities are issued, the rights of the security holders, and the duties of the issuing entity. An indenture typically contains a number of standard and restrictive provisions and an identification of collateral if the securities are secured. It also covers redemption rights and call provisions. The indenture provides for the appointment of a trustee to act on behalf of the security holders.

integration. Two or more offerings of securities may be "integrated" or viewed as part of a single offering. The concept of integration came into being in order to prevent circumvention of the registration requirements of the Securities Act of 1933 by conducting several exempt offerings instead of a single nonexempt offering. Integration questions may arise in connection with several private placements conducted in close proximity, or in connection with a private placement and a public offering. See also five-factor test.

investor redemption rights. Contractual provisions that grant investors the right to require a company to redeem all or part of the then outstanding principal amount (typically along with any accrued and unpaid interest) of a security. Redemption rights are typically subject to conditions. See also threshold-based redemption rights; time-based redemption rights.

issuer. In this book, "issuer" generally refers to a public corporation that issues securities through equity private placements.

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mandatory registration rights. When contractually granted, an investor’s right to require the issuer to file a resale registration statement covering the resale of securities purchased (or securities into which another security can be converted) in an equity private placement. Filing and effectiveness deadlines (as well as related penalties) are typically negotiated as part of a transaction and the issuer is obligated to adhere to those deadlines. See also registration rights agreement; registration statement; resale registration statement.

mandatory repayment of principal rights. Contractual provision that requires a company to redeem all of the outstanding principal (typically along with any accrued and unpaid interest) of a security at maturity.

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naked short selling. Naked short selling, or "naked shorting," generally refers to selling a stock short without first borrowing the shares necessary to make delivery. Naked short selling is considered a type of short selling abuse and is addressed within the SEC’s Reg SHO. See also Regulation SHO.

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option. Contract that gives the owner the right, but not the obligation, to buy or sell a security at a specific price within a specific time period. An option contract may be sold or purchased separately or may be embedded in another security, such as a convertible security. A call option gives the owner the right to buy the underlying security. A put option gives the owner the right to sell the underlying security. See also additional investment rights; convertible debt; convertible preferred stock; convertible security; warrants.

option value. The value of an options contract or an embedded option (such as a call option embedded in a convertible security) according to the Black-Scholes Options Pricing model.

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pay-in-kind (PIK) interest. Interest (or dividends) paid to an investor in the form of the primary security issued in a private placement. For example, a convertible debenture PIPE with 6 percent PIK interest, payable quarterly, would require the company to issue additional debentures, or to increase the outstanding principal of the existing debentures (ultimately to be repaid to the investor), on each quarterly interest payment date.

Penny Stock Reform Act of 1990 (PSRA). Passed to address a variety of abuses in micro-cap and small-cap stocks, it required a significant increase in disclosure to investors in penny stocks and restrictions on manner of trading. It also required the SEC to pass a rule providing disparate treatment of registration statements relating to blank checks. See also blank check.

PIPEs. See private investments in public equity (PIPEs).

placement agent. Persons or entities that connect issuers with investors. In the process, they advise on various financing alternatives specific to an issuer’s business and capital requirements. Placement agents include investment bankers, financial advisers, and broker-dealers that act in an advisory capacity specific to fund-raising activities.

plain-vanilla. Any PIPE investment vehicle that lacks "exotic" structuring elements such as reset pricing or scheduled redemptions. Typically used to refer to a fixed-price common stock private placement that is priced at a modest discount to the market price of the company’s common shares and does not involve the issuance of warrants.

post-effective amendment. A change to a registration statement that has already been filed with and declared effective by the Securities and Exchange Commission.

price protection. Contractual provisions that allow an investor to protect the value of the common shares either purchased or "convertible into" (that is, that can be acquired by conversion of another security) relative to the market price of the company’s common stock in the event of a decline in market price over time. Price protection is implemented typically in the form of some type of variable or reset price (purchase price or conversion price) and may be incorporated into a variety of security types including (but not limited to) common stock, convertible preferred stock, convertible notes, and equity line transactions. See also reset pricing; variable pricing.

pricing floor. A minimum purchase or conversion price. The pricing floor may be negotiated to be either a (i) hard floor price or (ii) soft floor price:
hard floor. A pricing floor that remains in force throughout the life of the investment and is not subject to conditions or adjustments (downward or upward) and does not provide investors with a remedy to be "made whole" in the event the market price of the issuer's common stock falls below the hard floor price.
soft floor. A pricing floor that may be subject to certain conditions, time limitations, or adjustments and/or provides alternative means for the investors to be "made whole" in the event the market price of the issuer's common stock falls below the soft floor price.

pricing period. The time period during which the purchase or conversion price of securities to be sold to investors is determined (based on the market price of the company’s common stock during such pricing period). Pricing periods can be negotiated to occur prior to or following the closing date. (In some cases, the pricing period will include the closing date.) In the case of non-fixed price PIPEs (e.g., equity lines), there may be multiple pricing periods throughout the term of the investment agreement.

primary registration statement. A registration statement that covers the initial sale of the company’s securities directly to investors. See also registration statement; resale registration statement.

principal protection. Contractual provisions that grant an investor an ability to protect the principal value of an investment (e.g., mandatory repayment of principal rights). See also mandatory repayment of principal rights.

private equity funds. Private partnerships of pooled investments among accredited investors. Private equity funds typically (although not exclusively) invest in private enterprises with high growth potential. Some private equity funds focus on startup stage companies, while others seek to invest in late-stage private enterprises. An increasing number of funds have made investments in public companies via PIPEs.

private investments in public equity (PIPEs). Specifically refers to a privately negotiated issuance of equity or equity-linked securities by a public company to a limited number of investors (does not include Rule 144A equity private placements). See also private placement; registered direct offering.

private placement. Within this book (unless otherwise specifically noted), a "private placement" refers only to a private sale of restricted securities by a public company to a relatively small number of institutions or individuals (rather than a private placement by a privately held company). This private sale is executed under certain exemptions from the registration requirements of the Securities Act of 1933, as amended. See also accredited investors; issuer; qualified institutional buyer (QIB); restricted securities; SEC Regulation D; SEC Regulation S; SEC Rule 144A; Securities Act of 1933, as amended.

prospectus. Under the Securities Act of 1933, as amended, an issuer of securities must describe the securities issued by it to raise capital in the public markets in a document called the prospectus. The document must explain the terms, the planned use of the money, historical financial statements, and other information that could help an investor decide whether the investment is appropriate. A prospectus must be given to all buyers and potential buyers of the new issue. See also base prospectus; prospectus supplement.

prospectus supplement. A prospectus supplement can be used by an issuer to detail the terms of a securities offering after the registration statement for those securities is declared effective by the SEC. The supplement will contain information such as the type of security, size of the deal, pricing, method of distribution, and expenses related to the offering. See also base prospectus; prospectus.

public equity line. A public equity line, also referred to as a shelf equity line, is a hybrid offering structure that has characteristics of both a PIPE and public offering. For an issuer to structure a public equity line, it must have a filed and effective shelf registration statement (although a registered broker-dealer acting as the buyer of the equity line may enter into the purchase contract before the effective date). See also Rule 415 of the Securities Act of 1933, as amended; SEC Form S-3.

public shell. A public shell or "shell company" is a publicly held (though not necessarily trading or reporting) company that seeks to merge or otherwise combine with a private business enterprise. Shells generally have no or nominal assets and no or nominal business operations, though some have cash. Shells generally go public with normal business operations, which are later terminated, sold, or abandoned. See also reporting company.

purchase rights. Purchase rights generally apply only to PIPE transactions that involve the purchase of convertible securities. In connection with the grant of purchase rights, investors may be given an opportunity to be treated as if they had already converted their securities into common stock, in the event that an issuer offers common stockholders the right to purchase stock, warrants, or other property. Thus, an investor will be entitled to acquire, upon the same terms as the common stockholders, the securities or other property that the investor could have acquired if it had converted all of its convertible securities prior to the grant of the purchase rights.

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qualified institutional buyer (QIB). An entity, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.

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reg. See SEC Regulation D et seq.

registered direct offering. An offering of registered securities by an issuer to a limited number of accredited investors. A registered direct offering is a hybrid between a public follow-on offering and an equity private placement, wherein transactions are structured and marketed as if they were private placements but the investor receives registered, transferable securities. See also follow-on offering; registered securities.

registered securities. Securities acquired directly or indirectly from an issuer, in a transaction completed under a valid and effective registration statement with the SEC. Such securities are freely tradable and do not have any resale limitations. See also registration statement; restricted securities; Securities and Exchange Commission (SEC).

registration rights agreement. A registration rights agreement outlines specific deadlines for an issuer to file, and then to seek effectiveness of, a resale registration statement post-closing of a PIPE transaction. This agreement provides the investor with a contractual right to require the issuer to provide liquidity via an effective resale registration statement. See also registration statement; resale registration statement; restricted securities.

registration statement. A document filed with the SEC in order to comply with the registration requirements under the Securities Act of 1933, as amended, with regard to offerings of securities to the public and resale of such securities to the public by purchasers of restricted securities (e.g., equity private placements). Registration statements must be declared effective by the SEC prior to resale of the securities purchased in an equity private placement. See also Securities Act of 1933, as amended.

regulation. See SEC Regulation D et seq.

Regulation M. Regulation M, which was promulgated under the Securities Exchange Act of 1934 in December 1996, replaced the old trading practice and antimanipulation rules, including Exchange Act Rule 10b-6. Regulation M governs market activities during distributions and stabilization practices. Rule 100 of Regulation M sets forth basic definitions; Rule 101 addresses the activities of underwriters, broker-dealers, and others participating in a distribution; Rule 102 governs the activities of issuers and selling security holders; Rule 103 relates to Nasdaq passive market making; Rule 104 governs stabilization transactions and post-offering activities; Rule 105 governs short selling in anticipation of a public offering.

Regulation SHO. "Reg SHO," which was promulgated in June 2004 under the Securities Exchange Act of 1934, addresses short selling of securities. Regulation SHO was intended to curtail instances of abusive naked short selling that may manipulate the market. See also naked short selling.

reporting company. A public company that is obligated under the Securities Exchange Act of 1934, as amended, to file periodic, current, and other reports with the SEC and comply with proxy, insider trading, and related rules. A public company must be a reporting company for its stock to trade on the OTC Bulletin Board, Nasdaq, Amex, or NYSE.

resale registration statement. A registration statement that covers the resale, by initial investors into the public markets, of the company’s securities purchased in a private placement. See also primary registration statement; registration statement.

reset pricing. The purchase price of the common stock or the conversion price of a convertible security is set either (i) at closing or (ii) on a specified date after closing and is subject to adjustment (downward or upward) based on various criteria that can include fundamental performance (operational reset), a specified event (event-driven reset), or the stock price of the issuer at a given point in time after closing (threshold price reset).

restricted securities. Securities, which have not (as of the date of purchase) been registered with the SEC, acquired directly or indirectly from an issuer in a transaction that does not involve a public offering and are subject to resale limitations. Securities issued in PIPE transactions are frequently restricted securities. See also registered securities; registration rights agreement; Securities and Exchange Commission (SEC).

reverse merger. A method by which a private company can arrange for its stock to be publicly traded through a merger or other combination with a publicly held "shell" company, after which the owners of the private company generally control the resulting entity. See also public shell; reverse triangular merger.

reverse triangular merger. Method by which a public shell or blank check company creates a wholly owned subsidiary that merges into or combines with a private company, causing the private company to become publicly held as a subsidiary of the public shell or blank check, generally avoiding shareholder approval at the level of the public shell or blank check. See also blank check; public shell; reverse merger.

right of first offer. A right of first offer provides an investor with the right to purchase all or a portion of a subsequent issuance by the issuer. An issuer must first offer the subsequent issuance to the investor prior to offering it to other third parties.

right of first refusal. The investor’s contractual right to make a subsequent investment in a company based on investment terms proposed by a third-party investing entity. Specifically, if the company receives or solicits an offer for investment from a third party, it is obligated to provide an investor with the opportunity to execute the investment under the same terms as the proposed third-party offering. May only apply to specific types of offerings (e.g., common stock private placements only), or alternatively may apply to any subsequent offering.

right of participation. The investor’s contractual right to participate in future securities offerings by the company in which it has an investment position via private placement. The level of participation (percentage of subsequent offering) and the specific types of offerings (e.g., common stock private placements only) that an investor may participate in are specifically negotiated between the company and the investor.

risk/return profile. Investors assess an investment based upon its risk/return profile. Risk/return assessments begin with an assumption that higher expected returns generally involve greater risk, and vice versa.

road show. A series of presentations to prospective investors by the senior management team of an issuer. The issuer is not permitted to disclose in such meetings any material information that is not already available to the public.

Rule 105 of Regulation M. Rule 105 of Regulation M generally prohibits a short seller from covering short sales with offering securities purchased from an underwriter or broker-dealer participating in the offering if the short sale occurred during the rule’s restricted period, which is typically the five-day period before the pricing of the offering. See also Regulation M.

Rule 203 of Regulation SHO. Rule 203 of Regulation SHO provides uniform borrowing and delivery requirements for stock sales. With respect to long sales, Rule 203 generally prohibits a broker-dealer from lending a security for delivery after the sale or failing to deliver securities on the delivery date unless specified exceptions apply. With respect to short sales, Rule 203 generally prohibits a broker-dealer from accepting a short sale from another person, or effecting a short sale for its own account, unless the broker-dealer has borrowed the security, entered into an arrangement to borrow the security, or has reasonable grounds to believe that the security can be borrowed so that it will be delivered by the delivery date. Compliance with these requirements must be documented. See also Regulation SHO.

Rule 415 of the Securities Act of 1933, as amended. Rule 415 governs shelf registrations and at-the-market offerings. For purposes of Rule 415, public equity line transactions are considered at-the-market offerings. See also at-the-market offerings; equity line; public equity line; SEC Form S-3.

Rule 419 of the Securities Act of 1933. Passed by the SEC in 1992 as required by the Penny Stock Reform Act of 1990, the rule requires cash raised in the IPO of a blank check, as well as stock issued therein, to be held in escrow pending a reverse merger. Also requires a transaction to be found and consummated within 18 months, and requires at least 80 percent of investors in the IPO to reconfirm their investment after receiving disclosure concerning the proposed transaction in order for that transaction to be consummated. Also, the value of the private business merging into the blank check must be equal to at least 80 percent of the amount being raised in the blank check’s IPO. Restrictions do not apply to a company with at least $5 million in assets or raising $5 million in a "firm commitment" IPO. See also blank check; Penny Stock Reform Act of 1990; reverse merger.

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Sarbanes-Oxley Act of 2002 (SOX). The most sweeping change in securities law since 1934, passed in the wake of many large corporate scandals. SOX required much more management accountability and faster reporting of results and material events by public companies. It also significantly increased the burden of independent audit committees and outside auditors.

SEC. See Securities and Exchange Commission (SEC).

SEC Form 8-K. The report that a publicly held corporation must file reporting material events (e.g., equity private placements, changes in control, material acquisitions) that might affect its financial situation or the value of its assets or shares.

SEC Form S-1. This is the basic registration form that issuers can use to register securities. Form S-1 requires that the issuer file post-effective amendments to keep such registration statements current. See also post-effective amendment.

SEC Form S-3. Issuers who have been timely in their periodic reporting for the last twelve months, have not defaulted on any senior debt or preferred stock, and have a public float value of at least $75 million on any one day within sixty calendar days prior to filing the registration statement are eligible to file a Form S-3 for the purpose of selling new securities. The filing of Form S-3 is frequently referred to as a shelf registration. Every report subsequently filed with the SEC is automatically incorporated, by reference, into the shelf registration, thereby keeping the document up-to-date without any special effort or additional filings.

SEC Regulation D. Regulation D, promulgated by the SEC in 1982, is comprised of eight rules, rules 501–508, which provide issuers with a safe harbor from the registration requirements of the Securities Act of 1933, as amended. Regulation D is intended to provide issuers with greater certainty than reliance on interpretations of the Section 4(2) exemption. An issuer that fails to satisfy the objective criteria of Regulation D still may rely on Section 4(2) of the Securities Act of 1933, as amended. Reg-u-lation D is often referred to as Reg D. See also Section 4(2) of the Securities Act of 1933, as amended; Securities Act of 1933, as amended.

SEC Regulation FD. Regulation "Fair Disclosure," commonly shortened to Reg FD in informal communications, addresses the selective disclosure of information by issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities such as securities professionals or stock analysts, the issuer must make public disclosure of that information. Regulation FD introduces a cautionary element into the marketing of a PIPE because the issuer is sharing nonpublic information (namely, that it is considering a financing transaction) with a limited number of investors.

SEC Regulation S. Regulation S provides for an exemption from the registration requirements under the Securities Act of 1933, as amended, for offshore sales of securities by United States–based issuers. These securities are treated as restricted under SEC Rule 144 with respect to the resale of securities to the public. See also restricted securities; SEC Rule 144.

SEC Rule 144. Rule 144 permits investors to sell, over a specified period of time, limited quantities of securities acquired in private placement transactions. Under Rule 144, restricted securities may be sold to the public by buyers of private placements, prior to the expiration of a two-year holding period, without full registration of the securities, pursuant to specific conditions and limitations. After a two-year holding period, resale of such securities to the public are unrestricted. See also restricted securities.

SEC Rule 144A. Rule 144A provides investors with a methodology for reselling certain securities without registration. Rule 144A provides a limited exemption from registration requirements that permits entities other than the issuer to resell, in a transaction not involving a public offering, restricted securities acquired from the issuer. Rule 144A requires that the restricted securities be sold to entities the seller reasonably believes to be a qualified institutional buyer; that the securities were not, when issued, of the same class as securities listed on a national securities exchange or quoted on an automated interdealer quotation system; that the investor is aware that the seller is relying on Rule 144A for its resale; and that the issuer either is a reporting company (a public company that is in compliance with the SEC’s reporting/disclosure practices; some public companies are not) or specifically makes available certain information to holders. See also qualified institutional buyer (QIB); restricted securities.

Section 4(2) of the Securities Act of 1933, as amended. Section 4(2) provides a statutory private placement exemption. Specifically, Section 4(2) provides that the registration requirements of Section 5 of the Securities Act of 1933, as amended, do not apply to financings executed by an issuer that do not involve a public offering.

Section 5 of the Securities Act of 1933. Section 5 of the Securities Act of 1933 generally requires that securities be registered and prohibits the sale of unregistered securities. See also Securities Act of 1933.

Securities Act of 1933, as amended. An act of Congress that governs the issuance of new securities. It requires the registration of securities and disclosure of pertinent information relating to new issues so that investors may make informed decisions. The oversight of this function is the responsibility of the Securities and Exchange Commission.

Securities and Exchange Commission (SEC). The federal agency that regulates United States financial markets. The SEC also oversees the securities industry and promotes full disclosure in order to protect the investing public against misconduct in the securities markets.

securities purchase agreement. An agreement in which investors agree to purchase and the issuer agrees to sell securities to be issued in a PIPE transaction. Terms generally include the purchase price and terms of the closing; the amount of securities purchased; representations, warranties, and covenants; and indemnification by the issuer for breaches of the representations, warranties, and covenants.

shelf equity line. See public equity line.

shelf registration. See SEC Form S-3.

shelf takedown. Issuers that utilize a shelf registration on SEC Form S-3 will engage in a shelf takedown, or issuance "off of the shelf," when it issues securities. See also Rule 415 of the Securities Act of 1933, as amended; SEC Form S-3.

Specified Purpose Acquisition Company (SPAC). Utilizing the $5 million exemption from Rule 419, SPACs raise over $5 million and avoid Rule 419 restrictions. However, they generally follow most of the 419 proscriptions in order to entice investors, but the shares issued in the SPAC IPO do not go into escrow, they generally trade while awaiting a merger. See also Rule 419 of the Securities Act of 1933.

straight equity. See plain-vanilla.

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threshold-based redemption rights. Threshold-based redemption rights let investors require the issuer to redeem an investment if certain thresholds are not achieved or maintained (e.g., financial covenants, or a specified minimum for the market price of the issuer’s common stock). See also investor redemption rights.

threshold securities. The term threshold securities generally refers to securities with substantial failures to deliver. Under Regulation SHO, equity securities for which there is an aggregate failure to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more that is equal to at least 0.5 percent of the issue’s total shares outstanding are threshold securities so long as they are included on a threshold security list published by an exchange or other self-regulatory organization. See also Regulation SHO.

time-based redemption rights. Time-based redemption rights let investors require the issuer to redeem the investment based merely on the passage of a specified time period or periods (e.g., weekly, monthly, quarterly, or annually) following the closing date but prior to the maturity date of the investment. See also investor redemption rights.

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underwriter. An investment bank that buys an issue of securities from a company and resells it to investors. An underwriter is commonly associated with the public offering of securities such as initial public offerings (IPOs) and follow-on offerings. See also follow-on offering.

underwriting syndicate. A group of investment banks that work together to sell new securities to public investors. The underwriting syndicate is led by a lead underwriter. See also underwriter.

unregistered securities. See restricted securities.

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value-based antidilution rights. Any of three types of antidilution protection triggered by a corporation's issuing additional equity or equity-linked securities at a purchase or conversion or exercise pricebelowa specified threshold price:
full-ratchet. The purchase or conversion or exercise price is lowered to equal the purchase or conversion or exercise price of a subsequent offering by the issuer.
most-favored nation. The investor has the option to substitute the purchase or conversion or exercise terms of a subsequent offering by the issuer for the then current purchase or conversion or exercise terms.
weighted-average. The purchase or conversion or exercise price is adjusted lower based on a weighted-average calculation of the dilution impact of a subsequent offering by the issuer. Although the calculation can be formulated in several different ways, the following is an example of a typical weighted-average adjustment: For example, assume a company has 100 shares of common stock outstanding and that an investor has purchased a convertible security with a conversion price equal to $2 per share. If the company subsequently sells an additional 20 shares of common stock at $1 per share, then the conversion price of the convertible securities will be reduced to $1.83 per share based on the formula below:
$2 ´ [($2 ´ 100) + ($1 ´ 20)] Divided By [$2 ´ 120] = $1.83 per share
See also antidilution protection; basic antidilution rights.

variable pricing. In a variable-priced transaction, the purchase price of common stock or conversion price of a convertible security fluctuates in relation to the stock price of the issuer after closing (usually subject to a maximum purchase or conversion price). The effective price will ultimately depend on the direction of the issuer’s stock price.

venture capitalist. Venture capitalists or "VCs" traditionally invest in -privately held companies. VCs frequently look for situations where a company might benefit not only from an influx of capital but also from value-added services such as management capabilities or domain experience. Depressed market prices of public companies make PIPEs an attractive alternative for VCs who are already accustomed to making private equity investments.

volume-weighted average price (VWAP). Pricing in a PIPE transaction is frequently determined by the volume-weighted average price (VWAP) of the issuer’s publicly traded stock during a specified pricing period. The VWAP takes into account every trade in the stock over the course of each trading day, weighted by volume, during a specified pricing period, making it perhaps the most accurate representation of the value of a company’s stock. See also pricing period.

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warrant agreement. A warrant agreement sets forth the terms under which an investor will have the right to purchase additional securities of the issuer. Terms typically contained in the warrant agreement include exercise terms, covenants, representations of the holders, and transferability. See also warrant coverage; warrants.

warrant coverage. If warrants are included with other securities issued in a PIPE, the deal is commonly referred to as having "warrant coverage." Warrant coverage is typically calculated as the total number of additional common shares that may be purchased via the exercise of warrants -divided by the total number of common shares purchased (or convertible or exchangeable into) in a transaction.

warrants. A security that entitles the holder to purchase another security (typically common stock) at a specified price during a specified time period. A warrant may be issued separately or together with other -equity private placement securities. See also warrant agreement; warrant coverage.