From: Mike Halloran
Ladies and Gentlemen:
I am an experienced securities law practitioner in Silicon Valley. I represent companies large and small, but focus today on problems smaller companies are having, and have had over many years, with raising capital necessary to complete a public offering. The problem is the hoary integration concept.
Companies, most often smaller ones, often do run out of money during the registration process . The process may be prolonged due to market conditions ,SEC comments or other issues. Companies which thought they had raised enough capital for the process through mezzanine or other financings are often proven wrong, or are surprised in their insouciance. They should not be penalized for keeping a registration statement on file to go public when they get to the end of the process.
Why are they penalized? Because the integration concept says that a private placement conducted while the registration statement is on file is itself integrated with the public offering and must be registered with the SEC-- which is in and of itself an impossibility while the very registration process is going on! So what does the company do? It may follow the SEC "make do" no action letters, Black Box, Verticom and their brethren, which say, basically ,that the private placement of securities is not to be integrated as long as it is done only with QUIB's!. Magic-an exception to the integration rule is created by administrative fiat. There is actually no legal basis for Black Box and Verticom, and lawyers have a hard time rendering opinions the private placement is in fact exempt on the basis of such no action letters. But, worse, most small companies cannot obtain financing from the likes of QUIB's! So they have to withdraw the registration, wait 30 days under applicable SEC rules to do the private placement and then refile and start the process all over again with the SEC, the underwriters and the market.
The Advisory Committee report does not address this issue. It addresses only the rule 152 "decides to file a registration statement " issue--which is a prefiling problem(doing a private placement shortly before the filing of the registration statement without incurring the wrath of the integration doctrine). I should. It should address the problem DURING the registration statement process.
It is recommended that a rule be adopted--and a rule is required to get rid of the integration theory and be able to render opinions-- that states that a private placement with accredited investors during the registration process will be exempt under section 4(2) or Regulation D notwithstanding the filing and pendency of the registration statement, provided the other requirements and conditions of such exemptions are complied with.