Pre-marketing. Threading the needle

Transcription

1 Pre-marketing Threading the needle John Ahern, Marie Elena Angulo, Sebastian Orton and Philip Ferrera of Jones Day examine the legal and practical issues that issuers and underwriters face when engaging in UK and US pre-marketing activities and non-deal roadshows. Illustration: Getty Images Pre-marketing activities, such as pilot fishing and pre-sounding, are favoured methods for seeking investor feedback, particularly in volatile markets, as they help companies to determine investor appetite and the possible terms under which a proposed equity offering may proceed (see box What is pre-marketing? ). Pre-marketing has become increasingly popular following the 2008 financial crisis, and the market practice surrounding these activities continues to evolve. This article first appeared in the March 2013 issue of PLC Magazine. 1

2 This article considers pre-marketing practices in the context of initial public offerings (IPOs) and documented follow-on offerings in the UK with a concurrent unregistered offering to institutional investors in the US, and differentiates these from non-deal roadshows (NDRs). In this article, the term pilot fishing is used to refer to pre-marketing activities in connection with an IPO and the term pre-sounding is used in the context of documented follow-on offerings by listed companies. NDRs are roadshows conducted by listed companies in the ordinary course of business and unrelated to a specific transaction. LEGAL CONSIDERATIONS Pre-marketing activities in connection with IPOs and follow-on offerings need to be considered within the context of both the UK and US legal and regulatory regimes (see box Summary of UK and US legal considerations ). UK legal considerations: pre-ipo Notwithstanding that an issuer s shares in a prospective IPO are not yet listed, there are still significant legal and regulatory issues to consider: Prospectus Rules. Section 85 of the Financial Services and Markets Act 2000 (FSMA) provides that it is unlawful to offer transferable securities to the public or to request for their admission to trading on a regulated market in the UK unless an approved prospectus has been made publicly available. There are certain exemptions under section 86 of FSMA, but during a pilot fishing exercise it is nonetheless crucial to avoid saying anything or including anything in any materials which might constitute an offer of securities, as this could trigger the application of the Prospectus Rules that are made by the Financial Services Authority (FSA) under section 85 of FSMA. Financial promotion. In the UK, a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity What is pre-marketing? The terms pre-marketing, early marketing, pilot fishing, pre-sounding, testing the waters and non-deal roadshows (NDRs) are generally used interchangeably by different market participants to refer to discussions by an issuer or underwriter with selected investors to gauge investor sentiment and receive feedback on how the market might respond to an offering of securities. This interchangeability of terms (and the absence of statutory definitions) has led to some confusion as to which terms apply to which activities, and when. The terms pre-marketing, early marketing, pilot fishing, pre-sounding, testing the waters and NDRs do not refer to: Roadshows where an initial public offering has been launched or a follow-on offering has been publicly announced. Independent investor education by a research analyst. The taking of an order by an underwriter. Nor do these terms refer to instances where an issuer or underwriter has specific discussions with a significant shareholder or potential cornerstone investor regarding a potential transaction before approaching other investors in order to get their commitment to the transaction. These types of discussions, where a commitment is sought and a specific valuation or price may be discussed, may be deemed early offers and sales rather than pre-marketing. unless the person is authorised or the content of the communication has been approved by an authorised person (the financial promotion restriction) (section 21, FSMA). Certain types of financial promotions are exempt from the financial promotion restriction and it is important that any pilot fishing falls within one or more of the exemptions set out in the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (SI 2005/1529) (2005 Order). Useful exemptions are under article 19 (promotions to investment professionals) or article 49 (promotions to high net worth companies, unincorporated associations), but there are others. Breach of the financial promotion restriction can result in criminal liability (section 25, FSMA), and any investment made by a person following a communication made in breach of section 21 of FSMA is voidable and the investor may claim its money back (section 26, FSMA). Section 397. The information communicated during pilot fishing must be accurate and not misleading. It is a criminal offence for a person to knowingly or recklessly make a misleading, false or deceptive statement in order to induce (or being reckless as to whether it may induce) a person to enter into a relevant investment (section 397, FSMA) (section 397). A person found guilty of the offence may be fined and imprisoned on summary conviction for up to six months or fined and imprisoned for up to seven years if convicted on indictment (section 397(8), FSMA). Fraud Act Fraud may be committed by false representation, or by failing to disclose information, or by abuse of position. In certain circumstances, it may be that where an offence under section 397 has not been committed, nevertheless an offence has been committed under the Fraud Act 2006, which does not require dishonesty or recklessness to be proved. 2 This article first appeared in the March 2013 issue of PLC Magazine.

3 Summary of UK and US legal considerations Pilot fishing Pre-sounding Non-deal roadshows (NDRs) Market abuse Generally not relevant (not listed). Consider if the company or group has other listed securities. Prospectus Rules Section 21, Financial Services and Markets Act 2000 (FSMA) Section 397, FSMA Should not be relevant as nothing should be discussed in relation to an offering. Financial promotions Should ensure that communication is exempt (for example, directed at article 19 persons or article 49 companies) or approved. Should ensure that communication is exempt (for example, directed at article 19 persons or article 49 companies) or approved. Typically there should not be promotional activity at NDRs. Criminal Justice Act 1993 Generally not relevant (not listed). Consider if company or group has other listed securities. Rule 10b-5 General advertising and general solicitation Need to consider until rules eliminating the prohibition under the Jumpstart our Business Startups Act (JOBS Act) are implemented. Need to consider until rules eliminating the prohibition under the JOBS Act are implemented. Need to consider until rules eliminating the prohibition under the JOBS Act are implemented. Directed selling efforts Other civil liability. There are a number of additional ways in which civil liability may arise if pilot fishing materials include incorrect or misleading information: In contract, if the representation were construed as a term of the contract, there may be liability in damages and/or rescission at common law. A fraudulent misrepresentation at common law (that is, where a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth) will give rise to a right to claim rescission and damages in tort. The Misrepresentation Act 1967 sets out remedies for misrepresentations which are negligent (an award of damages and rescission) or innocent (rescission). In tort, a claim for damages may be brought for negligent misstatement (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465), although the claimant must establish that the defendant owed it a duty of care. UK legal considerations: listed issuers Where pre-sounding activities are undertaken, the listed issuer and underwriters will need to consider the same legal issues that apply to pilot fishing. However, because the issuer s securities are already listed, additional regimes such as ongoing disclosure and market abuse are relevant. Inside information. In approaching any person in advance of a launch, there can generally be no disclosure of inside information. Under the FSA s Disclosure and Transparency Rules (DTRs) and This article first appeared in the March 2013 issue of PLC Magazine. 3

4 market abuse regimes, inside information is information that: Is not generally available. Relates directly or indirectly to one or more issuers of qualifying investments or to the qualifying investments themselves. Would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments (section 118C(2), FSMA). Generally, listed issuers are required to disclose inside information to the market promptly. DTR R requires that where information is disclosed by an issuer or by someone on its behalf to any person, the issuer must generally also disclose it simultaneously on a regulatory information service (RIS) so that market participants have equal access to the information. There are, however, exceptions whereby an issuer is permitted to delay disclosure so as not to prejudice its legitimate interests (for example, where negotiations are ongoing and a public disclosure would be prejudicial to the outcome) (DTR R). Disclosing offence. The criminal offence of insider dealing will be committed if a person discloses inside information to another person otherwise than in the proper performance of his employment (section 52(2), Criminal Justice Act 1993) (CJA). It is a defence, however, if the individual can show that he did not expect anyone to deal in securities because of the disclosure, or that he did not expect the dealing to result in a profit attributable to the fact that the information was price-sensitive (section 53(3), CJA). A UK-listed company subject to the DTRs must implement processes which deny access to inside information to persons other than those within the issuer who require it for their functions (DTR R), and which enable public disclosure to be made via an RIS as soon as possible in case the issuer is not able to preserve the confidentiality of the relevant inside information (DTR R). Market abuse. Market abuse is an area which has been the focus of intense regulatory attention in the UK in recent years. There has been a number of significant enforcement cases where substantial penalties have been imposed on individuals as well as on issuers and firms. Section 118 in Part VIII of FSMA currently prescribes seven types of behaviour that amount to market abuse. The provisions of Part VIII of FSMA are amplified by the rules and guidance set out in the FSA s Code of Market Conduct (MAR). The FSA s enforcement actions against David Einhorn, Greenlight Capital and related cases serve as a salutary warning of the dangers of carrying out presounding activity with persons on the public side of the wall ( law.com/ ; law.com/ ). US legal considerations Pre-marketing activities for a UK documented offering with a concurrent unregistered US offering to institutional investors must comply with US securities laws. Securities Act. In order to refrain from registration under US securities laws, most combined UK documented and US unregistered offerings are conducted: Outside the US in reliance on Regulation S under the US Securities Act of 1933, as amended (Securities Act). Inside the US to institutional investors, generally qualified institutional buyers (QIBs), in reliance on the Rule 144A resale safe harbor, the Section 4(a)(2) exemption or the so-called Section 4(1½) exemption from registration under the Securities Act. These provisions provide distinct, although sometimes overlapping, restrictions on communications with potential investors in the run up to an offering. In order to satisfy the requirements of combined Regulation S and Rule 144A, Section 4(a)(2) or Section 4(1½) offerings, pre-marketing activities must constitute neither directed selling efforts (in connection with the Regulation S offers and sales) nor general solicitation or general advertising (in connection with Rule 144A, Section 4(a)(2) and Section 4(1½) offerings) under US securities laws. Before 2009, in line with market practice for US registered offerings, few market participants engaged in premarketing in the US in connection with combined UK documented and US unregistered offerings. However, market practice with respect to unregistered offerings has since evolved to include pre-marketing meetings with a small number of QIBs in the US. The landscape in the US continues to evolve, as the Jumpstart Our Business Startups Act (JOBS Act), passed in April 2012, directs the US Securities and Exchange Commission (SEC) to amend Rule 144A to allow for the use of general solicitation and general advertising in connection with Rule 144A offerings to QIBs. Under the proposed rules, which have not yet been adopted, offers can be made to non-qibs, including through general solicitation or general advertising, as long as the securities are sold only to buyers that are reasonably believed to be QIBs. If such rules are adopted, the main changes that can be expected are a potential increase in the number of QIBs attending pilot fishing meetings in the US (or contacted in connection with pre-soundings) for Rule 144A offerings and the relaxation of publicity restrictions typically put in place in unregistered offerings. It should be noted, however, that the JOBS Act does not modify the prohibition against general solicitation and general advertising in connection with Section 4(a)(2) or Section 4(1½) offerings or the prohibition of directed selling efforts under Regulation S for offers 4 This article first appeared in the March 2013 issue of PLC Magazine.

5 and sales outside the US. Accordingly, the impact of the JOBS Act on European pre-marketing practice remains to be seen (see News brief US private offerings: solicitation and advertising on the cards, Anti-fraud concerns. Rule 10b-5 of the US Securities Exchange Act of 1934 (Rule 10b-5), as amended, makes it illegal for any person to issue materially misleading statements or omissions, or use manipulative and deceptive devices, in connection with the sale or purchase of securities. The applicability of Rule 10b-5 is broad and can include pre-marketing activities. Accordingly, pre-marketing communications should be vetted for accuracy and consistency, including with both the issuer s public disclosure (if any) and prospectus and any other relevant existing or future transaction materials (for example, any independent analyst or roadshow presentation). In practice, this means that potential prospectus disclosure may need to be considered earlier in the transaction than would otherwise be the case if pre-marketing activities were not being conducted and, even after such activities have taken place, such materials must be monitored for potential differences with the pre-marketing communications. Insider trading. It is also important, in the case of a follow-on offering in the UK with a concurrent unregistered offering into the US, for offering participants, particularly US investors, to consider pre-marketing activities in light of US theories of insider trading and the potential for different outcomes under US and UK theories. In the US, federal securities laws prohibit the use of material, non-public information in connection with the purchase or sale of securities and, in the context of such insider trading, the US Supreme Court has developed theories that give rise to claims subject to the existence (and breach) of a corporate fiduciary relationship (the classical theory of insider trading) or otherwise the existence (and breach) of a duty owed to the source of confidential information (the misappropriation theory). Technically, an investor is liable under US insider trading theories as long as there is a basis for a US court to claim jurisdiction over the trade. For example, in the case of a follow-on offering of shares of a non-us issuer listed in London, an investor may be liable under US insider trading theories if it places its order from the US. However, in practice, it is questionable whether the SEC would initiate a case against such an investor, unless its activities have a significant impact on US market integrity. In addition, there is no significant precedent of the SEC initiating a case against an investor that was located in the US and where the trade occurred in a non-us market. Generally, liability for insider trading arises in the jurisdiction where the relevant securities are listed, not where the investor is located. Therefore, offering participants (in particular, US investors) must consider both the US and UK regimes and make their own, independent determination as to whether they have inside information. PILOT FISHING Pilot fishing entails holding meetings with a small number of sophisticated investors to try to gauge interest in a proposed IPO before it is publicly launched. Confidential pilot fishing is viewed as a useful tool for gauging investor sentiment, identifying investors concerns and potentially identifying significant investors without making the transaction public. Feedback obtained during pilot fishing can be useful to issuers and underwriters in determining the right time to proceed with an IPO, particularly in volatile market conditions, as it reduces the risk of announcing an offering when there is insufficient market appetite. From the perspective of investors, pilot fishing gives access to the company s management earlier in the IPO process and provides it with more time to learn about the issuer and to model properly against publicly listed peer companies. In recent years, competing interests have developed between issuers and underwriters, with issuers wanting assurances over the likelihood of an IPO s success before they incur significant fees; underwriters, however, have questioned the usefulness of pilot fishing, highlighting that indications received from investors during pilot fishing are not binding commitments. Investors views can change as rapidly as market conditions. In addition, pilot fishing has led to some controversy because it could potentially undermine the underwriter s role in providing advice about the price at which an IPO should be launched. Furthermore, there are circumstances where pilot fishing in the context of an IPO is impractical. For example, if an issuer has listed debt or is being demerged from a listed company, investors may not wish to be wall-crossed with respect to the issuer weeks or months in advance of the IPO (see Pre-sounding below). In practice A fundamental principle of UK securities laws is that the prospectus is the document on which investors must rely when making an investment decision (see UK legal considerations: pre-ipo above). The prospectus reflects the due diligence exercise carried out by the sponsor (in a premium listing) and the underwriters, auditors, reporting accountants, and legal advisers involved in the offering. However, under current IPO practice, the prospectus comes at the end of the process. Investors in the UK first learn about the issuer through independent research published by an underwriter s research analyst, and limited pilot fishing. The roadshow presentation formally marketing the IPO typically takes place just two weeks before the closing of the transaction. This is the first time that investors have access to a draft prospectus, generally in the form of a pathfinder (an almost final prospectus that has been reviewed but typically not approved by the UK Listing Authority (UKLA) and which may include a price range). This article first appeared in the March 2013 issue of PLC Magazine. 5

6 Although investors in US-registered IPOs have access to information much earlier in the process through the SEC s review process (a registration statement containing a substantially completed prospectus is filed on the SEC s publicly accessible website for review; amended versions and SEC comments are also available), the information is limited to that contained in the registration statement. US securities laws limit what oral and written information a company and related parties can release to the public before the filing of the registration statement, and from the time that the registration statement is filed until the SEC declares it effective. Accordingly, US investors have historically not been afforded direct access to management until the roadshow. The passing of the JOBS Act in April 2012 changes this with respect to emerging growth companies only. The JOBS Act permits such issuers to submit the registration statement for confidential SEC review and to test the waters with QIBs and accredited investors, provided that the registration statement is filed publicly at least 21 days before the roadshow. Market practice with respect to pilot fishing in unregistered offerings into the US has generally followed the same practice as with US-registered IPOs. It is unclear, however, whether the changes introduced by the JOBS Act with respect to testing the waters ahead of an IPO will have an impact on market practice with respect to US unregistered offerings. The fact that the entire review process is confidential in the UK means that, unless there is a change in the UK regime and market practice, the prospectus will not be available to any investors (including US investors) earlier in the process, as is required under these new US rules. Analysing pre-marketing: CAT Issuers should consider a number of questions when proposing to carry out premarketing activities: Content Audience Timing What information will the communication provide to investors? What will be said to an investor? Will commitments be sought? How sales-like will the information be? How many investors will be approached? In a follow-on offering, will new investors be approached? What kind of investors? Will they need to sign a confidentiality agreement or to be formally made insiders? When will the pre-marketing or non-deal roadshow take place? Will the timing affect the content or audience? Nonetheless, the relaxation in the rules relating to direct communications between issuers or underwriters and investors before an SEC-registered IPO, together with the proposed rules allowing for the use of general solicitation and general advertising in connection with Rule 144A offerings (see US legal considerations above), if adopted, are likely to result in an increase in pilot fishing activities in the US and in the number of QIBs invited to pilot fishing meetings. However, it is still likely that underwriters will continue to maintain internal guidelines limiting the number of QIBs invited to pilot fishing presentations, and managing the content and timing of such presentations. All of the considerations set out above require that issuers and underwriters exercise considerable care to ensure that any material information disclosed in the course of pilot fishing is reflected in the prospectus when published. In addition, all materials produced should contain appropriate rubrics to ensure that they are directed only at persons to whom the IPO may be promoted in compliance with the UK financial promotion restriction and US securities laws. Pilot fishing: CAT analysis Decisions regarding what to do, what to say, to whom and when, in connection with pilot fishing, are generally specific to the facts and circumstances of the issuer, potential investor and nature of the transaction. In each case, it is useful to conduct a CAT analysis ; that is, looking at content, audience and timing (see box Analysing pre-marketing: CAT ): Content. Pilot fishing customarily takes place before there is an advanced draft of the prospectus, generally before, or shortly after, the issuer s presentation to the underwriters independent research analysts. At that stage, due diligence has not been completed, the accountants have not finalised their reports, and the issuer may not have firmed up the board composition nor signed off the accounts. This gives rise to three key areas of concern regarding the content of any pilot fishing materials: A need to ensure that no offer of transferable securities is made to the public other than by the publication of the UKLA-approved prospectus. Potential liability for information included in the presentation (such as misrepresentations or misleading statements, including US liability under Rule 10b-5). A risk of inconsistencies with the information to be included in the research analyst s presentation and the prospectus. Because of the potential UK and US liability for what is said during, or included in, the pilot fishing presentation, the general rule is: if it cannot be verified and included in the prospectus, leave it out of the presentation. Consequently, pilot fishing presentations should not 6 This article first appeared in the March 2013 issue of PLC Magazine.

7 include projections or predictions, key performance indicators or financial information that may not be covered by the accountants comfort letters or information about comparables that will not be included in the prospectus. Generally, the logos and names of the underwriters should not be included if the pilot fishing takes place before the analyst presentation. If it takes place after the analyst presentation or later on in the IPO process, the underwriters may be prepared for their logos and names to be included but may also require specific disclaimers in the materials to minimise potential liability. Market practice varies but, as is common practice for roadshow presentations, the preferred route is not to leave written materials behind. Audience. In the UK, the audience for pilot fishing should consist of a limited number of sophisticated, trusted and professional investors exempt from the financial promotion restriction (see UK legal considerations: pre-ipo above). What is considered a limited number will depend on the particular facts and circumstances, the internal guidelines of the lead underwriters, the size of the syndicate, and other factors. There is no specific safe number. In addition, market practice varies among underwriters as to whether the maximum should be based on the number of invitations or the number of acceptances; the latter is generally preferred. The timing of a pilot-fishing presentation typically dictates whether or not bankers attend. Generally, if pilot fishing takes place early on in the transaction (shortly after the kick-off meeting or weeks before the analyst presentation), the bankers would not attend. But where pilot fishing takes place later (after the analyst presentation but before publication of the research report), the bankers sometimes do attend. Furthermore, there are circumstances in which the transaction has been delayed after publication of the pathfinder. In those circumstances, the bankers may undertake some pilot fishing before relaunching the IPO in order to reassess appetite for the transaction. A list of all attendees should be kept, and all attendees should receive copies of the pathfinder and final prospectus (and any supplements). Extra caution is recommended if a decision is made to pilot fish in the US. As a prudent matter, attendees should be restricted to a limited number of QIBs, in accordance with the internal guidelines of the lead underwriters. Timing. Some buy-side investors (that is, large institutional investors) have argued that a one-hour meeting with management during a roadshow, just two weeks before the closing of the transaction, is not enough. They need a longer pre-marketing period and more time with the management of a company to understand the company s fundamentals, test the business plans against future delivery, and properly model against publicly listed peer companies. This has had an impact on the timing of pilot fishing in recent transactions. Early pilot fishing can be difficult. The equity story may not be fully developed and there is a risk of data changing and being inconsistent with the final prospectus. However, it has the benefit that feedback received can be reflected in the analyst presentation and considered when drafting the prospectus. Nonetheless, care must be taken: if the premarketing occurs before the research is published and the feedback from the pilot fishing is conveyed to the analyst during or in connection with the analyst presentation, it may jeopardise the independent status of the analyst s research. Late pilot fishing (after the analyst presentation) may be confused with the analyst s investor education programme and the formal roadshow marketing of the IPO. Market practice varies and the interests of the issuer may diverge from the underwriters : as a general principle, a larger gap between pilot fishing and the publication of research and the roadshow will separate the pilot fishing from the marketing process and avoid the risk of investor reliance on the discussion and materials, rather than the prospectus. However, it also may increase the risk of inaccurate information being conveyed to investors. Other considerations Investors may be asked to sign a confidentiality agreement before attending pilot fishing presentations. In the context of a private group, without other listed securities, this is because of commercial concerns regarding the confidentiality of the transaction. Insider dealing and market manipulation are not relevant. Pilot fishing may be impractical if the issuer has other listed securities or the transaction is a demerger or spin-off from a listed company. In those circumstances, insider dealing and market manipulation rules may come into play. PRE-SOUNDING Pre-sounding is a similar practice to pilot fishing, but is used to gauge investor appetite for a follow-on offering for a company that is already listed. If presounding discloses that there is unlikely to be broad support for the offering, the issuer and underwriters may decide not to proceed until a later time when conditions might be more favourable. Pre-sounding became a popular practice as a result of the 2008 financial crisis, particularly for companies that were seeking new funds in a rescue situation. It has also been a popular tool in capital raisings to fund acquisitions where issuers are seeking comfort regarding the availability of funding for the transaction. In practice As even the fact that a follow-on offering is contemplated may constitute inside information, the recipients of the information will need to be wallcrossed before the issuer or the underwriters can conduct pre-soundings. This article first appeared in the March 2013 issue of PLC Magazine. 7

8 Wall-crossing. Wall-crossing is the practice in follow-on offerings where an investor is made an insider to the transaction and agrees to keep the disclosed information confidential and to refrain from trading in (and advising on) the securities until the transaction is announced or the investor is otherwise cleansed. Cleansing refers to removal of wallcrossing prohibitions where the information has been disclosed to the market or ceases to be inside information (by reason of no longer being price sensitive or sufficiently precise). Cleansing can take place through the publication of a prospectus or an RIS announcement. However, it is important to note that wall-crossing does not amount to a licence to disclose without limit. Disclosure of the inside information must still be limited to the recipients and matters which are permitted by DTR 2.5.6R and under MAR (see UK legal considerations: listed issuers above). If an investor refuses to be wall-crossed, this will be an effective bar to undertaking any pre-sounding activity with that investor, so this needs careful advance consideration. Investors who are wallcrossed need to be told that they are agreeing to be made insiders, and procedures must be put in place to record their agreement. Market practice is to approach investors on a recorded telephone line on a no-names basis until they agree to be wall-crossed and rely on agreed scripts for the information to be provided to such investors. Aborted transactions. Once individuals are wall-crossed, there are varying views in the market as to if and how they ought to be cleansed of inside information should the transaction not proceed. In such circumstances, a private communication to the investors may not be sufficient. Such investors will still be aware that the issuer needs (or wants) to raise capital, which may be deemed inside information. One view is that an announcement should be made. In its final notice in relation to David Einhorn (see UK legal considerations: listed issuers above), the FSA stated that a party that has agreed to be wallcrossed is cleansed if the information about the transaction has been made public, either when the transaction is announced, or in cases where a transaction does not proceed, when an announcement is made to the market stating that a transaction was contemplated, but did not proceed ( pubs/final/david-einhorn.pdf). The latter statement caused considerable concern to market participants and practitioners alike. If an issuer considers an offering which, ultimately, does not proceed, the market will be surprised by an announcement of that fact and there could be adverse consequences for the issuer if such a cleansing statement were mandatory. The FSA has since confirmed that whether a cleansing statement should be issued for an aborted transaction will depend on the circumstances of each case ( Another potential solution is for issuers to include a statement in their ongoing disclosure that from time to time they may consider equity or other capital raisings. Whether this would suffice as a cleansing statement is open to debate. Practitioners views differ regarding the need to disclose an abandoned transaction. Some argue that unless the company is in a rescue situation or otherwise in urgent need of capital, an abandoned transaction may not be deemed material information. However, given the uncertainty surrounding this issue and increased FSA scrutiny, investors are increasingly asking the underwriters and issuer whether they will issue a cleansing statement if a transaction is abandoned, regardless of the original reasons for the capital raising. Pre-sounding: CAT analysis As with pilot fishing, a CAT analysis can help to clarify how to proceed with pre-soundings. Content. As with pilot fishing, statements which are made during presounding should not be inconsistent with what appears in the subsequent prospectus or other offering document. Any material statement made in presounding will need to be included in the prospectus, as otherwise the investors with whom pre-soundings are undertaken may hold inside information and be unable to trade in the securities. Calls with investors regarding bringing them over the wall should be undertaken with a script pre-approved by the underwriters internal legal and compliance personnel and external counsel, and should be made on recorded lines by specifically authorised people. Working from a script introduces an element of artificiality to a conversation. However, departing from the script dramatically increases the likelihood of straying into dangerous territory and can leave the underwriter exposed to increased liability. Where an investor indicates that they do not wish to be wallcrossed, it is crucial not to answer any further questions they may pose about the opportunity. Great care needs to be exercised in suggesting to potential investors that a significant shareholder or new investor has indicated that they will participate in the offering. In the absence of a firm commitment, there is nothing to stop the investor from changing its mind and, consequently, investors who commit on the strength of such an indication may seek redress from the underwriters if, in fact, the indication proves to be incorrect. Furthermore, if such a statement is not replicated in the prospectus, there will be a disparity between what is said in pre-sounding and the offering document, which would enhance litigation risk. Many practitioners believe that such disclosures should be avoided in pre-soundings, as a decision to invest should be based on the intrinsic fundamentals of the issuer rather than on the support of other investors. Similarly, where it is disclosed that a significant investor does not support the offering, there could be an inference that the issuer is in financial difficulty, and this could be potentially dangerous inside information in the hands of any 8 This article first appeared in the March 2013 issue of PLC Magazine.

9 investor with an existing stake in the issuer. Pre-sounding discussions do not typically involve distribution of written materials, so prepared scripts will be important and should be approved by internal legal and compliance personnel and external counsel. Audience. The underwriters will, generally, wish to approach significant investors in order to gauge support and, similarly to pilot fishing, the number of investors approached is limited but much will depend on the transaction. Once an individual has agreed to be wall-crossed, the underwriter should confirm to the person concerned in writing (this can be done informally by or by execution of a confidentiality agreement) that he is on the private side of the wall, that the information which has been provided is confidential, and that he may not deal in the securities or disclose any of the information until the transaction is announced. Extra caution is recommended if a decision is made to wall-cross investors and do pre-sounding in the US. Wall-crossing should be limited to a small number of QIBs who have agreed to be wallcrossed, in accordance with the internal policies of the underwriters leading the transaction. Timing. Ideally, no-one should be wallcrossed until the launch is relatively imminent due to potential insider trading liabilities: a good rule of thumb is to do the pre-sounding perhaps two or three days before launch. Unlike in an IPO, investors will probably already be familiar with the issuer and need less time to understand the rationale for the follow-on offering. Pre-sounding may be done earlier, but investors will not appreciate being locked out of the market for too long. If investors are wall-crossed too early, there is an enhanced danger of inside information leaking, and this could have a damaging effect on the issuer and the transaction s success as any leak would likely mandate a disclosure under DTR 2. Related information Links from This article is at Topics Initial public offerings Prospectus and marketing Cross border: Equity Capital Markets Practice notes When is a prospectus required? Financial promotion: overview Misleading statements and market manipulation Misrepresentation Insider dealing: overview JOBS Act: Regulation D and Rule 144A General Solicitation Summary NON-DEAL ROADSHOWS NDRs are generally part of a listed issuer s investor relations programme and are conducted regularly in connection with specific events, such as results announcements. The basic rule is that if there is a deal, it is not an NDR. If a deal has been announced, meetings with investors are deal roadshows. Market abuse, the CJA and DTR 2 are equally relevant to NDRs as they are to pre-sounding. An NDR should not involve the disclosure of inside information. If inside information is disclosed, it should be announced promptly by the issuer through an RIS so that attendees who become insiders as a result of the disclosure may be cleansed. As NDRs are conducted in the ordinary course of an issuer s investor relations communications, they should not mention a deal or potential capital raising. If a capital raising is contemplated, consideration will need to be given to the market abuse and financial promotion regimes, as well as other relevant issues. In practice Determining whether a roadshow for a listed company is deal-related is a question of fact. NDRs may be conducted in circumstances where an offering is For subscription enquiries to PLC web materials please call being considered, but no final decision has been taken to proceed. In those situations, the NDR should not include a discussion of any potential transaction, otherwise discussing a potential transaction with a limited number of investors could easily become selective disclosure in violation of DTR 2.5.6R and market manipulation rules. However, concerns have been raised about such NDRs misleading investors if they are unaware of the issuer s intentions. NDRs: CAT analysis The following analysis assumes that an offering is being considered but no final decision has been taken to proceed and that underwriters have not been formally mandated. Accordingly, no investors or existing shareholders have been made insiders and there has not been any pre-sounding. Content. An NDR should not mention a potential capital raising. There should be no mention of potential underwriters identities. The information to be discussed must not be inside information. There should be no disclosure of such information unless it is simultaneously released to the public via an RIS. If there is a potential transaction being considered, but no decision has been This article first appeared in the March 2013 issue of PLC Magazine. 9

10 made, particular care should be taken regarding the disclosure of projections or forecasts in the NDR as these may need to be included and reported on in any prospectus prepared in connection with a future capital raising. Videos, charts and slides may be used but not distributed to the attendees, unless that has been the case in the course of previous NDRs. Any materials used should be reviewed and verified for accuracy and consistency with what is expected to be included in any (potential) prospectus. Relevant disclaimers should be included in the materials, if appropriate. Senior management of the issuer and the underwriters, with the assistance of external legal counsel, should assess the risk of misleading investors if a potential transaction is being considered. If there is a transaction shortly after the NDR, consideration should be given to distributing the prospectus to investors who attended the NDR. Audience. Only existing shareholders and other investors who are usually invited should attend an NDR. The attendees should be sophisticated, institutional investors. Journalists and research analysts should not typically be invited but this may need to be carefully considered if they have been invited to previous NDRs. Generally, no bankers should be invited. However, some issuers usually include corporate brokers or salespeople in their NDRs. If that is the case, those bankers could attend the NDR. However, bankers on the equity capital markets or M&A teams should not attend. NDRs should be allowed to go into the US with caution and only if in the ordinary course. If there is a potential transaction being considered, but no decision has been taken, only QIBs should be invited in order to minimise risks under the US securities laws. Timing. NDRs should be scheduled as they would be in the ordinary course of a company s investor relations programme. If a transaction is contemplated, consideration should be given to putting in place a cooling-off period between the NDR and the launch of the transaction: some banks believe in imposing a cooling-off period of at least 30 days. An NDR should preferably take place before any kick-off meeting and before execution of an engagement letter between the bank and the issuer regarding any potential transaction. Other considerations Are NDRs when a deal is contemplated a genuine concept or are they too flawed by design and too difficult to police to be worth the risks? If the content, audience and timing of the NDR are not considered carefully, the NDR could result in market manipulation or insider dealing and a violation of financial promotions rules. Issuers and any potential underwriters need to consider what information is being discussed in the NDR and the timing of any contemplated transactions. NDRs run the risk of the issuer misleading investors who are unaware of the intentions of the presenters. In addition, materials used in the NDR need to be vetted for consistency with information that subsequently may be included in the prospectus. Special consideration should be given to (and a script considered for) how company management should respond to questions regarding plans for future capital raisings. John Ahern, Marie Elena Angulo and Sebastian Orton are partners, and Philip Ferrera is an associate, at Jones Day. 10 This article first appeared in the March 2013 issue of PLC Magazine.