Financing Alternatives in Today’s Capital Market Environment

Raising capital in today’s uncertain economic environment requires public companies to look beyond the methods used in the past. Private investment in public equity (PIPE) transactions or fully underwritten offerings can be expensive and time consuming in the best of times.

Because shares placed in a PIPE transaction are not registered, a resale registration statement must be filed with the SEC and declared effective for the shares to be freely tradable in open market transactions. Investors in PIPE transactions typically request a heavy discount to the issuer’s current share price and possibly warrant coverage to compensate for the risks related to this illiquidity. Additionally, the terms of the PIPE transaction may include penalties or liquidated damages provisions in the event the issuer fails to obtain an effective registration statement within a prescribed timeframe.

An underwritten or secondary offering of shares can be time consuming and expensive, given the need to file a registration statement and accompanying prospectus with the SEC and the associated legal and underwriting fees. The shares cannot be priced or placed until the SEC declares the registration statement effective which, depending on the SEC review process and any related follow on comments that need to be addressed, can take time, a commodity that many smaller public companies cannot afford.

A registered direct offering provides an alternative to public companies seeking capital and provides a number of benefits to the above alternatives; however, an RDO is not without its downsides.

What is a Registered Direct Offering?

A registered direct offering (RDO) is similar to a PIPE transaction, in that both are marketed and sold to a limited number of accredited and institutional investors; however, unlike a PIPE, shares sold in an RDO are registered and therefore, liquid, and can be sold to anyone. To complete an RDO, an issuer must be eligible to use Form S-3 and should have an effective shelf registration statement on file with the SEC. If an issuer is Form S-3 eligible, but doesn’t have an effective shelf registration statement on file, the issuer must file either a single purpose registration statement (i.e. “bullet”) covering the shares to be issued in the RDO, or a shelf registration statement.

RDO transactions are governed by a placement agency agreement, rather than an underwriting agreement. With a placement agency agreement, the offering is sold on a ‘best efforts’ basis, so there is no firm commitment for the placement of a specific number of shares, and the placement agent never takes possession of any securities. The placement agency agreement will typically include issuer representations and warranties concerning itself and its business, certain covenants applicable to the issuer, a promise to indemnify the placement agent for any Securities Act liabilities arising from the transaction, as well as closing conditions, such as legal opinions, comfort letter requirements, delivery of certificates, etc.

To complete the RDO pursuant to an effective registration statement, the issuer will ultimately prepare and file a preliminary or final prospectus supplement that describes the offering, depending upon how the shares are marketed and sold.

What are the advantages of an RDO?

An RDO has multiple advantages over a PIPE or traditional secondary offering.

1. Pricing – The shares sold in an RDO are freely tradable and therefore, there is no liquidity discount that would normally apply in a PIPE transaction. Additionally, the warrant coverage, if any, is typically lower in an RDO than would otherwise be the case in a PIPE.

2. Timeliness – With an effective shelf registration statement on file, an issuer can offer registered shares when market conditions permit, rather than be subject to the regulatory timeline that is typical in secondary offerings and that can cause an issuer to miss a market window. Investors in a PIPE transaction negotiate and execute individual purchase agreements, which can delay the closing of the transaction, whereas investors in an RDO are not required to sign or complete any such documentation.

3. Confidentiality – Because an RDO is marketed similarly to a PIPE, an issuer and the placement agent can market the transaction confidentially, enabling the parties to assess the market for the issuer’s securities without creating downward selling pressure on the stock that would typically accompany a public announcement of a proposed share offering. An RDO transaction is typically publicized just prior to or at pricing.

4. Lower legal and administrative expenses – Investors in an RDO are not required to negotiate and sign individual purchase agreements as they would otherwise be required to do in a PIPE transaction. Additionally, the shares in an RDO are typically offered under a shelf registration statement and therefore, are marketed based upon the issuer’s existing public disclosures, which eliminates the complexities of crafting a preliminary prospectus supplement as a selling document. RDO transactions also avoid the ‘give and take’ with the SEC typically associated with registration statements filed in connection with secondary offerings.

5. Exchange Rules – Certain securities exchanges require that any offering of securities that is determined not to be a ‘public offering,’ such as a PIPE, and which is greater than 20% of an issuer’s outstanding capital stock, must be presented to shareholders for approval. The determination of whether an RDO qualifies as a public offering is typically on a case by case basis; however, an RDO can be structured to allow the issuer to sidestep the 20% rule and avoid the need for shareholder approval of the proposed transaction.

What are the disadvantages of an RDO?

RDO’s are not a financing cure-all and there are some disadvantages to RDO’s over other methods of financing.

1. Distribution – Because an RDO is marketed to a select number of investors, shares are not as widely distributed as would typically be the case in a secondary offering. As a consequence, the issuer’s shareholder base is not necessarily broadened as a result of an RDO transaction.

2. Exchange Rules – If an RDO cannot be structured to meet an exchange’s definition of a public offering, and the proposed transaction is greater than 20% of the issuer’s outstanding capital stock, shareholder approval may be required, which would erode the advantages of timeliness and cost effectiveness of an RDO transaction.

3. Form S-3 – An issuer must be Form S-3 eligible to complete an RDO. While Form S-3 eligibility requirements have been relaxed, not all issuers will qualify.

4. Best efforts basis – A ‘best efforts’ basis means no firm commitment to the issuer regarding the number of shares to be sold. If the market fails to materialize for the issuer’s securities, the placement agent has no obligation to purchase any shares.

How do I start the process?

If an issuer does not already have an effective shelf registration statement on file, the first step in the process is to determine, together with legal counsel, the issuer’s Form S-3 eligibility. The next step is to assess any exchange rules that might apply regarding the determination of whether a proposed RDO is a ‘public offering.’ If the issuer is eligible for an RDO transaction, identification of the appropriate placement agent is the next critical hurdle. For a successful RDO, the placement agent should have longstanding relationships with a number of institutional investors who prefer to invest in the issuer’s industry or niche.

The Bottom Line

RDO’s are quicker to close than either a PIPE transaction or a secondary offering, which allows the issuer to quickly take advantage of favorable capital market conditions. The securities offered in an RDO are priced similar to a secondary offering, but without the related hurdles, and an RDO transaction can be marketed confidentially, which will reduce selling pressure on the issuer’s stock prior to completion of the transaction. Additionally, RDO transactions are typically cheaper to complete, in terms of discount, fees and related warrant coverage.

Twitter Tips For Direct Sellers

As a target marketing specialist for direct sales reps, I spend a lot of time testing new strategies to help direct sales reps reach and serve their customers. My current favorite is twitter.Twitter is an obvious choice for connecting real time with friends or followers. It’s quick and relatively easy to navigate. Simply create an i.d., and start looking for people to spread your message.The trouble comes when a person is brand new and has no idea how/where to begin.Twitter is not a platform for heavy selling. Rather, it’s a great place to introduce yourself, share more about who you are, and then open the door to potential business ventures. Heck, you only have 140 characters per tweet, and if you want people to share those tweets, you need to keep it under 120!In the interests of etiquette, here are a few simple tips to help direct sellers make the most of twitter:1. Be genuine. This is at the heart of everything twitter represents. Select a user name that reflects who you are, rather than your product or company name. In fact, most companies prohibit use of their name in that manner anyway, so why risk it?People will gravitate to who you are first, THEN to what you offer.2. Provide value. You’ve heard me say this time and again. People are always asking themselves, “why should I believe/listen you?” We are deluged with thousands of “advertising” messaged every single day. Your tweets need to stand out, provide value to your market and serve the very people you’re trying to reach.3. Be personal. By that, I mean resist the temptation to automate your following/unfollowing or direct messaging.There are appropriate ways to use automation with twitter. I’ve tested dozens of applications that were developed to maximize the efficiency of twitter. My results conclude that autofollows and autoDM’s just cause trouble.Take the time to make the connection manually – which will avoid the need to unfollow at a later date. Yes, it means your number of followers may grow more slowly, but you can be sure that the followers you do have are actually INTERESTED in what you have to say.4. Be patient. If you’re being true to who you are, you’re not likely to get a million followers overnight, but you WILL generate a following of people that know like and trust you.  Word will spread as your followers share your message with their followers.This is why I stress that social media and online marketing does not replace your home party business, but is an additional marketing component to running your business like a real business. Yes, there are people who have all but retired from doing home parties, but it didn’t happen overnight.Don’t fool yourself into thinking that a twitter account (or any single marketing strategy) is the fastest way to riches. It can help increase your reach dramatically, but it’s certainly not an overnight solution.==========© 2009 Lisa Robbin Young.

Tug of War Marketing

Warfare is one of the most common analogies used to describe the marketing process. Most of us have read books and articles with titles like “Guerilla Marketing” or “Strategic Marketing”, and most of us suspect (especially when budgeting time rolls around) that our corporate conference rooms aren’t that different from military command centers during a conflict. The analogy works so well because it’s not much of a stretch. Marketing is the most powerful piece of ammunition in our arsenal-and where there’s power, there’s competition! What’s warfare if not competition taken to its highest extreme?

I’m really detail-oriented by nature, and “plan your work, and then work your plan” is a message that I believe strongly in. This has served me tremendously well in marketing, because I’ve seen proof time and time again that there’s nothing like a good marketing plan to ensure success. On a fundamental level, in order to ensure success and maintain an effective marketing position, it’s important to think the process through-from start to finish-before you make a move. In a word, strategize. You can’t have a good fight without a good strategy.

Now, strategy is a grown-up word. Strategizing is something that adults do because growing up means taking control of one’s own destiny and destiny isn’t easily steered without a plan. Unfortunately, in learning how to strategize like grown-ups, we often forget how to act like children-on instinct.

My goal in writing is to help you bring a little of your childhood back into your adult actions, and make your marketing efforts far more successful as a result. We’ll be relying on the same old tried-and-true warfare analogy, but we’re going to make it a little more fun by mixing in the rules of a good old-fashioned game that man of us played as children: Tug of War!

How to play Tug of War

Lesson One: To win the game, play by the rules that are known to be effective.

It has always been amusing to me that as small children, each of us had an innate understanding of the correct strategy for playing and winning a game like “Tug of War”. We might not have had the strength or weight to be able to pull the other person or persons across the line, but what we lacked in brawn, we made up for in instinct. Sometimes, we sat down, or gave in just enough to let the other team think we were easy “pull-overs”-then inches from the line, we gave it all we had and pulled our way to a surprise victory. We didn’t know that we were strategizing when we whispered to each other to slack off for a count of ten, and then pull like crazy, but we knew how to win.

Somewhere between childhood and adulthood, we lose a great deal of understanding along the way. We forget the deceptively simple rules of staying on top. It happens to sports teams. It happens to armies. It happens to companies. It happens to brands.

The rules are simple:

- Rule 1 – Hold on tight.

- Rule 2 – Don’t let go.

- Rule 3 – Use all of the ammunition at your disposal.

- Rule 4 – Leverage your allies.

- Rule 5 – Move secretly and deceptively.

- Rule 6 – Don’t let the enemy gain momentum.

- Rule 7 – Don’t let the enemy see you sweat.

These are also the rules for Tug of War, and they’re also the rules for maintaining market leadership… but first and foremost, to benefit from them, you must have the will to be the leader.

You Must Value the Position.

Lesson Two: Know the value of winning.

Is it important to maintain your company and or communities’ leading position? What bad things might happen to you if you don’t? If the answers are unclear, create various winning and losing scenarios, and assess the importance.

Assuming that you do value the position, and do want to defend it forever, we offer the following:

Rule 1 – Hold on tight.

In Tug of War, holding on tight requires that you get a good grip, and keep it. You cannot expect to win by simply watching the line. You must keep your eye on all the players to see how they are reacting — and even when the tug gets stronger and harder to hold, you’d better maintain a good grip and tug right back as hard as you can.

In a Tug of War, you must also protect maintain a good foothold. Footholds in apartment marketing fall into three general categories: target residents, apartment and community variations, and advertising channels. Leave the competition no convenient means by which to gain a winning foothold.

Rule 2 – Don’t let go.

In direct hand-to-hand combat, the tall heavy guy has certain undeniable advantages of leverage. In a Tug of War, the same kinds of advantages are magnified.

Everything is harder for the guy who is holding on the opposite side. Always keep your opponent in site. In the Tug of War game, this means pulling harder and longer or with substantially stronger and heavier teammates. In marketing, this means continually training and developing your team in order to maintain a competitive advantage.

Rule 3 – Use all the ammunition at your disposal.

It’s hard to win at Tug of War if you’re only using your hands and the guys on the other side are using their arms and legs. The relative strength and superiority of teammates is vitally important. In Tug of War marketing, your valuable ammo includes (but is by no means limited to) your teammates, apartments/community, marketing and leasing techniques, and budgetary decisions/spending. Here’s where some of the rules of true warfare come into play:

Apartments/Community – You cannot protect the line with inferior Apartments. Our recommendation to anyone who wants to maintain market leadership is to work twice as hard as the next guy to improve and maintain the community. Your apartments do not have to be 100% superior, but they must offer some unique feature(s) that makes them more appealing to your target residents.

Marketing & Leasing Techniques – The second line of defense is vested in your marketing strategy. Fight with superior selling techniques. Within each technique, have the most advanced idea or concept. For instance, if advertising is important, have dramatically better copy than the competition. Remember, you don’t have to use all weapons, just those that work best for you, and those that work better than your enemy’s. Remember also that the element of surprise didn’t become a key defense strategy by accident – it’s in your best interest to the be first to develop new, even more effective “weapons”, so an aggressive development and testing program should be part of your strategy.

Spending – It takes strength to fight off challenges. Just having bodies in the right place is not enough. They must be strong bodies. You can’t save resources when you are losing the battle. You must use the reserves. You can save resources only during times when no battle is being fought. Too many companies forget that sometimes the decision of how much you will spend and where isn’t entirely yours to make – sometimes that decision is made for you by your competitors.

Rule 4 – Leverage your allies.

It is a lot easier to play Tug of War if half of the neighborhood decides to help you win. The same is true for an apartment community. Focus on building alliances with the major local employers, merchants, city offices (like your local chamber of commerce), and other businesses in your neighborhood. Get them on your side.

Rule 5 – Move secretly and deceptively.

Remember what we said about the element of surprise? A surprised enemy is a weak enemy. The element of surprise has two dimensions for successfully playing Tug of War.

First, do not let the enemy see where you are heading unless it is in your advantage to do so for deceptive purposes. The principle is: look strong when you are weak, look weak when you are strong.

Second, know the enemy. A strong market leader knows more about the competitor than the competitor knows about himself! If there is any mystery in your mind about why your competitors are succeeding or behaving the way they do, find out. Know what they are doing and why.

In a real war, intelligence and information are the most important elements of a successful strategy, because on them depends an army’s ability to move. In market warfare, competitive research, knowledge, and analysis are your intelligence agents. Take your steps one at a time, and as quietly as possible. There’s only one reason to shout to the enemy that you’re throwing down your sword, and that’s to lure him out into the open so you can blow him away with your new cannon.

Rule 6 – Don’t let the enemy gain momentum.

This is a concept that we’re all pretty familiar with form our experiences with sports or other games. Energy is a function of momentum. Energy fuels the will to win. In Tug of War, if you let the other team pull you too long and too far in their direction, they then benefit from what is known in psychology as the goal gradient. The opposite is true also. An enemy making no progress gets demoralized. A demoralized enemy is much easier to beat. For every inch you’re pulled in the wrong direction, pull the other team two inches back! Energy increases as you near the finish. Take advantage of it by channeling all of your strength into that winning tug!

Rule 7 – Don’t let the enemy see you sweat.

Finally, even when you are in critical stages of near defeat, it is clearly in the leader’s best interests to look cool, assured, and filled with boundless reserve energy for the fight. Never let a shark smell blood. Never let the other team see you struggling to hang on. The same is true for a competitor. Remember that in any fiscal period, somebody at the competitor’s office has the decision-making authority to decide what resources they will continue to risk in the battle for your leading position. Rarely is there absolutely no money left, all credit used. There is always more for the person who has the courage to risk it. If you look tired, or in any way not up to the fight, they will decide to pursue you with renewed vigor, and that decision will directly affect the resources needed to defend yourself. Send the kind of clear messages that discourage would-be competition.

Marketing is a war – a Tug of War. It’s a little bit of pull and yield, a little bit of give and take… the secret is to always pull and take more than you yield or give, and that requires a sound strategy. I hope these rules serve you as well as they’ve served me. Hold on to the rope, get a good foothold, keep your eye on the other team, and pull with all your might!