Jack Woltz is looking to take his studio, Woltz International Pictures, public. As part of the IPO, Woltz wants to have a directed share program to reward his family, associates and stars for their loyalty and hard work during the developmental years of the studio.
What issues do you need to consider?
- Gun-jumping issues. At some point, Woltz will need to formally invite his family and associates to participate in the DSP. Because this communication will likely be an offer subject to Section 5 of the Securities Act, it is important to find an appropriate safe harbor such as Rule 134. For a discussion of how Rule 134 works in the DSP context, see pp. 16-17 of our Client Alert on offers. (And don’t forget to leave the gun and take the cannoli.)
- Maximum DSP Size. In 2003, a FINRA (formerly NYSE/NASD) advisory committee recommended imposing a 5% maximum size for an issuer’s DSP – the rationale being that a larger DSP could compromise the IPO process. That recommendation has not yet been adopted as part of rulemaking and while some DSPs have adhered to the 5% recommended limit, market practice varies.
- Lock-ups. FINRA no longer requires that DSP shares be locked up for three months (a concept you may find in some older precedents). However, under FINRA Rule 5131(d), to the extent any lock-up agreement applies to shares owned by officers and directors, that agreement must include the shares purchased by the officers and directors in the DSP.
- Broker-Dealers Under FINRA Rule 5130(d)(1), broker-dealers are not allowed to participate as a purchaser in the DSP (with an exception for immediate family members of broker-dealer personnel that are employees of the issuer). The 2007 proposing release for the rule stated that “[FINRA] does not see any…basis to justify new issue allocations from the issuer to a broker-dealer.” Therefore, unfortunately, if Jack makes the underwriters an offer to participate in the DSP, it will be an offer they will just have to refuse (even though, as Jack likes to say, “I ain’t no bandleader”).
- Underwriting/Disclosure. The underwriting arrangements will address the DSP, and typical DSP disclosure would include a short paragraph in the Underwriting section of the prospectus covering topics such as the number or percentage of shares being reserved for the DSP, categories of DSP purchasers, and the reallocation process if the DSP is not fully purchased or if designees renege on their commitments.