Saturday, March 15, 2008
The Birth of Rule 144A Equity Offerings, by WILLIAM K. SJOSTROM Jr., Northern Kentucky University - Salmon P. Chase College of Law, was recently posted on SSRN. Here is the abstract:
In a groundbreaking deal closed in May 2007, Oaktree Capital Management LLC, a leading private U.S. hedge fund advisory firm, sold a 15% equity stake in itself for $880 million. The deal is groundbreaking because it was not structured as an initial public offering (IPO), traditionally the only option for an equity offering of this size by a private company. Instead, it was structured as a private placement under Rule 144A of the Securities Act of 1933. Rule 144A enables a company to market and sell securities through an underwriter to institutional investors without registering the offering with the Securities and Exchange Commission as is required for an IPO. Had the Oaktree deal been structured as an IPO, it would have been the sixth largest by a domestic issuer in 2007.
Oaktree's novel use of Rule 144A is driven by two factors. First, passage of the Sarbanes-Oxley Act of 2002 has made it much more expensive to be a public company thereby decreasing the attractiveness of an IPO. Second, the emergence of a centralized trading market for Rule 144A equity securities has improved their liquidity thus increasing the attractiveness of a Rule 144A equity offering. Consequently, a tipping point has been reached where the value of pursuing a Rule 144A equity offering exceeds the value of pursuing an IPO for some firms. The purpose of this article is to explore this development. Specifically, the article analyzes the legal framework of Rule 144A and details the burgeoning Rule 144A trading market. It then compares the costs and benefits of an IPO to those of a Rule 144A equity offering and theorizes about a firm's calculus for choosing one structure over the other. Finally, the article argues that Rule 144A equity offerings are firmly grounded in public policy and thus recommends regulatory reforms to improve their viability.