MORRISON & FOERSTER LLP

Bought Deals, Block Trades and Confidentially Marketed Public Offerings

1.5 CLE Credits

November 14, 2013, 8:30AM – 10:00AM

Speakers: Anna T. Pinedo James R. Tanenbaum

1. Presentation

2. Frequently Asked Questions About Bought Deals and Block Trades

3. Frequently Asked Questions About Block Trade Reporting Requirements

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2013 M

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Block Trades, Bought Deals

and

Confidentiality Marketed

Public Offerings

November 2013

NY2 726410

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Market Trends

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Market Trends • Privates have become more “public”

• In an effort to improve access to capital and minimize liquidity discounts, hybrid

techniques have become more important

• SEC’s Office of Risk Fin published a study in February 2012 (“Capital Raising in

the U.S.: The Significance of Unregistered Offerings Using the Regulation D

Exemption”) which showed that from 2009 to 2011 there was a shift from public to

private or hybrid offerings

• The shortened Rule 144 holding period, and the popularity of PIPE transactions,

and other hybrids contributed to the rise of private or targeted offering techniques

• JOBS Act changes to general solicitation rules will contribute even further to

making privates even less private

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Market Trends (cont’d) • Perhaps more importantly, public offerings are becoming less

“public”

• Due to market developments, such as heightened volatility and concerns about

investor front-running, fewer public offerings involve traditional marketing

• Most public offerings begin as confidentially marketed public offerings

• During 2013, we also have seen a resurgence of bought deal activity

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Our traditional financing continuum

Private Hybrid Public

Conventional

private placements

Private placements

with trailing

registration rights

Traditional PIPEs

Structured PIPEs

Private equity lines

Registered direct

offerings

144A offerings

Underwritten

offerings

Pre-marketed (over-

the-wall)

underwritten

offerings

Bought deals

At-the-market

offerings

Equity shelf

programs

Rights offerings

Less Liquid More Liquid Liquid

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Most Liquid

Current Continuum

Less Liquid

Unannounced Offerings Announced Offerings

• 506(b) offering • PIPE transaction • Registered Direct

offering • Bought deal • Confidentially

Marketed Public Offerings

144A Offering

• 506(b) offering • Crowdfunded

offering • Initial public

offering • Marketed follow-

on offering • At-the-market

offering

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Market Trends (cont’d)

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Market Trends (cont’d)

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Market Trends (cont’d)

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Market Trends (cont’d)

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Market Trends (cont’d)

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Market Trends (cont’d) • Overall, as the charts illustrate, companies rely on unannounced

deals (PIPEs, registered directs, CMPOs)

• In 2012, more than $29 bn in 770 equity offerings that were unannounced

• The same trends are evident in 2013 (to date)

• Reliance on unannounced deals in unlikely to abate

• As among deal formats, reliance on PIPE transactions has declined

significantly. More companies are eligible to use a Form S-3 for

takedowns (completed as registered directs or as underwritten

confidentially marketed public offerings)

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Block trades, bought deals and CMPOs

• All involve sales of securities into an existing market

• All can be used for primary or for secondary shares

• All may be done as “take-downs” off of an effective shelf registration

statement

• All involve little “public” marketing

• Bankers may use these terms to describe very different transactions

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Block Trades

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Block trades: Background • A “trade” of a large quantity of stock usually consisting of at least

10,000 shares of stock

• Shares may be “restricted” securities or may be pursuant to a shelf

registration statement

• An investment bank may execute a block trade on an agency basis or

on a principal basis

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Who uses block sales and why? Who?

• Issuer may sell through a block trade, but unlikely and not common

• Usually, block sales are used by sponsors, VCs, and other large

stockholders (often securityholders that acquired stock in an M&A

transaction) to sell down their position

Why?

• Cheaper than an underwritten transaction

• Effective execution for smaller amounts of stock

• Often an affiliate may not be able to meet the 144 requirements and

may choose to sell through block instead

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Working a block • Block trade desk may or may not use “special selling efforts”

may sell into the market

may sell over the course of a few days

may have identified demand

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Distribution, or not?

• A block trade may or may not be a “distribution” for

securities law purposes

• The intermediary should consider the following

• primary or secondary shares?

• if secondary, are these shares held by an affiliate?

• magnitude of the offering

• intended sales process (agency or principal; sales period; use of

special selling efforts)

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Documentation • The intermediary may want a sales agency agreement (agented

sales) or an underwriting agreement

• Diligence defense

• May require issuance of a press release

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The “4(a)(1½) Exemption”

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The “4(a)(1½) exemption” • The Section 4(a)(1½) exemption has evolved in practice, without the

benefit of any official rulemaking.

• It is a hybrid consisting of:

• a Section 4(a)(1) exemption which exempts transactions by anyone other than an

“issuer, underwriter or dealer,” and

• a Section 4(a)(2) analysis to determine whether the seller is an “underwriter,” i.e.,

whether the seller purchased the securities with a view to a distribution.

• In 1980, the SEC recognized the section 4(a)(1½) exemption, which

although not specifically provided for in the Securities Act “[is] clearly

within its intended purpose,” provided that the established criteria for

sales under both sections 4(a)(1) and 4(a)(2) are satisfied.

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When is the “4(a)(1½) exemption” used?

• The Section 4(a)(1½) exemption can be used by institutional

investors to resell restricted securities purchased in a private

placement.

• The Section 4(a)(1½) exemption can also be used by affiliates for the

sale of control securities when Rule 144 is unavailable.

• It is still used for resales to accredited investors.

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How are 4(a)(1½) sales structured? • In a Section 4(a)(1½) transaction:

• the seller must sell in a “private” offering to an investor that satisfies the

qualifications (for example, sophistication, access to information, etc.) of an

investor in a Section 4(a)(2) private offering, and

• the investor must agree to be subject to the same restrictions imposed on the

seller in relation to the securities (for example, securities with a restricted legend).

• Given that a Section 4(a)(1½) transaction seeks to replicate a

statutory private placement, it is our view that general solicitation

cannot be used in connection with this transaction.

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Common practices for 4(a)(1½) sales • Because the 4(a)(1½) exemption seeks to recreate the conditions

that enabled the original private placement, a number of common

practices have emerged among practitioners in connection with

4(a)(1½) transactions, including:

• purchaser agrees to resale restrictions and make representations and warranties

regarding its sophistication and investment intent;

• Inquiring into the identity of the purchaser, including its financial condition, in order

to assess the likelihood that the purchaser will be able to hold the securities for

investment and not resell prematurely;

• legal opinions confirming the view that no registration is required;

• restrictive legends on the securities to alert the purchaser to the restricted nature

of the securities;

• stop transfer instructions from the issuer;

• reselling the restricted securities in large minimum denominations or investments

to bolster the purchaser’s claims regarding its sophistication and investment

intent.

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Summary: what should you ask? • Who is selling? What is their status?

• Do they have a resale registration statement?

• How long have they held?

• Why are they selling?

• How will shares be sold? Over what period of time? In what

manner?

• Has fee been negotiated and documented?

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Bought Deals

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Bought deals • Firm commitment transaction (sometimes referred to as an

“overnighter”) wherein the underwriter purchases the securities from

the issuer without pre-marketing

• An issuer or a selling securityholder may need certainty of execution, and, as a

result, may prefer a bought deal to a CMPO

• Generally, a bought deal will only be feasible for a WKSI

• Usually, it is easier to execute a bought deal following the filing of a 10-Q or 10-K

when the issuer’s disclosures are current

• The underwriter must use its best efforts to re-sell the securities

(once purchased)

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Process • An underwritten public offering (unlike a block trade, which may be

agented, and may involve restricted securities). The issuer and the

underwriter enter into an underwriting agreement containing all of the

“standard” provisions

• No doubt that there is a “distribution” (unlike a block trade, which may

or may not be a distribution)

• The underwriters undertake customary diligence for a shelf

takedown. The process is abbreviated, and, as a result of the

compressed time period, caution should be exercised.

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Process (cont’d) • The issuer may “bid” out the deal

• Usually, in the context of a deal that is being bid out, the issuer will have

designated underwriters’ counsel. In advance of notifying potential bidding banks,

the issuer and its counsel will have worked with designated underwriters’ counsel

to obtain a draft comfort letter, negotiate an underwriting agreement, and confirm

that other deliverables will be available at closing

• There is no pre-announcement. The deal is announced once the

underwriting agreement is executed. Investors would not be able to

front-run the transaction.

Sometimes, the issuer may announce the deal after market close and keep it open

until before market open the following day.

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Communications • Typically, the transaction will be announced promptly after market

close through the issuance of a launch press release that will comply

with Rule 134

• After the launch, it remains critical to maintain the confidentiality of

the price that the underwriters have agreed to pay the issuer (or the

selling security holder) for the securities.

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Trading • After completion of a bought deal (completion in this context means

the sale by the issuer to the underwriter), the underwriter will re-sell

the securities

the underwriter may re-sell all of the securities at a fixed price (that price may

vary)

the underwriter may re-sell the securities at varying prices

the underwriter may hold shares in a proprietary account

the underwriter may allocate to asset management accounts (subject to

compliance with applicable policies)

• Communications and trade reporting may vary depending on the

underwriter’s execution

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Variable re-offers • The issuer will disclose that the underwriter may vary the price at

which the securities are offered to the public and sell the securities

from time to time in various types of transactions. There is no

announcement at pricing of a single price paid to the issuer because

the underwriters may still be long the securities.

• Underwriters engaged in a variable price re-offer should include the

following language in both the preliminary (if any) and final

prospectus supplements and in any launch or pricing press release:

• Cover: The underwriter may offer the common stock from time to time in one or

more transactions in the over-the-counter market or through negotiated

transactions at market prices or at negotiated prices. See “Underwriting.”

• Generally, the cover page will not be set up with the traditional fee table

(disclosing the gross proceeds number, minus underwriter’s spread).

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Variable re-offers (cont’d) • Underwriting section: The underwriter proposes to offer the shares of common

stock from time to time for sale in one or more transactions in the over-the-counter

market, through negotiated transactions or otherwise at market prices prevailing at

the time of sale, prices related to prevailing market prices or negotiated prices,

subject to receipt and acceptance by it and subject to its right to reject any order in

whole or in part. In connection with the sale of the shares of common stock

offered hereby, the underwriter may be deemed to have received compensation in

the form of underwriting discounts. The underwriter may effect such transactions

by selling shares of common stock to or through dealers, and such dealers may

receive compensation in the form of discounts, concessions or commissions from

the underwriter and/or purchasers of shares of common stock for whom it may act

as agent or to whom it may sell as principal.

• Press release: The underwriter may offer the common stock from time to time in

one or more transactions in the over-the-counter market or through negotiated

transactions at market prices or at negotiated prices.

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Pricing information • After the overnight marketing, underwriters may express confidence

that they have allocated the entire block of securities to accounts.

However, the pricing announcement should be deferred until all

investor orders have been confirmed

• A gross proceeds number may be calculated and disclosed but this

would not inform the market of the price paid by the underwriters

• The underwriting discount and the fixed price are not in and of

themselves material

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Unsold allotments • An underwriter in a bought deal may not be able to re-sell all of the

securities it has purchased immediately. In order to deem the

distribution completed, the underwriter would have to move the

securities to a proprietary account

• The securities would then be considered an unsold allotment

• The underwriter will need a current prospectus to resell any unsold

allotment

• It is especially important in the context of a bought deal to focus on

the provisions in the underwriting agreement requiring the issuer to

keep the prospectus current, as well as on the disclosure in the

“Underwriting” section of the prospectus

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Wall-Crossed Deals

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Pre-Marketed Offerings: Methodology

• A proposed offering is confidentially marketed prior to the public

announcement of the offering to a select group of institutions,

including:

Mutual funds and hedge funds that are among the issuer’s largest shareholders

Private equity investors

Sovereign wealth funds

• For SEC-registered offerings, confidential pre-marketing should not

be done without an effective shelf registration statement in place.

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Unannounced offerings • Compressed time period necessitates special diligence and

disclosure procedures

• Requires careful coordination on the part of the working group

• Often raises challenging Reg FD questions

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Pre-marketing public offerings • Assumes that the issuer already has an effective shelf registration

statement

Will the eventual offering be a public or a private offering?

Is the issuer’s disclosure grid current? is it necessary to file updated risk factors?

is it necessary to provide guidance on the current quarter? on write-downs? on

anticipated ratings actions?

What is the best approach for updating the issuer’s disclosures (if needed)?

Plan ahead all of the required (or desired) filings (e.g., these may include: 8-K,

preliminary prospectus supplement or FWP, term sheet, press release, final

prospectus supplement)

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Material non-public information • What information is being shared with potential purchasers?

• What is the anticipated duration of the marketing period?

• When will information shared with potential purchasers be publicly disclosed? When will the information become stale? Covenant to file a Form 8-K

“Standstill” agreement

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Pre-marketing public offerings From the issuer’s perspective:

• Consider issuer’s Reg FD policy

• Consider trading windows/blackout period policy

• Consider whether there will be any insider participation

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Pre-marketing public offerings (cont’d)

From the financial intermediary’s perspective:

• Consider length of the marketing process

• Who will be involved in the marketing effort? (consider “Best

Practices”)

• Trading lists

• Selling restrictions

• Confidentiality agreements

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Why a pre-marketed offering? • Why a confidentially marketed public offering?

• Wider distribution: An advantage of a registered direct offering is that it is marketed in a targeted manner. However, that often means that the offering is not as widely distributed as other public offerings, in which case a pre-marketed public offering may be attractive (it can be opened up to retail investors).

• 20% rule: If an issuer anticipates offering and selling a number of shares that exceeds 20% of the total shares outstanding prior to the offering, and those shares will be sold at a discount, a registered direct offering may not be considered a “public offering” under the rules of the applicable exchange; thus presenting shareholder vote issues under the 20% rule. A pre-marketed public offering may be an attractive alternative because it is underwritten (important for NASDAQ) and in the second (public) stage can be opened up to a broader universe of offerees.

• Perceived better pricing: Many issuers still view an underwritten offering to be the most desirable financing alternative.

• Underwriter can stabilize or over-allot (if it chooses to do so): Depending on market conditions, this may be important.

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Fiction/fact scenarios • Fiction: A pre-marketed offering involves widespread marketing and

solicitation of investors like other public underwritten offerings.

• Fact: Yes and no. The first stage of the process involves confidential marketing

prior to the public announcement of the offering to a select group of institutions.

Only after this announcement, will the underwriters commence a more widespread

marketing effort which culminates in an underwritten public offering.

• Fiction: Investment banks should only contact up to 50 investors during the

pre-marketing phase.

• Fact: Provided that the bank has procedures that are effective in wall crossing

investors, there is no limitation on the number of offerees.

• Fiction: An investment bank can contact investors on behalf of a well-known

seasoned issuer (WKSI) before the WKSI has filed an automatic shelf

registration statement under SEC Rule 163.

• Fact: Rule 163 only permits the WKSI to make offers prior to the filing of an

automatic shelf registration statement. The SEC proposed to amend Rule 163 in

2009 to permit investment banks to approach potential investors in a WKSI

offering prior to the filing a registration statement, but did not adopt any final rules.

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Fiction/fact scenarios (cont’d) • Fiction: In the pre-marketing phase, investors may be provided material,

non-public information (“MNPI”) regarding the issuer/offering.

• Fact: Yes, provided that certain restrictions are imposed on the investors:

• Wall-crossed investors must agree to keep the MNPI confidential.

• Wall-crossed investors must agree not to trade while in possession of the

MNPI.

• Fiction: The investor is permanently subject to the confidentiality undertaking

and covenant not to trade.

• Fact: No. Often, investors request that the issuer file a Form 8-K disclosing the

financing within a certain period of time. Once a press release is issued, the

investors and other potential investors contacted by the placement agent are

released from their confidentiality undertakings and accompanying trading

restrictions.

• Fiction: Merely contemplating an offering is “material” information and

requires a cleansing press release.

• Fact: It depends. Counsel should consider and discuss in advance.

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Fiction/fact scenarios (cont’d) • Fiction: Once indications of interest have been obtained, the issuer

files a press release with disclosure and selling documents.

• Fact: That is correct, however, this can also be in the form of a free writing

prospectus, a current report on Form 8-K, or a preliminary prospectus

supplement.

• Fiction: A pre-marketed offering involves a lengthy roadshow.

• Fact: No, typically the widespread marketing effort involves a short time period,

often from the market close to the following morning.

• Fiction: The underwriters may not further syndicate the offering.

• Fact: Not true. The underwriter may include co-managers or syndicate members

in the second stage of the distribution.

• Fiction: From the investment bank’s perspective, additional attention

must be given to whom will be involved in the marketing effort.

• Fact: Yes. Investment banks should implement “Best Practices.”

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Compliance concerns • The SEC remains quite focused on the policies and procedures that

investment banks have developed to handle “unannounced deals”

(such as PIPE transactions, registered direct offerings, and CMPOs)

• The SEC’s Office of Compliance, Inspection and Examinations

(OCIE) published a report assessing information wall practices at

investment banks

• The report noted heightened concerns with communications relating to

unannounced deals

• As a result, investment banks should continue to review and refine their practices

for wall crossing investors

• Similar concerns also have been surfaced in connection with the

SEC’s recent enforcement actions related to Reg M Rule 105

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Cuban case Mark Cuban SEC enforcement (N.D. Tex.):

• Issuer’s CEO informed Cuban – major stockholder – of a proposed PIPE offering.

• Later that day, Cuban sold his entire holding in the company, avoiding a $750 loss.

• 5th Circuit Court of Appeals:

• Liability for insider trading can exist independent of a formal relationship where

sophisticated parties enter into an agreement (1) to maintain confidentiality and

(2) to abstain from trading.

• Jury Trial:

• No illegal insider trading, as the SEC failed to prove that Cuban (1) undertook a

duty of confidentiality with respect to the planned PIPE or (2) agreed to abstain

from trading.

• Absent these limitations, Cuban was free to trade on the information.

• Takeaway:

• When discussing planned PIPEs with investors, issuers should insure that the

investors agree both to maintain confidentiality and to refrain from trading on the

information.

F R E Q U E N T L Y A S K E D Q U E S T I O N S

A B O U T B O U G H T D E A L S A N D B L O C K T R A D E S

Bought Deals

What is a “bought deal”?

In a typical underwritten offering of securities, the

underwriters will engage in a confidential (in the case of

a wall-crossed or pre-marketed offering) and/or a public

marketing period (which may be quite abbreviated) to

build a “book” and price the offering of securities. In a

traditional underwritten offering, the underwriters will

have an opportunity to market the offering and obtain

indications of interest from investors before the

underwriters enter into the underwriting agreement

with the issuer.

By contrast, in a “bought deal” (sometimes also

referred to as an “overnight deal”), the issuer usually

will establish a competitive “bid” process and solicit

bids from multiple underwriters familiar with the issuer

and its business. The bidding underwriters will be

given a short period of time in which to bid a price at

which they are willing to purchase the issuer’s

securities. A bidder in a bought deal will not have had

an opportunity to conduct any marketing effort before it

provides the bid price and agrees to enter into a firm

commitment to purchase the securities from the issuer.

The securities will be issued in a registered public

offering and may be offered by the issuer (primary

shares) and/or selling stockholder(s) (often affiliate(s))

of the issuer (secondary shares). The bought deal

process will be substantially the same in either case.

Given that the underwriters must agree to a price in

advance of conducting any marketing, a bought deal

entails significant principal risk. As a result,

underwriters in bought deals will negotiate a significant

discount, to offset the risk when purchasing the

securities from the issuer or selling stockholder(s).

Underwriters also may form a syndicate for a bought

deal so that each firm bears only a portion of the risk.

What happens if the underwriters do not sell the

securities?

If the underwriters cannot sell the securities, they must

hold them and sell them over time. This is usually the

result of the market price of the securities falling below

their public offering price, resulting in the underwriters

losing money. Furthermore, having to hold the

securities will often also use up a portion or all of the

underwriters’ available regulatory capital, which could

probably otherwise be put to better use, as most

underwriters are not typically in the business of

purchasing new issues of securities.

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If an underwriter does not sell the securities and holds

them in a proprietary account, it will not be limited to

the passive market making allowed under Section 103 of

Regulation M. However, it may be subject to further

prospectus delivery requirements along with potential

liability under Section 11 of the Securities Act of 1933, as

amended (the “Securities Act”), upon the resale of such

securities.

Why would an issuer choose to pursue a bought deal

over a typical underwritten offering?

An issuer may choose a bought deal because it can be

accomplished quickly. The issuer does not publicly

announce its intention to offer securities until it receives

a definitive commitment from the underwriters to

purchase the securities. As a result, in a bought deal,

there is little possibility for investor front-running and,

as a result, an issuer may believe that it will obtain

better pricing. An issuer may prefer a bought deal over

a confidentially marketed public offering because it may

not be inclined to bear price risk and may need certainty

of execution. However, the issuer typically will be

asked to accept a significant discount to the prevailing

closing price of its securities in a bought deal, and

bought deals generally are only feasible for issuers that

are well-known seasoned issuers (“WKSIs”), as defined

in Rule 405 under the Securities Act, with highly liquid

stocks. Otherwise, underwriters likely will not feel

comfortable quoting a fixed price.

Bidding underwriters may be somewhat aggressive in

bidding, but, given the risks, the bidding underwriters

will still bid at a discount to the prevailing market price

for the stock in order to mitigate their execution risk.

In the case of secondary shares, a selling stockholder

with a substantial position may choose to liquidate its

position through a bought deal in order to mitigate its

risk and obtain a set price. Also, a significant

stockholder, such as a financial or private equity

sponsor, may want to dispense with its position through

an underwritten offering as the other liquidity

alternatives may provide less certainty.

What does an issuer need to do in order to execute a

bought deal?

Generally, in order to execute a bought deal, an issuer

must have an effective shelf registration statement. If

the issuer does not have an effective shelf registration

statement, it may still be able to execute a bought deal,

provided that it is a WKSI, since a WKSI can file an

immediately effective automatic shelf registration

statement on Form S-3 without review by the Staff of

the Securities and Exchange Commission (the “SEC”).

Non-WKSI issuers without an effective shelf registration

statement, by contrast, will not be in a position to

consider a registered bought deal because they will not

typically have the time to wait for a new Form S-3

registration statement to become effective. However, an

unregistered Rule 144A-type offering might be executed

as a bought deal, although this option usually will be

considered only by foreign (non-U.S.) issuers. For more

information, see our Frequently Asked Questions About

Shelf Offerings, available at:

http://www.mofo.com/files/Uploads/Images/FAQShelf

Offerings.pdf.

Next, the issuer must ensure that it has sufficient

capacity under its shelf registration statement to execute

the bought deal. Again, qualifying as a WKSI here will

prove convenient as a WKSI does not need to specify an

aggregate dollar amount or number of securities when

filing a shelf registration statement, as a WKSI can rely

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on the “pay-as-you-go” provisions of Rules 456(b) and

457(r) under the Securities Act to pay fees at the time the

final prospectus supplement for the offering is filed

under Rule 424(b) under the Securities Act. Even if the

WKSI shelf registration statement specifies a maximum

deal size and there is insufficient remaining capacity, a

WKSI can simply file a new, immediately effective

automatic shelf registration statement. An issuer that is

not a WKSI but is still Form S-3 eligible can upsize its

existing shelf registration statement if there is

insufficient capacity using the immediately effective

short-form registration statement pursuant to Rule

462(b) under the Securities Act. However, this option

can only be used once per shelf registration statement

though, and also is limited to 20% of the unused

capacity of the original shelf registration statement.

An issuer should prepare, with the assistance of

counsel, a prospectus supplement (to the base

prospectus included in the shelf registration statement)

that can be shared with bidding underwriters. Counsel

will work with the issuer to ensure that the issuer’s

public disclosures are current and that no updating of

risk factors or other information is necessary in

connection with the proposed offering. The issuer also

will need to contact its auditors in advance so that the

auditors are well aware of the issuer’s plans and can be

in a position to deliver a comfort letter to the

underwriters at pricing. Execution will be simplified if

the issuer has designated underwriters’ counsel.

Designated underwriters’ counsel may be contacted in

advance by the issuer and its counsel in advance of any

contact having been made with the potential

underwriters so that designated underwriters’ counsel

can update its due diligence and work with the issuer

and its counsel on the underwriting agreement, the

prospectus supplement and the comfort letter.

Can a bought deal be executed if no registration

statement is available?

While most bought deals are conducted on a registered

basis using an effective shelf registration statement, it is

possible for U.S. issuers to execute a bought deal on an

exempt basis when an effective registration statement is

not available. The mechanics of the bought deal will

generally remain the same. Due to the nature of the

exempt offering, the universe of available purchasers for

an exempt bought deal will be limited to accredited

investors (for Regulation D private placements),

qualified institutional buyers (for Rule 144A offerings),

and “non-U.S. persons” (for Regulation S offerings).

Furthermore, as with any other unregistered offering,

the securities will be “restricted securities” subject to

restrictions on transfers and resales. This may force the

issuer to provide a bigger discount due to the lack of

liquidity.

Are there times when it is easier to execute a bought

deal?

Generally, it is easier to undertake a bought deal

immediately or shortly after an issuer’s earnings

announcement and the filing of its latest quarterly

report on Form 10-Q or annual report on Form 10-K in

order to coincide with a trading window in the issuer’s

insider trading policy (in the case of a secondary trade),

and to avoid the need to update disclosure prior to

launch, as the issuer’s disclosures will be current.

Waiting until the issuer's earnings announcements and

the filing of the Forms 10-K or 10-Q will also make it

easier for the underwriters to conduct due diligence and

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for the underwriters to obtain a comfort letter from the

issuer’s auditors.

Documentation for Bought Deals

What is included in an issuer’s bid package?

When contacting potential underwriters to solicit bids

for a bought deal, an issuer will provide a bid letter

specifying the terms of the transaction and specifying

the deadline for bid submissions. An issuer also will

provide:

a copy of the proposed underwriting

agreement;

a draft of the comfort letter from the issuer’s

auditors (or assurance that a comfort letter in

the customary form will be provided); and

a draft of the prospectus supplement.

The bid package may also include a current investor

presentation, as well as a “launch” press release. Along

with the bid package, the issuer should reassure the

bidding underwriters that it is not providing or sharing

any material non-public information with the

underwriters (other than the fact that the issuer may

undertake a bought deal).

What documents are used to execute a bought deal?

The documentation for a bought deal is very similar to

that used in any underwritten offering. The issuer

and/or the selling stockholder(s), as applicable, will

enter into an underwriting agreement with the

underwriters. As discussed above, due to the

accelerated timing of a bought deal, the issuer must

have an effective shelf registration statement. The

issuer and its counsel will prepare a preliminary

prospectus supplement and a launch press release.

After launch, the press release will be filed or furnished

on Form 8-K. After the transaction prices, the final

prospectus supplement will be filed as well, and the

underwriting agreement will be filed as an exhibit to a

Form 8-K.

In connection with the offering, the underwriters will

receive a standard comfort letter from the issuer’s

auditors, standard legal opinions from issuer’s (and, if

applicable, selling stockholders’) counsel, and a 10b-5

negative assurance letter from issuer’s counsel and from

underwriters’ counsel. If the selling stockholders are

affiliates, they will often provide to the underwriters a

representation letter to the effect that the selling

stockholders are not in possession of any material non-

public information that they are using to make their

decision to execute the bought deal.

In a variable price re-offer transaction, there are a few

specialized changes to the documentation that

underwriters should keep in mind. First, the cover page

of the preliminary prospectus supplement will not be

set up to disclose the gross proceeds of the offering,

minus the underwriters’ discounts and commissions.

The table that is included in the prospectus supplement

for a typical underwritten offering to show these

amounts both on an aggregate and per-share basis is

omitted. Instead, the issuer generally discloses (1) the

per share price due to it from the underwriters, and (2)

the fact that the underwriters will re-offer the securities

to the market at a range of varying prices. A longer

explanation of variable price re-offer also is included in

the underwriting section of the prospectus supplement.

If the underwriters convey final pricing terms in

writing when they confirm final orders (through what is

often referred to as a “Rule 134 release”), then that

5

release should also disclose the variable price nature of

the transaction and the highest clearing price to the

market. The transaction will typically close like most

transactions, on a T+3 or T+4 basis.

Due Diligence for Bought Deals

How is due diligence conducted in a bought deal?

A bought deal is subject to the same disclosure and

liability concerns as any traditional underwritten

offering. Therefore, despite the time pressure imposed

on the offering process, the issuer and the underwriters

will need to ensure the accuracy and completeness of

the disclosure prior to pricing the offering.

Generally, underwriters will only participate in

bought deals for issuers with which they are (as an

institution) quite familiar. The underwriters may

provide research coverage on the issuer, may have

participated in prior offerings by the issuer, or may

have conducted non-deal roadshows for the issuer. This

familiarity will be essential in order for the underwriters

to participate in the process and complete their due

diligence quickly and efficiently.

As soon as an underwriter becomes aware of the

potential offering and decides to submit a bid to the

issuer, then that underwriter should commence its due

diligence. The issuer will make its management

available for a standard business due diligence call, and

the auditors make themselves available for an auditors’

due diligence call. Designated underwriters’ counsel

will have conducted periodic legal due diligence or may

be in the midst of conducting their legal due diligence.

Underwriters’ counsel generally will undertake

standard “shelf” or periodic due diligence, which

typically consists of reviewing the issuer’s public filings,

reviewing exhibits to the public filings, reviewing press

releases, determining whether there have been any

changes to the issuer’s ratings, conducting a due

diligence call covering regulatory and litigation matters

with the issuer or its counsel, and reviewing minutes

and other corporate documents.

What materials should a bidding underwriter review?

A bidding underwriter should review carefully all of

the materials in the bid package, and should consult

with either designated underwriters’ counsel or, if

counsel is not designated, issuer’s counsel, to verify that

the underwriting agreement is in customary form, that

there are no exceptions or qualifications in the comfort

letter, and that issuer’s counsel and designated

underwriter’s counsel both will provide standard legal

opinions and 10b-5 negative assurance letters. The

bidding underwriter will also want to confirm that the

issuer’s public disclosures are current.

Marketing for Bought Deals

Do bought deals entail any marketing before launch?

It depends. In the conventional bought deal, the issuer

will set out the bid process, the bidders will submit their

information, business and accounting due diligence

calls will take place, and the winning underwriters will

be chosen. Promptly thereafter, the issuer and the

underwriters will sign the underwriting agreement.

Sometimes, the underwriters may conclude that better

execution requires some measure of pre-marketing. In

this case, the issuer and the underwriters will agree that

the underwriters can conduct limited pre-marketing to

investors that have been “wall-crossed.” There are

6

various ways in which the underwriters can gauge the

market to determine whether certain investors will

participate in the offering. If the underwriters do not

wish to restrict investors with whom they speak, they

can take a no-names approach, and just talk to investors

about securities of an issuer in a particular industry or

sector having a certain market capitalization. There will

be no specific references made to the issuer of the

specific deal the underwriters have bought or intend to

buy.

If the underwriters wish to obtain a more concrete

indication of interest from investors about the particular

bought deal, the underwriters will have to “wall-cross”

the investor. If the investor agrees to be taken “over the

wall,” the underwriters will send the investor an email

confirming its willingness to keep any information

conveyed strictly confidential and the investor will be

required to send a return email acknowledging the

confidentiality agreement. In some cases, formal

confidentially agreements or non-disclosure agreements

may be signed for the benefit of the issuer and the

underwriters.

The length of this pre-marketing period may vary.

Once the issuer has chosen the underwriters, it may

agree that the underwriters may reach out to investors

for a few hours prior to the issuance of the launch press

release. The underwriters should follow their typical

approach for wall-crossing investors.

How is a bought deal launched?

A bought deal usually will be announced promptly after

market close through the issuance of a launch press

release. The launch press release is intended to comply

with Rule 134 under the Securities Act. Rule 134

enables an issuer with an effective registration

statement to issue a press release that includes certain

limited information related to an offering without the

communication being deemed to be a prospectus or an

issuer free writing prospectus. This Rule 134 release

also simultaneously satisfies the requirements of

Regulation FD, which requires an issuer to publicly

disclose any material, non-public information

simultaneously with its intentional disclosure to the

financial community at large. A bought deal may or

may not on its own constitute a material development.

An issuer would be wise to satisfy Regulation FD with a

press release, particularly one concurrently filed on a

current report on Form 8-K, rather than assume that the

bought deal is not material.

Sometimes an issuer will use an issuer free writing

prospectus under Rule 433 under the Securities Act to

launch a bought deal, though this is less common. The

issuer should ensure that whatever approach taken

properly conveys all of the information required to be

disclosed to investors under the federal securities laws.

The issuer and the underwriters may agree to use a

preliminary prospectus supplement (to the base

prospectus included in the shelf registration statement).

A preliminary prospectus supplement is not required,

but it may be useful in order to convey recent

developments or provide new or additional information

about the issuer. The preliminary prospectus

supplement will not contain pricing information;

however, it may state whether the offering is structured

as a fixed-price deal or a variable re-offer deal. The

preliminary prospectus supplement must be filed

within 48 hours of first use.

After the launch of the transaction, it remains critical

to maintain the confidentiality of the price the

underwriters have agreed to pay the issuer and/or

7

selling stockholder(s) for the securities. If an investor

obtains this price information, the investor might

attempt to extract better pricing from the underwriting

syndicate, which may affect deal execution. For this

reason, the price paid by the underwriters should not

appear in any press release at launch or in the

preliminary prospectus supplement.

Pricing for Bought Deals

What is a fixed-price offering?

When filing its shelf registration statement, it is

impossible for an issuer to know the exact method of

distribution that will be used by underwriters in future

takedowns. Therefore, the issuer should include broad

language in the base prospectus (included in the shelf

registration statement) so that at the time of a takedown

there will be no need to update this information.

Issuers typically use the following language for this

purpose:

We may sell the securities covered by this

prospectus in any of three ways (or in any

combination): (1) to or through underwriters or

dealers; (2) directly to one or more purchasers;

or (3) through agents.

We may distribute the securities covered by

this prospectus from time to time in one or

more transactions: (1) at a fixed price or prices,

which may be changed from time to time; (2) at

market prices prevailing at the time of sale; (3)

at prices related to the prevailing market

prices; or (4) at negotiated prices.

In a fixed-price offering, the underwriters purchase

the shares from the issuer and re-offer the securities to

the public at one fixed price, also referred to as a

“clearing price.” While the underwriters expect to sell

the entire offering at the fixed-price, the plan of

distribution for the offering will often contain language

allowing the underwriters to change the pricing at any

time without notice, in case the underwriters find

themselves with securities they cannot sell at the

clearing price. This situation, where the underwriters

expect to encounter difficulties selling all of the

securities, is often referred to as a “sticky deal.”

What is a variable price re-offer?

In a variable price re-offer, the issuer discloses that the

underwriters may vary the price at which the securities

are offered to the public and sell the securities, from

time to time, in various types of transactions. In a

variable price re-offer, there is no announcement at

pricing of a single price paid to the issuer because the

underwriters may still be “long” the securities at that

point.

The underwriters may vary the price at which they

offer the securities, take the securities into a proprietary

account (unlikely), or place them in managed accounts.

Because of the proprietary risk taken by the

underwriters, these transactions present significant deal

and pricing risk for underwriters. Pre-announcement, it

is important that precautionary measures are taken to

prevent information leaks that can lead to shorting

activity and harm the transaction. Participants should

be advised and reminded of their obligations to keep

matters confidential.

8

Are there any restrictions on the issuer once the bought

deal is launched?

Typically, in order to assist the underwriters in

distributing the securities they purchased in the bought

deal, the issuer, along with certain company insiders

and any selling stockholder(s), will agree not to sell any

of the issuer’s securities for a certain period of time after

the offering, usually ranging from 30 to 90 days.

When is pricing information for a bought deal disclosed

to the public?

After the end of the overnight (or otherwise agreed-

upon) marketing period, underwriters often will

express confidence that they have allocated the entire

block of securities to investors (or close to it), in which

case the issuer will be eager to announce the “pricing”

of the transaction. However, announcement of pricing

should not be made until investor orders have been

confirmed (after which the underwriters’ risk is greatly

reduced).

How is pricing information shared with the public?

Issuers are not specifically required by rule to publicly

announce the results of an offering prior to filing the

final prospectus supplement. However, there may be

Regulation FD concerns if the clearing price is known

only to a limited number of market participants.

Including the clearing price in a pricing press release

will address any Regulation FD concerns.

Furthermore, the New York Stock Exchange (the

“NYSE”) requires a pricing press release if certain of the

pricing terms are considered to be material

information.1 Therefore, an issuer should issue a

pricing press release to ensure that the NYSE does not

raise issues after the fact.

Underwriters often will want to withhold pricing

information as long as possible, particularly if they have

not yet sold their entire position. If an issuer presses to

disclose the proceeds of the offering, a compromise may

be reached by including in a pricing press release the

amount of gross proceeds before deducting

underwriting discounts and commissions and offering

expenses. This amount would be calculated based on

the closing trading price on the launch date and the

number of shares sold, but would not inform the market

of the price paid by the underwriters.

Counsel generally will take the view that the

underwriting discounts and commissions and the fixed

price are not in and of themselves material, and that the

issuer has shared with the market all of the information

that may be deemed material (e.g., the size of the deal,

certainty regarding the deal, timing of the deal, and,

possibly, gross proceeds).

When will the final prospectus supplement be filed?

While in a typical underwritten offering, the final

prospectus supplement is filed within a day of pricing,

in a bought deal, the filing of the final prospectus

supplement usually is delayed as long as possible. The

final prospectus supplement must be filed within two

1 Section 202.05 of the NYSE’s Listed Company Manual states:

“A listed company is expected to release quickly to the

public any news or information which might reasonably be

expected to materially affect the market for its securities.

This is one of the most important and fundamental purposes

of the listing agreement which the company enters into with

the Exchange.”

However, the NYSE usually leaves the ultimate determination

of materiality with the company itself.

9

business days of first use, in which case the deal team

will have 48 hours during which the market may still be

unaware of the pricing details.

In the case of a variable price re-offer, the final

prospectus supplement also will contain the amount

paid by the underwriters, and filing also may be

delayed (in this case, it should be filed within two

business days of the pricing of the offering, but not

before).

Block Trades

What is a block trade?

A block trade is defined as an order or trade submitted

for sale or purchase of a large quantity of securities:

generally 10,000 shares or more (not including penny

stocks) or a total market value of $200,000 or more in

bonds. The shares “traded” may be restricted securities

or control shares, or may be sold off of an effective shelf

registration statement. Certain types of block trades

need to be reported to the Financial Industry Regulatory

Authority, Inc. (“FINRA”) and the securities exchanges.

For more information, see our Frequently Asked

Questions About Block Trade Reporting Requirements.

Who is likely to pursue a block trade?

An issuer may sell its securities through a block trade;

however, that is an unlikely and uncommon scenario.

Institutional investors, including mutual funds and

pension funds, often execute block trades, while

individual investors usually do not. Block trades also

are typically used by financial or private equity

sponsors, venture capitalists, and other large

stockholders who may have acquired large quantities of

securities in an M&A or other transaction and wish to

sell down their position.

An investment bank may execute a block trade on an

agency or best efforts basis, or on a principal basis.

Often an affiliate of the issuer may choose to sell

securities through a block trade as it may not be able to

meet the requirements of Rule 144 under the Securities

Act (“Rule 144”) for the public resale of its securities

(e.g., one-year holding period, volume limitation, etc.).

Unlike Rule 144, there is no volume limitation or

prohibition on soliciting buyers applicable to a block

trade, making it an enticing option for an affiliate that

cannot use Rule 144 for resales.

Why would one pursue a block trade?

A block trade offers certain advantages to the selling

stockholder. Many securities exchanges permit large

block trades to be privately negotiated and transacted

off-exchange. Upon being reported to the relevant

exchange, the transaction becomes centrally cleared,

and the parties to the transaction no longer have to

worry about other parties affecting the trade. A block

trade also allows a party with a desire to engage in a

large-sized transaction to access a different and often

larger investor base than regular electronic trading. In

addition, block trades are often cheaper than standard

underwritten transactions, and are fast and effective for

smaller amounts of stock than are typically offered in an

underwritten transaction.

10

“Distributions” for Block Trade Purposes

Are block trades considered to be “distributions” under

the securities laws?

Block trades that are considered “distributions” under

the securities laws must be reported under the trade

reporting rules of FINRA and could subject the broker-

dealer executing the trade to liability as a statutory

underwriter under the Securities Act.

Section 2(a)(11) of the Securities Act defines an

underwriter as “any person who offers or sells for an

issuer in connection with the distribution of any

security” (emphasis added). For purposes of this

definition, the SEC has defined “issuer” broadly to

include any person directly or indirectly controlling or

controlled by the issuer or under common control with

the issuer. As a result, activities undertaken by a broker-

dealer on behalf of affiliates of an issuer (e.g., officers,

directors and 5% stockholders) may raise the same

concerns as those taken on behalf of the issuer.

Furthermore, one does not need to be engaged formally

as an underwriter or placement agent in order to incur

this potential liability. The broker-dealer’s relationship

to the transaction, the extent of its activities and its fees

determine whether it may be considered to be acting as

a statutory underwriter.

While this broad definition of an “underwriter” is fact-

specific, the SEC has routinely refused to make

determinations on specific cases, explaining that the

individual or entity in question is in a better position

than the SEC to determine its status. In addition, the

SEC has not included definitions in the Securities Act

for certain of the other terms used in Section 2(a)(11),

particularly, the term “distribution.” It is clear that only

when a “distribution” occurs can an underwriter be

involved.

Generally, the marketing and related activities

surrounding a block trade may not rise to the level

generally associated with a “distribution” under the

federal securities laws. The shares purchased and sold

often are placed quickly for a standard dealers’ fee,

without the use of sales documents and with little sales

effort by the broker-dealer. Further, these shares also

often are sold to relatively few institutional buyers who

already may have expressed an interest in obtaining

stock. However, under certain circumstances, block

trades may be considered a “distribution,” which has

the effect of exposing the broker-dealer to potential

liability as an underwriter.

The nature of the party for whom the broker-dealer is

executing the block trade may effect whether the

transaction is deemed a “distribution” of securities for

an issuer. A “distribution” may include a private

transaction as well as a public (pursuant to a

registration statement) transaction. As used in the

Securities Act, an “issuer” is defined to include the

issuer itself and its affiliates or control persons. In

executing a block trade on behalf of an issuer or on

behalf of an affiliate, a broker-dealer should consider

the factors discussed below and may wish to structure

its activities in a manner intended not to constitute a

“distribution.” However, if a broker-dealer is executing

a block trade on behalf of a third party (unrelated to the

issuer and not an affiliate or control person), depending

on the facts and circumstances, it may be more likely

than not that the transaction is not deemed to constitute

a “distribution.”

11

Does Regulation M provide any helpful guidance?

Regulation M, adopted by the SEC to curtail

manipulative practices by distribution participants,

provides some guidance for determining whether a

“distribution” exists. This guidance helps narrow the

broad scope of the definition of an underwriter by

limiting the situations in which that definition is

implicated.

Regulation M defines a “distribution” as “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.” This definition sets forth two criteria

to consider in determining whether activities give rise to

a distribution: (1) the magnitude of the offering and (2)

whether special selling efforts and selling methods are

used in connection with the offering. Presumably, if

these factors are absent, the transaction would be

considered an ordinary trading transaction and not a

“distribution.”

How does the magnitude of an offering help determine

whether a “distribution” exists?

In determining the magnitude of an offering, the SEC

looks to:

the number of shares being registered or sold;

the percentage that these shares represent of

the total outstanding shares of that issuer;

the issuer’s public float; and

the average trading volume of the issuer’s

securities.

All of these factors must be taken in context and it is

important to note that what may be a problematic fact

pattern for one issuer may not raise concerns with

respect to another issuer.

What are “special selling efforts” that a trading desk

may use in executing block trades?

Activities that may constitute special selling efforts and

selling methods might include a broker-dealer receiving

higher compensation than it ordinarily would receive

for normal trading transactions (or dealer activity), the

use by such broker-dealer of sales documents,

conducting a road show in connection with the

transaction, or holding investor meetings. Presumably,

if these factors are absent, the transaction would be

considered an ordinary trading transaction and not a

“distribution.”

The definition of a “distribution,” because it is based

on facts and circumstances, can lead to the same facts

being considered a “distribution” in one case but not in

another. Certain activities may constitute special selling

efforts or methods for one broker-dealer while for

another larger, established broker-dealer with an active

block trading desk, such activities may be in keeping

with its regular trading activities. For this reason, a

broker-dealer must analyze each situation not only on

its merits, but also in the context of the broker-dealer’s

regular activities.

Documentation and Marketing for Block Trades

What documentation is required for the execution of a

block trade?

Not all block trades will require the same

documentation. In cases where the broker-dealer is

executing the block trade on an agency or best efforts

basis, it may want a sales agency agreement or, in

12

certain cases, an underwriting agreement. This is less

common in cases where the broker-dealer is executing

the block trade on a principal basis. The underwriting

or sales agency agreement will contain certain stripped

down representations from the seller (including as to

valid title, no encumbrances and compliance with

securities laws). The underwriting or sales agency

agreement also will contain pricing and settlement

provisions and will likely contain an indemnity from

the seller to the broker-dealer.

If the block trade is considered a “distribution” for

purposes of the federal securities laws, then the broker-

dealer will want to have a due diligence defense

available to it to offset its potential liability as an

underwriter. If that is the case, then the broker-dealer

will need time to review the issuer’s public disclosures

and may ask the issuer to provide it with other

materials it wishes to review.

Sometimes law firms will be asked to provide legal

opinions, usually covering the seller’s corporate

authority, authority to sell the securities and valid title

to the securities. A broker-dealer also may request a no-

registration opinion, confirming that the block trade

does not need to be registered with the SEC. In

addition, investors in the block trade may be asked to

sign representation letters acknowledging, among other

things, the absence of offering documents, their

financial sophistication and any selling restrictions

applicable to the securities.

If the broker-dealer engages in marketing efforts for

the block trade, then it may become necessary for the

issuer to issue a press release to satisfy Regulation FD

requirements if the trade is considered material, or if

some market participants have been provided

information that others may not have.

Is there any marketing period for a block trade?

No. Generally there is no marketing for block trades, as

these trades are not usually considered “distributions”

and are not typically underwritten deals. Furthermore,

there is no traditional “road show” for a block trade and

any selling efforts would be targeted directly at a few

institutional investors. However, the disclosure

obligations for sales made through block trades are just

as rigorous as they would be in any typical

underwritten offering and the potential for liability

exists in block trades as well.

Block Trades and the Section 4(a)(1½) Exemption

What is the Section 4(a)(1½) exemption?

The Section 4(a)(1½) exemption provides a specific

exemption for the private resale of restricted or control

securities, and can be used to execute block trades. The

Section 4(a)(1½) exemption is useful for and popular

with investors because it permits the private sale of

restricted or control securities without having to rely on

the exemption from registration provided under Rule

144. Under Rule 144, a non-affiliate investor would

have to satisfy a six-month holding period and an

affiliate investor would have to satisfy a one-year

holding period and would be subject to certain volume

limitations and manner of sale requirements. However,

the Section 4(a)(1½) exemption does not impose such

holding period requirements, volume limitations or

manner of sale requirements.

The Section 4(a)(1½) exemption is a hybrid exemption

consisting of:

the exemption under Section 4(a)(1) of the

Securities Act (“Section 4(a)(1)”), which

13

exempts transactions by anyone other than an

“issuer, underwriter, or dealer,” and

the analysis under Section 4(a)(2) of the

Securities Act (“Section 4(a)(2)”) to determine

whether the seller is an “underwriter” (in other

words, whether the seller purchased the

securities with a view towards a

“distribution”).

Note that the exemption from registration under

Section 4(a)(1) is not available because it applies solely

to open market or public transactions by individual

security holders who hold neither restricted securities or

control securities. The exemption from registration

under Section 4(a)(2) is not available because it only

applies to transactions by an issuer not involving a

public offering (and not a selling stockholder).

In 1980, the SEC recognized the Section 4(a)(1½)

exemption, which, although not specifically provided

for in the Securities Act, clearly was within the intended

purpose of the Securities Act, provided that the

established criteria for sales under both Section 4(a)(1)

and Section 4(a)(2) are satisfied.2 However, the SEC has

since declined to provide further guidance through no-

action letter relief.

What types of investors can use the Section 4(a)(1½)

exemption?

Section 4(a)(1½) offerings can be used by a variety of

investors. The Section 4(a)(1½) exemption can be used

by institutional investors (typically sponsors, venture

capitalists and other large securityholders, who

2 See Employee Benefit Plans, Securities Act Release No. 6188,

19 SEC Docket 465, 496 n.178 (Feb. 1, 1980) (acknowledging the

existence of the Section 4(a)(1-1/2) exemption), available at:

http://www.sec.gov/rules/interp/33-6188.pdf.

acquired their securities in connection with M&A

transactions) to resell their restricted securities or

control securities. The Section 4(a)(1½) exemption also

can be used by affiliates to sell control securities when

the exemption under Rule 144 is not available. In

addition, the Section 4(a)(1½) exemption can be used for

resales to accredited investors.

How are sales utilizing the Section 4(a)(1½) exemption

structured?

In a Section 4(a)(1½) transaction (1) the seller must sell

in a “private” offering to an investor that satisfies the

qualifications of an investor in a Section 4(a)(2) private

offering,3 and (2) the investor must agree to be subject

to the same restrictions imposed on the seller in relation

to the securities (for example, receiving securities with a

restricted legend), in order to demonstrate that the seller

is not making the sale with a view towards distribution.

However, the investor would still be able to “tack” the

holding period of the seller for purposes of satisfying

the holding period requirement under Rule 144, if the

investor chooses to use the exemption from registration

under Rule 144 for a subsequent sale of the securities.

If a purchaser buys securities in a private placement

with the intent to resell the securities or serve as a

conduit from the issuer to other buyers, Section 4(a)(2)

would be violated, and the purchaser will be deemed to

have acted as an underwriter. If this occurs, the offering

may be deemed a public offering. Deeming the offering

to be public would require the issuer to register the

3 An investor in a Section 4(a)(2) offering must meet the

qualifications laid out by the U.S. Supreme Court in SEC v.

Ralston Purina, 346 U.S. 119 (1953). Under Ralston Purina,

purchasers must (1) be sophisticated and (2) have access to the

same information as would be available if the securities were

registered.

14

offering of the securities with the SEC and each and

every state into which it sold its securities.

Section 4(a)(1½) offerings are often structured in the

form of a block trade, where the seller engages a

financial intermediary to help sell the securities as

agent. Because the Section 4(a)(1½) exemption seeks to

recreate the conditions that enabled the original private

placement, a number of common practices have

emerged among practitioners in connection with Section

4(a)(1½) transactions, similar to those typically

applicable to Section 4(a)(2) or Regulation D private

placements, including:

the purchaser agreeing to resale restrictions

and making representations and warranties

regarding its sophistication and investment

intent;

inquiring into the identity of the purchaser,

including its financial condition, in order to

assess the likelihood that the purchaser will be

able to hold the securities for investment and

not resell prematurely;

requiring legal opinions confirming the view

that no registration is required for the offering;

including restrictive legends on the securities

to alert the purchaser to the restricted nature of

the securities;4

requiring stop transfer instructions from the

4 If the seller is an affiliate, the legend should clearly indicate

that the securities are restricted securities within the meaning

of Rule 144(a)(3) under the Securities Act and cannot be resold

publicly under Rule 144 until the purchaser meets the holding

period requirement of Rule 144(d), which restarts upon the

acquisition of the securities from an affiliate.

issuer;5 and

using a large minimum investment to bolster

the purchaser’s claims regarding its

sophistication and investment intent.

These common practices are typically memorialized in

provisions contained in a securities purchase agreement

entered into between the seller and the purchaser or, if

the Section 4(a)(1½) transaction is structured in the form

of a block trade, a sales agency agreement (if the

financial intermediary is acting as agent). In the case of

a block trade, the financial intermediary also may want

to conduct due diligence on the issuer and have the

issuer issue a press release regarding the completion of

the offering.

_____________________

By, Ze’-ev D. Eiger, Partner, and Michael J. Rosenberg,

Associate, Morrison & Foerster LLP

© Morrison & Foerster LLP, 2013

5 The seller will often arrange to have the issuer issue a stop

transfer order to the transfer agent for the restricted securities

to prevent the purchaser from reselling the securities

purchased in the Section 4(a)(1½) offering without obtaining a

legal opinion with respect to the legality of the resale.

F R E Q U E N T L Y A S K E D Q U E S T I O N S

A B O U T B L O C K T R A D E R E P O R T I N G

R E Q U I R E M E N T S

Block Trades and Distributions

What is a block trade?

Many people use the term “block trade” colloquially.

Technically, a block trade is an order or trade submitted

for the sale or purchase of a large quantity of securities.

Although the term is not defined under the securities

laws, Rule 10b-18 under the Securities Exchange Act of

1934, as amended (the “Exchange Act”), refers to a

“block” as a quantity of shares with a purchase price of

$200,000 or more or a quantity of shares of at least 5,000

with a purchase price of at least $50,000. Block trades

are typically executed by institutional investors

(including mutual funds and pension funds), financial

or private equity sponsors, venture capitalists and other

large stockholders who may have acquired large

quantities of securities in a merger, acquisition or other

transaction and wish to sell down their position.

Block trades offer a number of advantages to selling

shareholders. For instance, many securities exchanges

permit large block trades to be privately negotiated and

transacted off-exchange. In addition, a block trade

allows a party to access a different and often larger

investor base than regular electronic trading. Finally,

block trades are often cheaper than standard

underwritten transactions, and are fast and effective for

smaller amounts of stock than are typically offered in an

underwritten transaction.

When must a block trade be reported for FINRA

purposes?

The execution of a block trade may vary. A block trade

may be offered and sold in a manner that would render

it a “distribution.” A “distribution” must be reported

under the trade reporting rules of the Financial Industry

Regulatory Authority, Inc. (“FINRA”).

Is there any helpful guidance under Regulation M for

determining when a “distribution” exists?

Regulation M was adopted by the Securities and

Exchange Commission (the “SEC”) in order to curtail

manipulative practices by distribution participants and

provides some guidance for determining whether a

distribution exists. Under Regulation M, a

“distribution” is defined as “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.”

2

Magnitude of the offering

In determining the “magnitude of the offering,” the SEC

will look at the number of shares being sold, the

percentage that these shares represent of the total shares

outstanding of that issuer, the issuer’s public float and

the average trading volume of the issuer’s securities.

The SEC has provided guidance regarding trading

volumes, as it relates to determining whether a

transaction is deemed a “distribution.” For example,

Rule 144 (“Rule 144”) under the Securities Act of 1933,

as amended (the “Securities Act”), imposes a volume

limitation requirement which provides a safe harbor for

sales of securities that would otherwise be deemed a

“distribution.” Similarly, the block repurchase

limitations under Rule 10b-18 under the Exchange Act

provides a safe harbor from liability for market

manipulation when an issuer or its affiliated purchaser

engages in a block repurchase of shares of the issuer’s

common stock.

Special selling efforts and selling methods

Activities that may constitute “special selling efforts and

selling methods” might include a broker-dealer

receiving higher compensation than it ordinarily would

receive for normal trading transactions or dealer

activity, using sales documents, conducting a road show

in connection with a transaction or holding investor

meetings.

The guidance under Regulation M is useful because it

narrows the broad scope of the definition of an

underwriter by limiting the situations in which that

definition is implicated. The definition of a distribution

is based on facts and circumstances, and can lead to the

same facts being considered a distribution in one case

but not in another. For this reason, a broker-dealer

must analyze each situation not only on its merits, but

also in the context of its regular activities. If a broker-

dealer is concerned about whether its activities

constitute a “distribution,” the broker-dealer may find it

prudent to conduct diligence activities and enter into an

agreement with its client, providing for the making of

representations and warranties and requiring the

delivery of opinions of counsel.

What is a “distribution” in the context of a block trade?

Generally, trading activities for a block may not rise to

the level associated with a “distribution” under federal

securities laws. Shares that are purchased and sold in a

block trade are often placed quickly by an investment

bank’s block trade desk and executed for a standard

“dealers’ fee,” without the use of sales documents and

without special selling efforts. Further, these shares

often are sold to relatively few institutional buyers who

already may have expressed an interest in acquiring

stock should a block become available. However, under

certain circumstances, block trades may be considered a

distribution, which has the effect of exposing the

broker-dealer to potential liability as a statutory

underwriter.

Under Section 2(a)(11) of the Securities Act, an

“underwriter” is defined as “any person who offers or

sells for an issuer in connection with the distribution of

any security” (emphasis added). The SEC has defined

“issuer” broadly to include any person directly or

indirectly controlling or controlled by the issuer or

under common control with the issuer. As a result,

activities undertaken by a broker-dealer on behalf of

affiliates of an issuer (officers, directors or 10%

stockholders) may raise the same concerns as those

taken on behalf of the issuer. Further, a broker-dealer

does not need to be engaged formally as an underwriter

3

or placement agent in order to incur this potential

liability. The broker-dealer’s relationship to the

transaction, the extent of its activities, and its fees, taken

as a whole, will determine whether it may be

considered to be acting as a statutory underwriter.

The nature of the party for whom the broker-dealer is

executing the block trade also may implicate the broker-

dealer as a potential underwriter. A broker-dealer will

be considered a statutory underwriter if the broker-

dealer participates in a distribution of securities for an

issuer. A “distribution” may include a private

transaction as well as a public (pursuant to a

registration statement) transaction. As used in the

Securities Act, an “issuer” is defined to include the

issuer itself and its affiliates or control persons. In

executing a block trade on behalf of an issuer or on

behalf of an affiliate, a broker-dealer should consider

the factors discussed above and may wish to structure

its activities in a manner intended not to be a

distribution. However, if a broker-dealer is executing a

block trade on behalf of a third party (unrelated to the

issuer and not an affiliate or control person), depending

on the facts and circumstances, the transaction will

more likely than not be deemed to constitute a

distribution.

This broad definition of a “distribution” is fact-specific

and the SEC has routinely refused to make

determinations on specific cases, explaining that the

individual or entity in question is in a better position to

determine its status than the SEC. In addition, the

Securities Act does not contain definitions for certain of

the other terms used in Section 2(a)(11), including the

term “distribution.” It is clear that only when a

distribution occurs can an underwriter be involved.

Reporting Requirements

What are the reporting requirements for block trades

under the exchanges?

In general, the transaction reporting requirements for

the New York Stock Exchange (the “NYSE”) and

NASDAQ are similar. The NYSE has a general reporting

rule specifying that transactions must be reported

promptly. In particular, NYSE Rule 131 specifies that

trades must be reported within an hour after the close of

business on the day the trade was made.

The NASDAQ rules provide more detail as to the

types of information a broker-dealer must provide for

equity trades. A broker-dealer must specify the

following information:

the symbol of the stock;

the number of shares bought or sold;

the price paid or received for such shares;

the type of transaction for the reporting party

(buy, sell, or cross); and

the time of execution.

How long after a block trade is executed must a broker-

dealer report the trade?

Under FINRA Rule 6380B, trades executed during

normal market hours (i.e., between 9:30 a.m. and 4:00

p.m. ET) must be reported to the Consolidated Tape (the

“tape”) within 30 seconds of execution (unless the

transaction involves restricted equity securities, in

which case the trade must be reported no later than 8:00

p.m. ET on the following business day). Trades

executed outside normal market hours and during the

hours the relevant reporting facility is open must still be

reported within 30 seconds of execution. Trades

4

executed during the hours the relevant reporting facility

is closed are not subject to the 30-second reporting

requirement. Specifically, trades executed between

midnight and 8:00 a.m. ET must be reported by 8:15

a.m. ET on the trade date, and trades executed between

the close of the relevant reporting facility and midnight

must be reported on an “as/of” basis by 8:15 a.m. ET on

the following business day.

It is important to note that all transactions reported

after 30 seconds will be considered reported late.

Which party is responsible for reporting a block trade?

The answer depends on the parties involved. In

transactions between two market makers, only the

FINRA member (“member”) on the sell-side must

report. In transactions between a market maker and a

non-market maker, the market maker is obligated to

report. If the transaction involves two non-market

makers, the member on the sell-side is obligated to

report. In a transaction between a member and

customer, the member is required to report. Finally, in a

transaction between two members, the “executing

party” must report.

How is the “executing party” defined?

The “executing party,” for purposes of FINRA trade

reporting, is defined as the member that (1) receives an

order for handling or execution or is presented with an

order against its quote, (2) does not subsequently re-

route the order, and (3) executes the transaction. For

transactions between two members, where both

members could reasonably maintain that they satisfy

the definition of executing party (e.g., manually

negotiated trades via the telephone), the member

representing the sell-side must report the transaction to

FINRA, unless the parties agree otherwise and the

member representing the sell-side contemporaneously

documents such agreement.

What types of transactions are excluded from the

reporting requirements?

A broker-dealer is not required to report to the tape the

following transactions:

transactions reported on or through an

exchange, such as the NYSE or NASDAQ;

transactions that are part of a primary

distribution by an issuer, a registered

secondary distribution (other than shelf

distributions), or an unregistered secondary

distribution such as a selling shareholder block

trade or PIPE;1

transactions made in reliance on Section 4(a)(2)

of the Securities Act;

the acquisition of securities by a member as

principal in anticipation of making an

immediate exchange distribution or exchange

offering on an exchange; and

purchases of securities off the floor of an

exchange pursuant to a tender offer.

Unfortunately, self-regulatory organizations, such as

FINRA, do not provide a definition for many of the

terms referenced above. As a matter of practice, broker-

dealers and their counsel should refer to the rules and

regulations promulgated under the Securities Act and

the Exchange Act for further guidance.

1 In the case of a transaction that consists of both a primary

distribution and a secondary distribution, each type of

distribution would be analyzed separately.

5

What information must a broker-dealer relying on an

unregistered secondary distribution provide to FINRA?

A member that would otherwise have the trade

reporting obligation must provide notice to FINRA that

it is relying on the exception for transactions that are

part of an unregistered secondary distribution. A

member relying on the unregistered secondary

distribution exception must provide the following

information to FINRA:

security name and symbol;

execution date;

execution time;

number of shares;

trade price; and

FINRA member firms that are parties to the

transaction.

Notice and information regarding the unregistered

secondary distribution must be provided to FINRA no

later than three business days following the trade date.

If the trade executions occur over multiple days, then

the initial notice and available information must be

provided no later than three business days following the

first trade date and the final notice and information

must be provided no later than three business days

following the last trade date.

Must a broker-dealer report a transaction made

pursuant to an asset purchase agreement?

Securities that are transferred pursuant to an asset

purchase agreement (“APA”) are not reportable if:

(1) the APA is subject to the jurisdiction and approval of

a court of competent jurisdiction in insolvency matters;

and (2) the purchase price under the APA is not based

on, and cannot be adjusted to reflect, the current market

prices of the securities on or following the effective date

of the APA.

Must a broker-dealer report block trades made for the

purpose of creating or redeeming an instrument that

shows ownership of or otherwise tracks the underlying

securities transferred?

Transfer of equity securities for the sole purpose of

creating or redeeming an instrument that shows

ownership of or otherwise tracks the underlying

securities transferred (e.g., American Depositary

Receipts and exchange-traded funds) are not considered

over-the-counter (“OTC”) transactions for purposes of

the trade reporting rules. Such trades are not reportable

events, and therefore are not required to be reported to

the tape.

Must a broker-dealer report block trades in foreign

equity securities?

A broker-dealer is not obligated to report transactions in

foreign equity securities if: (1) the transaction is

executed on and reported to a foreign securities

exchange; or (2) the transaction is executed OTC in a

foreign country and is reported to the regulator of

securities markets for that country. FINRA members

must also have policies and procedures and internal

controls in place to determine whether a transaction

qualifies for an exception under the trade reporting rule.

Must a cancellation or reversal of a trade be reported?

Yes. A cancellation (if made on the trade date) or

reversal (if made on a date after the trade date) must be

reported by the same party responsible for reporting the

initial block trade.

6

Must a broker-dealer report unregistered block trades?

Unregistered block trades executed on behalf of an issuer

A block trade executed on an issuer’s behalf on an

agency or best efforts basis in a transaction exempt from

registration under Section 4(a)(2) of the Securities Act

does not need to be reported to the tape regardless of

whether the transaction is considered a “distribution.”

Unregistered block trades executed on behalf of an affiliate

A block trade executed on behalf of an affiliate or

control person on an agency or best efforts basis in a

transaction exempt from registration under Section

4(a)(1½)2 or a sale effected pursuant to Rule 144 does

not need to be reported to the tape if the transaction is

considered a “distribution.” If the unregistered

transaction does not constitute a “distribution,” then the

transaction must be reported to the tape following the

procedures outlined in the relevant exchange

regulations for reporting agency trades, unless the block

trade is effected off the floor of the relevant exchange,

which would be the case in a Section 4(a)(1½)

transaction.

Unregistered block trades executed on behalf of a non-affiliate

A block trade executed on behalf of a non-affiliate or

non-control person in a transaction exempt from

registration under Section 4(a)(1½) or a sale effected

pursuant to Rule 144 does not need to be reported to the

tape if the transaction is considered a “distribution.” If

2 Section 4(a)(1½), although not specifically provided for in the

Securities Act, has been recognized by the SEC and provides a

hybrid exemption from registration. Section 4(a)(1½) consists

of (1) the exemption under Section 4(a)(1) of the Securities Act,

which exempts transactions by anyone other than an “issuer,

underwriter or dealer.” and (2) the analysis under Section

4(a)(2) of the Securities Act to determine whether the seller is

an “underwriter.” For more information, see our Frequently

Asked Questions About Bought Deals and Block Trades,

available at http://www.mofo.com/files/Uploads/Images/FAQs-

Bought-Deals-Block-Trades.pdf.

the unregistered transaction does not constitute a

“distribution,” then the transaction must be reported to

the tape following the procedures outlined in the

relevant exchange regulations for reporting agency

trades, unless the block trade is effected off the floor of

the relevant exchange, which would typically be the

case in a Section 4(a)(1½) transaction.

For a helpful summary, see the “Summary Table” at

the end of these Frequently Asked Questions.

Must a broker-dealer report registered block trades?

A block trade executed either on behalf of an affiliate or

control person (or on behalf of a non-affiliate holding

restricted shares if such shares were issued in a private

offering and the non-affiliate holding the restricted

shares has not satisfied the six-month holding period

under Rule 144) may be executed in a registered

transaction, such as a “takedown” off of an existing

shelf registration statement (including at-the-market

sales) or a new stand-alone registration statement

covering resales.

Registered block trades executed on behalf of an issuer

A block trade executed on an issuer’s behalf on an

agency or best efforts basis in a registered transaction

does not need to be reported to the tape if the

transaction is considered a “distribution.” If the

registered transaction does not constitute a

“distribution,” then the transaction must be reported to

the tape following the procedures outlined in the

relevant exchange regulations for reporting agency

trades.

Registered block trades executed on behalf of an affiliate

A block trade executed on behalf of an affiliate or

control person in a registered transaction does not need

to be reported to the tape if the transaction (1) does not

7

involve a shelf takedown and (2) is considered a

“distribution.” If the registered transaction involves a

shelf takedown and does not constitute a “distribution,”

then the transaction must be reported to the tape

following the procedures outlined in the relevant

exchange regulations for reporting agency trades, unless

the shares are sold to or through a market maker.

Registered block trades executed on behalf of a non-affiliate

A block trade executed on behalf of a non-affiliate or

non-control person in a registered transaction does not

need to be reported to the tape if the transaction (1) does

not involve a shelf takedown and (2) is considered a

“distribution.” If the registered transaction involves a

shelf takedown and does not constitute a “distribution,”

then the transaction must be reported to the tape

following the procedures outlined in the relevant

exchange regulations for reporting agency trades, unless

the shares are sold to or through a market maker.

For a helpful summary, see the “Summary Table” at

the end of these Frequently Asked Questions.

Impact of FINRA Rules and Interpretive Memos

What rules must a broker-dealer consider with respect

to prices and commissions earned in connection with

block trades?

Generally, markups, markdowns, and commissions are

required to be “fair” under the circumstances. FINRA

IM-2440-1 expands on this general policy by

establishing a 5% guideline for markups and

markdowns, and lists various circumstances that would

affect (or not affect) the reasonableness of a markup,

including the following:

The markup or markdown is based on the

prevailing market price of the security. If the

broker-dealer is selling from inventory, the

original cost of the security to the broker-dealer

is not to be taken into consideration (see

FINRA IM-2440-1(a)(3)).

If the trade is done on a “riskless principal”

basis, which is the functional equivalent of an

agency trade, the level of markup/markdown

would normally be measured by what would

be a fair commission on an agency trade (see

FINRA IM-2440-1(c)(1)).

A higher markup may be more acceptable in a

transaction in equity securities than for fixed

income securities, e.g., government securities

(see FINRA IM-2440-1(b)(1)).

A higher markup may be more justified in a

transaction in inactive securities than for very

liquid securities (see FINRA IM-2440-1(b)(2)).

Although there is no direct correlation between

the price of the security and the appropriate

level of markup, the fact that the security is

low priced, so that the block trade involves a

smaller amount of money, could justify a

higher percentage markup than for a block of

the same number of shares in which the

individual securities are higher priced and

therefore the total price of the block is higher.

Correspondingly, a block consisting of a larger

number of shares might justify a higher

markup that a block at the same aggregate

price comprised of a smaller number of more

8

expensive shares (see FINRA IM-2440-1(b)(3)

and (4)).

If the broker-dealer and its customer agree on

the amount of commission or

markup/markdown in advance of the

transaction, this may affect the fairness of the

actual commission/markup/markdown

charged. However, the broker-dealer would

still have to deal fairly with its customer. If the

customer is an institutional investor, as is more

likely the case in a block trade, more weight

would probably be given to the customer’s

agreement to pay a relatively high commission

or markup (see FINRA IM-2440-1(b)(5)).

If the customer is liquidating one parcel of

securities to use the proceeds to purchase

another parcel of securities, the fairness of the

markup on the second transaction could be

evaluated taking into account the broker-

dealer’s profit or commission on the first

(liquidating) transaction (see FINRA IM-2440-

1(c)(5)).

Which rules must a broker-dealer consider with respect

to “best execution” of block trades?

Under FINRA Rule 5310, a broker-dealer has a duty to

effect a “best execution” for its customers at the best

price, under the circumstances. The subject of what is

“best execution” and how to achieve it is frequently a

complex question, inasmuch as customers can put more

or less weight on the importance of speed,

confidentiality, willingness of a broker-dealer to

position securities, skill in handling a “not held” order,

or other factors apart from a simple question of the

lowest price for the first 100 shares of a block to be

bought or the highest price for the first 100 shares of a

block to be sold. In the case of block trades, the skill

and resources of the broker-dealer are more likely to be

a factor in the determination of best execution than in

the case of a retail trade for a single round lot.

Must a broker-dealer consider whether a particular

transaction is suitable for its client?

Pursuant to FINRA Rule 2111(a), a member must obtain

certain information about its customers as part of its

obligation to determine customer suitability. However,

there are certain exceptions to the suitability

requirements for institutional customers. Typically,

block trades are executed for institutional customers,

and under FINRA Rule 2111(b), a member is not

required to conduct a suitability analysis if (1) the

member or associated person has a reasonable basis to

believe that the institutional customer is capable of

evaluating investment risks independently, both in

general and with regard to particular transactions and

investment strategies involving a security or securities,

and (2) the institutional customer affirmatively indicates

that it is exercising independent judgment in evaluating

the member’s or associated person’s recommendations.

In order to facilitate compliance with FINRA Rule

2111(b), some third-party distributors have created

institutional suitability certificates to be provided by

institutional customers, indicating that the institutional

customer is familiar with the transaction and is not

relying on recommendations from broker-dealers.

However, it is important to note that FINRA has not

approved or endorsed these certificates, and that the use

of such certificates does not constitute a safe harbor

from FINRA Rule 2111(b).

9

Must a broker-dealer avoid trading ahead of a

customer’s limit order?

Yes. Under FINRA Rule 5320, a member that accepts

and holds an order in an equity security from its own

customers, or a customer of another broker-dealer,

without immediately executing the order is prohibited

from trading that security on the same side of the

market for its own account. The prohibition under Rule

5320 does not apply if the member, immediately after

accepting the customer’s order, executes the customer

order up to the size and at the same (or better) prices at

which it traded for its own accounts.

With respect to large-sized orders (i.e., orders of 10,000

shares or more and greater than $100,000 in value) or

orders from institutional accounts, FINRA Rule 5320.01

generally permits members to negotiate terms and

conditions that would permit them to trade ahead of, or

along with, such orders. Under FINRA Rule 5320.01, a

member must provide a clear and comprehensive

written disclosure to the customer at the time of the

account’s opening and annually thereafter that:

discloses that the member may trade

proprietarily at prices that would satisfy the

customer order and

provides the customer with a meaningful

opportunity to opt in to the protections of

FINRA Rule 5320 with respect to all or any

portion of its order.

FINRA Rule 5320.01 also permits members to provide

clear and comprehensive oral disclosure to, and obtain

consent from, the customer on an order-by-order basis,

in lieu of the written disclosure requirement. In order to

avail themselves of such requirements, members must

keep records of who provided such consent and that the

consent evidences the customer’s understanding of the

terms and conditions of the order.

_____________________

By, Ze’-ev D. Eiger, Partner, and Neeraj Kumar,

Associate, Morrison & Foerster LLP

© Morrison & Foerster LLP, 2013

10

SUMMARY TABLE

The following table provides a summary of the various reporting requirements discussed above for different types of block trades,

including unregistered block trades that may or may not qualify as “distributions” under Regulation M. If a block trade must be

reported, the report must generally include (1) the symbol of the stock, (2) the number of shares bought or sold, (3) the price paid or

received for such shares (for the relevant trade), (4) whether, for the reporting party, the trade was a buy, sell, or cross- transaction, and

(5) the time of execution. The table is not a complete discussion of all applicable requirements and should be read in conjunction with the

Frequently Asked Questions and the applicable rules.

SUMMARY REPORTING BY DEAL TYPE

Type of Block Trade Does the Block Trade

Involve a “Distribution”?

Does the Block Trade Need to be

Reported?

Section 4(a)(2):

Issuer Shares -Yes

-No

- No

- No

Section 4(a)(1½):

Affiliate Shares -Yes

-No

- No

- No

Non-affiliate Shares -Yes

-No

- No

- No

Rule 144:

Affiliate Shares -Yes

-No

- No

- Yes

Non-affiliate Shares -Yes

-No

- No

- Yes

Shelf Takedown:

Issuer Shares -Yes

-No

-No

-Yes

Affiliate Shares -Yes

-No

-Yes3

-Yes3

Non-affiliate Shares -Yes

-No

-Yes3

-Yes3

ATM Sale:

Issuer Shares -Yes

-No

-No

-No

Affiliate Shares -Yes

-No

-No

-No

Non-affiliate Shares -Yes

-No

-No

-No

Registered Sale (Non-shelf):

Issuer Shares -Yes

-No

-No

-Yes

Affiliate Shares -Yes

-No

-No

-Yes3

Non-affiliate Shares -Yes

-No

-No

-Yes3

Clean Shares:4

(not being sold pursuant to

registration statement)

-Yes5

-No

-No

-Yes

3 Unless the shares are sold to or through a market maker, in which case the block trade does not need to be reported. 4 Clean shares held by an affiliate will no longer be unrestricted. 5 However, in practice this would be highly unlikely.