Understanding At-the-Market Offerings

By: Michael Rave, Day Pitney LLP

LEXIS PRACTICE ADVISOR RESEARCH PATH: Securities & Capital Markets > Post-IPO Equity Offerings > Other Equity Offerings > Practice Notes

There are various ways in which companies can attempt to raise capital in the face of liquidity and capital resource constraints. One such method is an “at-the-market” offering (ATM), which provides certain publicly traded companies an efficient means of raising measured amounts of capital over time. Different broker-dealers apply different names for ATM offerings, such as “controlled equity offerings,” “dribble out facilities,” or “equity distribution programs,” but the key features of the majority of these programs are generally the same.

ESSENTIALLY, ATMs ARE A TYPE OF SHELF-BASED REGISTERED offering under which an exchange-listed issuer incrementally sells shares of its listed securities directly into the market at prevailing market prices. Issuers have control over the timing and size of each sale and can modify these parameters as desired. This differs from traditional underwritten offerings, where a fixed number of shares are sold at a fixed price all at once. Sales of the issuer’s shares, which can be newly issued “primary” shares and/or “secondary” shares held by existing security holders, are made through one or more registered broker-dealers who act as agents on the issuer’s behalf. An agent in an ATM program is sometimes referred to as the “sales agent,” “placement agent,” or “distribution agent.”

ATMs have become more and more common recently as issuers seek alternatives to traditional offerings. With the added flexibility, control, discretion, and just-in-time capital that an ATM can provide, it has become an increasingly attractive capital-raising option for issuers seeking to protect themselves from the many inefficiencies found in the more traditional underwritten issuance model, including negative price impact, discounted purchases, substantial underwriting spreads, and management attention.

Advantages of At-the-Market Offerings

ATM offerings provide issuers with several advantages over other traditional methods for capital raising, including the following:

• Minimal market impact. Unlike traditional financings, the impact of an ATM program on an issuer’s stock price is limited as ATMs do not send a signal to the market that a company needs capital. Issuers can incrementally sell shares into the market at market prices without having to market or announce each sale. Additionally, investors cannot short the issuer’s stock in advance of the offering since the timing of any particular sale is not known.
• Flexibility. An issuer can raise capital on an “as needed” basis. ATMs can be started and stopped at the issuer’s option and efficiently ramped up to raise money when there’s an opportunity in the market or additional need, which gives issuers the flexibility to take advantage of good news and rising stock prices.
• Control. The terms of each sale, including timing, size, and minimum price, are agreed on between the issuer and the sales agent. This enables an issuer to control the offering to match its ongoing capital needs. For example, an issuer can implement a limit price below which sales will not occur and/or a percentage limitation on daily sales to reduce downward price pressure on its stock, as well as dilution.
• Cost. The costs associated with ATMs are generally lower than those associated with traditional financings, in part because of the lack of marketing-related documents and expenses. Furthermore, the distribution commissions payable to the sales agent in an ATM program typically fall in the 1-3% range whereas commissions to an underwriter often fall in the 5-7% range.
• Speed. ATM programs can be put in place relatively quickly (2-3 weeks), with no road show or other special sales efforts required.
• Less distraction. With no road show requirement and only limited prospectus preparation and delivery requirements, ATMs generally require much less management time and attention.
• No lock-up. There is generally no lock-up period required from directors, officers, or significant security holders under an ATM program.

Disadvantages of At-the-Market Offerings

Issuers should also consider some of the disadvantages of ATMs as compared to traditional financings. Due to their “dribble out” nature, ATMs tend to be substantially smaller than traditional follow-on offerings and, therefore, may not be the best option for issuers seeking to raise a large amount of capital in a short period of time. ATMs are still registered offerings and are generally only available for use by issuers eligible to conduct shelf offerings using Form S-3 (or Form F-3 for foreign private issuers) under Rule 415 (17 C.F.R. § 230.415) of the Securities Act of 1933, as amended, on a primary basis. Therefore, an issuer that is not Form S-3 eligible or one that has a thinly traded stock may not be a candidate for an ATM offering. Given the ongoing nature of ATM offerings, issuers should consider implementing controls to ensure that no sales orders are issued or completed while the issuer is in possession of material nonpublic information to avoid violation of securities anti-fraud rules. Furthermore, shares in an ATM are sold at prevailing market prices, so the cost of raising capital will fluctuate as the market price fluctuates. In a down market, issuers with pressing capital constraints may be forced to enter into sales transactions for its shares at depressed prices under its ATM program should alternative financing options not be available.

Eligibility Requirements

As noted previously, ATM facilities can generally only be employed by issuers that meet the eligibility requirements to use a shelf registration statement on Form S-3 (or Form F-3 for foreign private issuers) under Rule 415 of the Securities Act on a primary basis. Canadian foreign private issuers and closedend investment companies registered under the Investment Company Act of 1940 must use Form F-10 and Form N-2, respectively. If eligible, the issuer registering shares under an ATM program does not need to identify underwriters or agents in its registration statement and there is no limit on the number of securities that can be registered on the registration statement. To be eligible, the issuer, among other things,

• must have a class of securities registered under Section 12(b) (15 U.S.C.S. § 78l) or Section 12(g) of the Securities Exchange Act of 1934, as amended (or is required to file reports under Section 15(d) (15 U.S.C.S. § 78o) of the Exchange Act);
• must have been subject to the reporting requirements of Sections 12 or 15(d) of the Exchange Act and filed with the U.S. Securities and Exchange Commission (SEC) all reports required under Sections 13 (15 U.S.C.S. § 78m), 14 (15 U.S.C.S. § 78n), or 15(d) for at least 12 calendar months immediately preceding the filing of the registration statement; and
• since the end of the last year covered by its audited financial statements, cannot have failed to pay dividends or sinking fund installments on preferred stock or defaulted on installments on indebtedness for borrowed money or on material leases.

An issuer is “primary eligible” to use Form S-3 to offer securities on its own behalf for cash on an unlimited basis in at-the-market offerings if either the aggregate market value of its voting and non-voting common equity held by nonaffiliates, or “public float,” is at least $75 million, or

• the issuer has issued (as of a date within 60 days prior to the filing of the shelf registration statement) at least $1 billion in non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act, over the prior three years;
• the issuer has outstanding (as of a date within 60 days prior to the filing of the shelf registration statement) at least $750 million of non-convertible securities, other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act;
• the issuer is a wholly owned subsidiary of a “Well-Known Seasoned Issuer” (as defined in Rule 405 (17 C.F.R. § 230.405) under the Securities Act, but generally, an issuer with a worldwide market capitalization held by nonaffiliates of $700 million or more) (WKSI); or
• the issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI.

Generally, most issuers attain the status of being primary eligible by having $75 million or more in public float.

Basic Documentation

Registration Statement and Prospectus

To implement an ATM program, an issuer must have an effective registration statement on Form S-3 (or Form F-3 for foreign private issuers) that complies with Rule 415 under the Securities Act. A company may either (i) file a new shelf registration statement or (ii) use an existing and effective shelf registration statement, as long as there is a sufficient amount of shares available under the existing shelf registration statement to cover the total number of shares (or the full dollar amount) of the issuer’s shares subject to the ATM program. There should also be language in the registration statement stating that sales of common stock may be made from time to time at prevailing market prices by the issuer directly or through a designated agent. Accordingly, counsel drafting the registration statement for an ATM offering should include such language in the registration statement or prospectus supplement as applicable.

The issuer must prepare a prospectus supplement specifically for the ATM program. Counsel representing the issuer will typically draft the prospectus supplement, which must (i) specify the size of the offering; (ii) describe the securities to be issued under the ATM program; (iii) describe the general terms of the ATM program, including commissions payable to the sales agent; and (iv) identify the sales agents. The contents of the prospectus supplement are discussed in more detail below.

Important things for issuers to consider when deciding to implement an ATM program is whether an existing shelf registration statement could potentially expire mid-program and the likelihood that the issuer could become ineligible to use Form S-3 during the life of the program.

Sales Agency Agreement

An issuer will enter into a sales agency agreement (sometimes also referred to as a “distribution agreement” or “placement agency agreement”) with the broker-dealer that has been engaged to serve as sales agent for the shares to be sold under the ATM offering program. As the sales agent may be deemed an “underwriter” under the Securities Act and subject to Section 11 (15 U.S.C.S § 77k) liability with respect to material misstatements and omissions in the registration statement, the sales agency agreement will typically include representations and warranties of the issuer similar to those included in underwriting agreements used in traditional firm commitment offerings. The sales agency agreement will generally require customary closing deliveries from the issuer’s counsel, including a corporate opinion and negative assurances letter, in addition to a customary accountant’s comfort letter. Although there is likely to be little to no financial information in the prospectus supplement, the accountants will be required to provide comfort on the financial information incorporated by reference into the prospectus through the issuer’s Exchange Act reports. The sales agency agreement will often also require periodic bring downs of the issuer’s counsel’s initial legal opinions and accountant’s comfort letter for so long as the ATM program is effective. The frequency of the periodic bring downs is usually an important negotiating point, but it is usually tied to the date the issuer files its Form 10-K and Forms 10-Q with the SEC, the date the registration statement or related prospectus is amended or supplemented, and/or the occurrence of specified material developments. In addition, if the issuer desires to continue the offering during the time between the filing of the issuer’s earnings press release and the filing of the Form 10-K/10-Q, the sales agency agreement will usually require the issuer to file (and not furnish) the earnings press release on a Form 8-K so that the press release is incorporated by reference into the prospectus.

The sales agency agreement will usually allow the sales agent to act as a principal for its own account and as an agent of the issuer. When acting on an “agency basis,” the sales agent will try to place the issuer’s securities with investors, typically on a “best efforts” basis. On a “principal basis,” the sales agent will purchase the issuer’s securities directly for its own account with a view to reselling those securities, although this method is not as commonly undertaken by sales agents.

Other Disclosures

In addition, the issuer will disclose aggregate sales and commission amounts paid under the ATM program on at least a quarterly basis in either

• a prospectus supplement filed under Rule 424(b) (17 C.F.R. § 230.424) under the Securities Act or
• the company’s quarterly report on Form 10-Q or annual report on Form 10-K (as applicable).

In cases where the volume or terms of a particular sale or related group of sales may be individually material, the issuer would be required to promptly disclose such sale(s) in a prospectus supplement filed under Rule 424(b) instead of quarterly. These disclosure requirements would usually be set out in the distribution agreement.

Structure and Mechanics of an ATM Offering

Preparation time for an ATM offering is often shorter than that for a fully underwritten follow-on offering. An issuer can generally put an ATM program into effect in 30 days or less. The first action to be taken is to interview one or more investment banks to act as sales agent for the offering. Care should be taken to ensure that the investment bank chosen has sufficient expertise to successfully complete the offering. More importantly, management of the issuer should discuss with the agent their expectations as to how the offering should be conducted. Important considerations are the size of the offering and the price floor. However, other considerations include volume limitations the issuer may require, whether the sales agent is authorized to execute block trades to one or more discreet investors, and whether the issuer has any particular timing requirements. The issuer and the sales agent must also agree upon the amount of the sales commission to which the agent is entitled. Generally, the sales agent commission is significantly lower than those for underwritten offerings, or about 1-3% of the total amount of the offering.

Notwithstanding the fact that the ATM offering is generally a less costly and more efficient method of raising capital, it is nevertheless a registered offering under the Securities Act of 1933, as amended, and therefore the issuer and the sales agent are subject to significant liability. Accordingly, the sales agent will be required to conduct a full due diligence examination of the issuer. The sales agent will typically require a full legal opinion and negative assurances letter from issuer counsel, as well as a “cold comfort letter” from the issuer’s registered public accounting firm. The due diligence process should not significantly differ from that of a fully underwritten offering. Generally, the sales agent will provide the issuer with a document request list, including a request to review board and committee minutes. Although this list is intended to be comprehensive, counsel to the issuer should review the list and object to any items that appear to be overbroad or irrelevant. Interviews with management and the issuer’s public accounting firm should also be conducted prior to kicking off the program.

The legal documentation required in connection with an ATM offering is similar to that required for an underwritten offering in many respects but can be significantly less burdensome to prepare and negotiate. As discussed above, the issuer must have an effective shelf registration statement in place prior to commencing an ATM program. For non-WKSI issuers, care should be taken to ensure that the amount of common stock to be offered and sold under the ATM offering does not exceed the aggregate value of securities remaining under the effective registration statement. In cases where the amount remaining under the shelf registration statement is insufficient, the issuer may be able to increase the amount available by filing a registration statement under Rule 462(b) (17 C.F.R. § 230.462) under the Securities Act. WKSI issuers are not required to specify an aggregate dollar amount for their shelf registration statements and thus need not be concerned with this issue. Furthermore, since ATM offerings may last many months, all issuers (including WKSIs) should note the date when their shelf registration statement expires (three years after effectiveness) in order to ensure that there is adequate remaining time available. The S-3 shelf base prospectus should also specify that sales of the issuer’s securities may be made through a placement agent at prevailing prices, although failure to include such language should not require a post-effective amendment but merely the inclusion of such language in a prospectus supplement.

As discussed above, in order to “take down” securities from an effective shelf registration statement, the issuer is required to prepare and file with the SEC a prospectus supplement. Unlike prospectus supplements for follow-on and other offerings, the prospectus supplement for an ATM offering is typically not meant to be a sales document. In fact, the contents of an ATM offering prospectus supplement are often very sparse. The prospectus supplement typically will disclose only

• the maximum amount of common stock offered by the issuer,
• some general information about the issuer and its business,
• the anticipated use of proceeds of the offering,
• a pro forma capitalization table,
• a plan of distribution describing the method of offering the shares, and
• the name of the sales agent.

The prospectus supplement should be filed with the SEC in accordance with Securities Act Rule 424 immediately prior to kicking off the offering.

As discussed in more detail above, the issuer will enter into a sales agency agreement with the sales agent. This document will establish the legal relationship between the two parties.

Once the issuer and sales agent have prepared the prospectus supplement and negotiated the sales agency agreement, the parties should agree on a launch date. Typically, the best time to launch an offering is shortly after the filing of the issuer’s Form 10-K or 10-Q. At this time, all material public information about the issuer has presumably been disseminated into the market. In addition, no bring down due diligence will be required until the filing of the issuer’s next scheduled periodic report. Immediately prior to the launch of the offering or the morning of the launch of the offering (but prior to the opening of the market), the issuer and the sales agent will execute and deliver the sales agency agreement and all legal opinions and the comfort letter will be delivered to the sales agent. The issuer will frequently issue a press release simultaneously with the filing of the prospectus supplement with the SEC. Most issuers will also file the press release and sales agency agreement on a Form 8-K. Settlement for the shares sold in the offering is typically made on a rolling T+3 basis, although sometimes the sales agency agreement will provide for a single settlement at the end of a designated selling period.

Once the shelf registration has been declared effective and all other required documentation has been executed, filed, and delivered, the issuer can begin to send sales orders to the sales agent for execution. The issuer has complete discretion with respect to when and how frequently sales orders are delivered to the sales agent, as well as with respect to the actual terms of sale (i.e., minimum price per share, any volume limitations, the period during which sales are to made, etc.). The issuer can also revoke sales orders before they are executed.

The sales agent will not engage in any special selling or marketing efforts, including roadshows or other solicitations, but instead will typically execute each sale in ordinary brokers’ transactions on securities exchanges or through electronic trading systems, except that in an ATM program, the issuer, and not a shareholder, is the party placing the order to sell. In contrast, the underwriters in a traditional follow-on offering often engage in special selling efforts (i.e., through a formal roadshow and/or the solicitation of potential investors). The sales agent will execute sales throughout the desired period, usually in volumes averaging less than 25% of the average daily trading volume for the shares to avoid putting any downward price pressure on the issuer’s common stock.

Once a sale is consummated, the sales agent will retain the agreed upon commission and remit the net proceeds to the issuer on or prior to the settlement date against delivery of the requisite shares. The compensation payable by the issuer to the sales agent in connection with an ATM offering is analogous to the commission payable to a dealer executing trades rather than the spread that would be payable to an underwriter in connection with a more traditional registered offering.

If the ATM offering has not been completed at the time of the filing of the issuer’s next earnings press release and the issuer wishes to continue selling stock under the program, the sales agent will usually require the issuer to file (and not furnish) the issuer’s earnings press release on a Form 8-K. The purpose of this requirement is to ensure that the most recent financial information of the issuer is incorporated by reference into the prospectus. At the time the issuer files its Form 10-K or Form 10-Q, the sales agency agreement will require the issuer’s counsel to affirm its legal opinion and the issuer’s accountants to issue a new comfort letter that would cover the most recently filed Form 10-K or Form 10-Q. At the time the ATM offering has been terminated (by either the issuer or the sales agent, or because all shares have been sold) it is advisable for the issuer to issue a press release. The total aggregate sales and commissions paid should be disclosed on a Form 8-K or in the issuer’s next Form 10-K or 10-Q.

Regulatory Issues

In connection with a distribution of securities effected by or on behalf of an issuer, Regulation M generally makes it unlawful for the issuer or any “affiliated purchaser” of the issuer, directly or indirectly, to “bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period.” A “distribution” means an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods. A “distribution” is generally understood to include an ATM offering. The prohibition on purchases during the restricted period is only intended to prevent the manipulation of the stock of the issuer and does not apply to purchases of securities from an issuer that results from (i) the exercise of stock options, warrants, or other convertible securities and (ii) offers to buy the securities being distributed.

The following definitions from Regulation M are important in determining the restrictions applicable to an issuer, as well as the issuer’s executive officers, directors, and affiliates:

• A “covered security” is defined as “any security that is the subject of a distribution” (with respect to an ATM offering, the issuer’s common stock).
• The term “affiliated purchaser” is defined to include (A) a person acting, directly or indirectly, in concert with the issuer in connection with the acquisition or distribution of any issuer common stock; or (B) an affiliate that directly or indirectly controls the purchases of any common stock by the issuer, whose purchases are controlled by the issuer, or whose purchases are under common control with the issuer; or (C) an affiliate that regularly purchases securities for its own account or for the account of others, or that recommends or exercises investment discretion with respect to the purchase or sale of securities. There is an exception from the restriction in clause (C) that would apply only (i) if the issuer and an affiliate engaged in the securities business maintain, enforce, and have annual audits of a “Chinese Wall”; (ii) if the affiliate has no officers or employees (other than certain administrative personnel) in common with the issuer or another distribution participant; and (iii) the affiliate does not, during the restricted period, act as a market maker or as a broker-dealer for the issuer common stock.
• An “actively traded security” means a security with an average daily trading volume (or ADTV) of at least $1 million for an issuer with a public float of at least $150 million.

Regulation M exempts actively traded securities from Rule 101 (17 C.F.R. § 242.101) and Rule 102 (17 C.F.R. § 242.102), which combined are the major components of Regulation M. A large percentage of ATM offerings involve actively traded securities, so typically compliance with Rules 101 and 102 is not a concern. However, issuers of actively traded securities and their affiliated purchasers must nevertheless refrain from manipulating the issuer’s stock as Rule 104(e) (17 C.F.R. § 242.104) specifically prohibits stabilizing activities in ATM offerings.

In the case of a distribution of any security that is not an actively traded security, the restrictions imposed depend on the ADTV of the issuer’s common stock. If the issuer’s common stock has an ADTV of $100,000 or more and a public float value of $25 million or more, a “restricted period” begins one business day prior to the determination of the price of the securities to be distributed and continues until the issuer’s participation in the distribution is completed. For issuers that do not meet this test, the restricted period begins five business days prior to the price determination. The issuer’s participation in the distribution is deemed completed upon the closing of the ATM offering, which will be at the earlier of (i) the termination date in the applicable sales agency agreement and (ii) when all common stock to be sold in the ATM offering has been distributed.

In addition to Regulation M, sales agents and their counsel should be familiar with SEC Rule 139(a) (17 C.F.R. § 230.139), which permits a broker-dealer acting as a sales agent in an ATM offering to publish a research report regarding the issuer without having the research report be considered a prospectus for purposes of the Securities Act. The only conditions to this rule are that the research report must be included in a publication that is distributed in the normal course of business of the broker-dealer and the issuer must be eligible to use Form S-3 (which is a pre-condition to effecting an ATM offering). The rule also allows projections to be included in the research report so long as

• the broker-dealer has previously published or distributed projections on a regular basis in order to satisfy the “regular course of its business” condition;
• at the time of publishing or disseminating a research report, the broker-dealer is publishing or distributing projections with respect to that issuer; and
• the broker-dealer includes projections covering the same or similar periods with respect to either a substantial number of issuers in the issuer’s industry or sub-industry or substantially all issuers represented in the comprehensive list of securities contained in the research report.

Michael Rave is a partner in the Parsippany, New Jersey office of Day Pitney and chair of the firm’s Capital Markets practice group.

LEXIS PRACTICE ADVISOR RESEARCH PATH: Securities & Capital Markets > Post-IPO Equity Offerings > Other Equity Offerings > Practice Notes