Restricted Stock May Flood Market
Thursday, February 14th, 2008
Restricted Stock May Flood Market When Rules Take Effect
February 14, 2008, 7:08 am
On Friday, billions of dollars in restricted stock will become eligible for trading on the open market as new Securities and Exchange Commission rules take effect.
In November, the S.E.C. eased restrictions on private placements and other restricted securities that hedge fund managers and other institutional investors buy directly from corporations.
By one estimate, the new rules will put about $35 billion in previously restricted shares on the market in one day, causing a flood of shares to hit the market at once, The Deal reported.
Hundreds of millions of dollars in restricted shares are issued annually, but until now holders of the shares have been prohibited from selling them for one to two years. But pressed by financiers and fueled by technology and globalization, the S.E.C. is allowing investors to sell those securities as soon as six months after the placement.
Go to Article from The Deal.com »
http://dealbook.blogs.nytimes.com/2008/02/14/
restricted-stock-may-flood-market-when-rules-take-effect/
Restricted stock eligible for trading
by Ron Orol in Washington
Updated 05:44 PM EST, Feb-13-2008
 |
On Friday, Feb. 15, billions of dollars in restricted stock will become eligible for trading on the open market as new Securities and Exchange Commission rules take effect.
The commission in November eased restrictions on private placements and other restricted securities, which hedge fund managers and other institutional investors buy directly from corporations.
By one estimate, the new rules will put on the order of $35 billion in previously restricted shares on the market in one day, and many observers will see whether a flood of shares will hit the market at once.
At issue is the SEC’s Rule 144, which permits sophisticated investors to bypass the public markets. Hundreds of millions of dollars in restricted stock is issued annually, but until now holders of the shares have been prohibited from selling them for between one and two years.
But pressed by financiers and fueled by technology and globalization, the SEC is allowing investors to sell those securities as soon as six months after the placement. This step, securities lawyers, underwriters and hedge fund mangers generally agree, will drive additional investment to the capital markets by way of institutional investors.
“It provides greater flexibility to both investors and corporations,” said David Danovitch, partner at Gersten Savage LLP in New York. “If I am an investor and I know that I can start selling a little bit of my investment commencing in six months rather than one year, I might get involved, and I might be willing to pay more.”
Danovitch added that corporations, particularly smaller capitalization companies that use private placements more frequently, are enthusiastic about the prospect of added investment.
The SEC permits corporations to issue restricted stock only when they are current with regulatory filings, including quarterly and annual reports. The SEC reviews restricted stock deals to make sure corporations give a true picture of the company and the risks that come with investing there.
Until now, investors in private placements also have been limited in the amount of shares they could sell at one time. After one year, managers were able to sell every three months securities amounting to either 1% of the company’s outstanding shares or as much as the average weekly trading volume during the four weeks prior to the sale. After two years, investors were able to sell the whole restricted stake. With the new rule, institutions with less than 10% stakes can sell all their securities after six months. The new regulation also eases restrictions on other transactions that fall under the purview of Rule 144, including warrants and private investments in public equities, or PIPEs.
The agency retained a six-month restriction to block small public companies from attempting so-called “backdoor public offerings.” The agency does not want a corporation badly in need of money selling restricted stock to a large investor who would quickly resell the securities in an open-market transaction, acting as an underwriter or conduit to the average retail investors who need protections of disclosure requirements and SEC vetting of a public-market stock.
The agency considered but ultimately chose not to prohibit some risk-reducing strategies hedge fund managers often employ when buying private placements. To hedge risk from buying illiquid restricted securities, many hedge fund managers short stock of the same company on the open market. The agency considered limiting this strategy in 1997, suggesting that such short sales constituted the sale of the underlying restricted securities, but in the end decided not to block it.
Heidtke said the SEC’s permissiveness was misguided. “I consider shorting to hedge a private placement unethical,” he said, noting that many companies ask private-placement investors to agree not to short the stock.
http://www.thedeal.com/servlet/Satellite?pagename=NYT&c=TDDArticle&cid=1202101582587
//////////////////////////////////////////////////////////
Restricted Stock Partners bridges the gap between holders of restricted securities and sources of capital. We specialize in providing liquidity solutions to holders of:
• Restricted stock, warrants and convertible securities
• Control and affiliate positions
• Employee stock options
• Rule 144A securities
• Minority stakes
Restricted Stock Partners manages the Restricted Securities Trading Network (RSTN), a proprietary network of more than 300 institutional and accredited investors representing over $200 billion in assets available for investment. We also have partnerships with some of the world’s leading banks, law firms, accounting firms and financial advisors.
NEW! Special Report Analyzes Impact of Rule 144 Rule Change
Join the Restricted Securities Trading Network to get your copy.
http://www.restrictedstockpartners.com/
//////////////////////////////////////////////////////////
RSTN Studies Effects of Rule 144 Change
By Christopher Faille, Senior Financial Correspondent | Monday, February 11, 2008 1:26:33 PM ET
This is the second of two articles on private markets and hedge funds.
NEW YORK (HedgeWorld.com)— Because of the halving of the length of a regulatory holding period, billions of shares of unregistered stock will become saleable in the public market all on the same day, this Friday [Feb. 15]. In a special report released to platform participants, the proprietors of the Restricted Securities Trading Network detailed the range of issuers that are affected by the changes to Securities and Exchange Commission Rule 144, changes approved by the SEC in February.
The RSTN is an online trading platform specifically designed to allow hedge funds and other sophisticated parties to deal in restricted securities. It is operated by Green Drake Capital Corp., which does business as Restricted Stock Partners.
The SEC changed the rule largely because it hoped doing so would make it easier for small issuers to raise capital. In addition to a reduction in the holding period from one year to six months, the changes included an increase in the threshold that triggers Form 144 filing requirements, some simplification and streamlining of the wording of the rule, and codification of certain staff interpretations thereof.
Restricted Stock Partners’ report analyzed 300 stock issuance transactions completed between Feb. 15 and Aug. 15 of 2007, and thus immediately affected by the rule change. “In aggregate, there will be 5.0 billion shares eligible for sale from these transactions representing approximately $11.9 billion in current market value,” according to the report. (For purposes of making a conservative estimate of that dollar figure, the authors of the report assumed a maximum conversion price for those transactions with variable pricing.)
In a statement, Barry Silbert, the founder and chief executive of Restricted Stock Partners, said, “Hundreds of companies may see share amounts equal to 100 or more times their average daily trading volume available for sale on Feb. 15.”
In an interview on Monday [Feb. 11], Mr. Silbert said that the Restricted Stock Trading Network now has more than 400 members, and that about two-thirds of those are hedge funds. This is what one would expect, since most unregistered securities created by private investments in public equity, or “PIPEs,” are owned by hedge funds. The remainder of the membership includes other large institutions, including “the Merrill Lynch’s of the world,” as well as private equity and venture capital firms.
Mr. Silbert also said that it’s difficult to predict what effect Friday’s rule change will have on share prices, because there are always a lot of other factors in valuation.
Speaking more generally about the PIPE market, he said that he recognizes that there have been scandals caused by “trouble-makers in the PIPEs world,” but there are decidedly fewer such scandals now than their were five years ago.
“Hedge funds are starting to grow comfortable with the concept of trading liquidity for risk-and-return.”
http://www.restrictedstockpartners.com/press-room/webclips/
RSTN-Studies-Effects-of-Rule-144-Change.htm
Restricted Stock Partners Secures Funding From Pequot VenturesFunds to Speed Launch of Online Platform for Restricted Securities Trading Network
NEW YORK, N.Y., Sept. 19, 2007 – Restricted Stock Partners today announced that it has secured Series A funding from Pequot Ventures. A portion of the funding will be used to speed the launch of a proprietary electronic trading platform for the Restricted Securities Trading Network (RSTN), the largest marketplace for restricted and other illiquid securities.
Pequot Ventures, the New York-based direct venture investment arm of Pequot Capital Management, Inc., has approximately $2 billion of committed capital. The investment includes a future funding commitment.
About Restricted Stock Partners
Restricted Stock Partners (RSP) of New York, N.Y., a division of Green Drake Capital Corp. (Member FINRA/SIPC), manages the Restricted Securities Trading Network (RSTN) (www.RestrictedSecurities.net), the largest marketplace for restricted securities in the United States. Through RSTN, RSP provides liquidity and trading solutions to institutional and accredited investors who hold restricted securities positions in public and private companies. RSP also offers other hedging and monetization services, such as Rule 144 sales and loans secured by restricted stock, as well as administrative and settlement support for restricted securities transactions. For more information visit www.RestrictedStockPartners.com.
*****
About Pequot Ventures
Pequot Ventures, which has more than $2 billion in capital commitments, is the direct venture investment arm of Pequot Capital Management, Inc. Pequot Ventures is focused on today’s most dynamic startup and growth-stage companies in the technology industry. For over a decade, Pequot Ventures has partnered with talented entrepreneurs to build market-leading companies across a range of industry sectors to create sustainable long-term value. Recent investments include: Netgear, Inc. (NASDAQ: NTGR); First Advantage Corp. (NASDAQ: FADV); StubHub, Inc (Acquired by eBay, Inc. (NASDAQ: EBAY)); Netegrity, Inc. (NASDAQ: NETE) / Acquired by CA Inc. (NYSE: CA)); Flarion, Inc. (Acquired by Qualcomm, Inc. (NASDAQ: QCOM); and OutlookSoft Inc. (Acquired by SAP AG (NYSE: SAP)). Pequot Ventures brings energy, insight and substantial sector expertise to its portfolio companies through the collective intellectual capital, deep operating experience, and extensive network of its investment team. The firm leverages its unique multi-billion dollar presence across both public and private equity markets to help build competitive, sustainable businesses in partnership with the founders and management teams of its portfolio companies. Pequot Ventures is headquartered in New York City. For more information, please visit www.PequotVentures.com.
****
http://www.restrictedstockpartners.com/press-room/pr-9-18-07.asp
Restricted securities are stocks, warrants, debt or other securities that are:
- Generally acquired, either directly or indirectly, from public companies or company affiliates in transactions that are not registered with the U.S. Securities and Exchange Commission (SEC) or
- Registered with the SEC, but held by a “control” person and cannot be sold publicly without meeting certain requirements.
Restricted securities are a $1.2 trillion asset class that is growing because of the many purposes restricted securities serve. For example, restricted stock may be issued in connection with:
- Private placement transaction
- Mergers or acquisitions
- Compensation
- Corporate restructuring or reorganization
As the name implies, restricted securities cannot be freely traded and are, therefore, less liquid than publicly traded stock. That does not mean restricted securities cannot be bought and sold.
Selling Restricted Securities
The sale of restricted securities is governed by the Federal Securities Act of 1933, which allows the following sales options:
Rule 144 (Safe Harbor). The purpose of Rule 144 of the Securities Act is to ensure that the owner of restricted securities assumes the economic risks of the securities before selling them. It requires availability of information about the issuer and compliance with requirements governing manner of sale. In addition, the seller must hold the securities for at least one year before the exemption becomes available, and must adhere to certain manner of sale requirements such as volume limitations and public disclosure.
Prospectus Resale. A holder of restricted securities can resell them to the public if the resale is registered with the SEC via an effective registration statement filed by the issuer. Section 5 of the Securities Act requires the filing of a registration statement with the SEC and requires that a prospectus be delivered to each investor.
Privately Negotiated Sale — Section 4(1-1/2) Exemption. The so-called Section 4(1-1/2) exemption is a hybrid derived from Section 4(1) of the Securities Act, which provides an exemption for resale transactions “by any person other than an issuer, underwriter or dealer,” and Section 4(2), which provides a private placement exemption for issuers.
The Section 4(1-1/2) exemption contemplates a private resale that is similar to an issuer’s Section 4(2) sale. “This is a hybrid exemption not specifically provided for in the 1933 Act but clearly within its intended purpose,” according to the SEC (Act Release No. 6188, 1980 WL 29482).
Best practices associated with Section 4(1-1/2) transfers include:
- Placing a legend on the securities alerting the buyer about any restrictions.
- Arranging for the issuer to issue a stop-transfer order that allows any subsequent resale only after counsel issues an opinion about the legality of the resale.
- Making basic inquiries about the identity of the buyer and the buyer’s qualifications.
- Securing acknowledgement that the buyer is aware of the restrictive character of the securities and intends to hold the securities for investment.
http://www.restrictedstockpartners.com/education-center/index.asp
Pluris Valuation Advisors LLC is a full-service valuation firm specializing in valuing restricted securities and other illiquid assets.
To comply with the rules and regulations of the SEC, the IRS and other regulatory agencies, you need an experienced, independent valuation firm. Pluris Valuation Advisors was founded to help investment advisors, hedge funds, public and private companies, and high-net-worth individuals comply with valuation requirements.
Data from real-world transactions plays a key role in valuing illiquid assets. Our proprietary LiquiStat™ database provides us with detailed valuation data from recent restricted securities transactions. This, along with our in-depth experience, ensures that our clients receive the most accurate valuations possible.
NEW! For a free copy of our “FAS 157 Handbook,” click here.
Pluris Valuation Advisors LLC is an affiliate of Restricted Stock Partners, a division of Green Drake Capital Corp. (Member FINRA/SIPC ).
Public markets can efficiently determine the value of many financial assets — publicly traded stocks, bonds and derivatives, for example.
But what if there is no public marketplace for your assets? This is the case with illiquid assets, such as restricted securities and stock options.
While demand is increasing for the valuation of illiquid assets, expertise for providing such valuations is limited. Pluris was created to fill this gap. Some of the valuation needs Pluris will help fill include:
- Portfolio Valuations. For investment banks, hedge funds and other investment funds, or other reporting entities, Pluris will provide valuations of restricted stock, warrants and other illiquid securities.
- Financial Reporting Valuations. For disclosure and accounting purposes, Pluris will provide valuations of stock option grants and non-vested shares of reporting entities, as well as valuations of complex derivatives.
- Tax Valuations. Pluris will value illiquid securities and other assets for estate tax, gift tax and income tax returns.
- Transaction Opinions. Pluris will provide fairness and solvency opinions needed as part of the due diligence process for corporate transactions.
- Litigation Support. Pluris provides shareholder litigation support services when expert assistance is required.
Regulators and investors are paying more attention than ever before to the valuation of illiquid assets. Regulatory improprieties can severely damage a fund’s or a company’s reputation. When investors no longer trust managers, they are likely to liquidate their investments.
Unfortunately, when a few companies push the legal boundaries, all businesses are affected. Using a professional valuation firm can help ensure that you have valuations that are not only fair and accurate, but are defensible if regulators ever question them.
The LiquiStat™ Database
How can you determine what price an investor would be willing to pay for your illiquid asset in an arm’s-length transaction?
The only reliable way to obtain this vital information is to compare the asset with other similar assets that were recently sold. The more data from real-world transactions a valuation is based on, the better you can support your opinion of an asset’s value.
Pluris Valuation Advisors has created the proprietary LiquiStat™ database of restricted stock transactions for this purpose. We believe our database provides the most in-depth, comprehensive empirical transaction data available on restricted securities transactions. The LiquiStat™ database is based on data licensed from Restricted Stock Partners, an affiliate of Pluris. Restricted Stock Partners operates the Restricted Securities Trading Network (RSTN), a proprietary network of institutional and accredited investors interested in buying and selling restricted securities.
http://www.plurisvaluation.com/about/index.htm