Abstract:
A method for raising capital comprises the steps of generating between a first company and a second company a first agreement granting the first company an option to obligate the second company to sell a predetermined volume of equity in the first company according to a predefined price structure, during a predefined time period and generating a second agreement between the first company and a third company, wherein, under the second agreement the third company is obligated to remedy a predefined failure of the second company to fulfill its obligations under the first agreement.

Description:
FIELD OF THE INVENTION  
         [0001]    The present invention relates to methods of raising equity capital for a company.  
         BACKGROUND INFORMATION  
         [0002]    Generally, a company may raise capital by selling its equity to public markets. This process, which is shown in FIGS. 1 and 2, is called “underwriting.” The underwriting process is initiated when an Issuer  10  hires an investment banking firm (“Underwriter  20 ”) to raise capital through offering the Issuer  10 &#39;s equity (e.g., its common shares) (“Offering”) to the public markets  40  (step  105 ).  
           [0003]    There are two main varieties of these Offerings. The first time that the Issuer  10  accesses the public markets  40 , the Issuer  10  conducts an Initial Public Offering (“IPO”). On the other hand, if the Issuer  10  has already raised capital in the public markets  40 , then the Issuer  10  may conduct what is known as a Follow-On Offering (“Follow-On Offering”).  
           [0004]    The first step for the Underwriter  20  is to conduct a due diligence review of the Offering (step  110 ). The due diligence review usually involves a detailed review of the Issuer  10 &#39;s financial statements, its performance and its prospects for the future, etc. After the due diligence review has been completed and the Underwriter  20  is satisfied with the results of this review, the counsel for the Issuer  10  and the Underwriter  20  prepare a prospectus of the Offering. The prospectus discloses certain information regarding the financial condition of the Issuer  10  and the terms of the Offering (step  115 ).  
           [0005]    Subsequently, the prospectus is filed with a Regulatory Agency  30  (e.g., the Securities and Exchange Commission) (step  120 ). The Regulatory Agency  30  reviews the prospectus to determine whether the prospectus complies with applicable laws and regulations and provides adequate disclosure regarding financial risk factors of the company and risk factors associated with making an investment in the company. Upon determining that the prospectus is in compliance, the Regulatory Agency declares the prospectus to be “effective” (step  125 ). Simultaneously, the Underwriter  20  and the Issuer  10  may market the prospectus to the public (e.g., by publishing “red herring” ads) (step  130 ).  
           [0006]    In step  132 , the Underwriter  20  determines, in view of particular market conditions, the key terms of an Offering. In particular, the Underwriter  20  must find a group of potential buyers willing to purchase a certain volume of the Issuer  10 &#39;s equity and ascertain the conditions under which they are willing to make such a purchase. Based on the demand from this group of buyers and other market conditions, the Underwriter  20  determines a price, volume and timing of the Offering. For example, it is common for the Underwriter  20  to increase the size and/or price of the Offering when it has received a large number of orders which exceed the original volume of the proposed Offering.  
           [0007]    The Offering is considered to be closed when the deal is done, e.g., when the willing group of buyers is found at a particular price the Underwriter  20  is looking for (step  135 ). Subsequently, when the Issuer  10 &#39;s equity is sold to the public market  40 , the Underwriter  20  obtains its commission.  
           [0008]    In certain circumstances, the public markets  40  may be unreceptive to Follow-On Offerings or the Underwriter  20  may not be interested in conducting a Follow-On Offering for a particular Issuer  10 . Follow-On Offerings may also entail considerable expense to the Issuer  10  and often present significant risks. For example, a Follow-On Offering may be postponed or cancelled for market reasons or the Underwriter  20  may set a price for the equity which is undesirable to the Issuer  10 .  
           [0009]    Furthermore, there may be a long delay between the time at which the Issuer  10  decides to conduct a Follow-On Offering and the actual date of the Offering. During the intervening time, market conditions may change significantly. This imposes an added layer of risk in that, by the time of the Offering, the previously set price may have become unacceptable to the Issuer  10 . For example, the Issuer  10 &#39;s stock may be trading at $25.00 per share when the Issuer  10  decides to conduct a Follow-On Offering. If, by the time steps  105  through  135  are performed, the stock is trading at $10.00 per share, the Issuer  10  may be counting on the capital that it feels that it has no choice but to go forward with the Offering at this unacceptable price.  
           [0010]    Thus, for the reasons stated above, Follow-On Offerings are often considered an inefficient way to raise capital. Another option is for the Issuer  10  to raise equity capital by utilizing a series of private offerings of common stock with subsequent registration of the common stock (i.e., a serial private placement). The private offerings may be offered to Qualified Institutional Buyers (“QIB”) as defined by applicable laws. Private offerings offer the Issuer  10  the ability to structure private placement transactions as a series of private placement transactions with multiple optional tranches. Such transactions provide certain benefits to the Issuer  10  (e.g., ability to continuously raise capital) and the terms of transactions provide for market derived pricing during a predetermined valuation period. For example, if the Issuer  10  wants to sell $1 million worth of its stock over the next 10 days, the pricing may be a percentage (e.g., 90%) of a 10 day average price for the stock. Thus under a serial private placement, a QIB may be confident that it will be able to sell stock during the valuation period under conditions virtually ensuring a gain equal to the 10% discount from the purchase price.  
           [0011]    However, serial private placements also present certain disadvantages to the Issuer  10 . Because the price is not determined until sales are made, the number of shares required to make up the desired amount of capital is not completely controllable by the Issuer  10 . Under serial private placements, due to market fluctuations, the Issuer  10  does not have absolute control over either the price at which this stock is sold or the amount of shares to be sold. For instance, if the stock price falls precipitously during the 10-day valuation period, the Issuer  10  may have to sell stock at a decreasing share price. For this reason, deals often include a floor price so that if the stock trades below the floor price, the QIB is no longer obligated to purchase the stock. Therefore, the QIB may make a profit from short selling above the floor price and repurchasing stock below the floor price. In this case, the Issuer  10  will raise no capital.  
           [0012]    Thus, to a large extent, there has not been a suitably effective and efficient method for raising capital which provides to a company sufficient control over the terms an Offering of its equity.  
         SUMMARY OF THE INVENTION  
         [0013]    The present invention is directed to a method for raising capital comprising the steps of generating between a first company and a second company a first agreement granting the first company an option to obligate the second company to sell a predetermined percentage of the first company&#39;s average trading volume of equity during a predefined time period according to a predefined price structure and generating a second agreement between the first company and a third company, wherein, under the second agreement the third company is obligated to remedy a predefined failure of the second company to fulfill its obligations under the first agreement. 
       
    
    
     BRIEF DESCRIPTION OF DRAWINGS  
       [0014]    [0014]FIG. 1 shows a conventional system for raising equity capital for a company from public markets.  
         [0015]    [0015]FIG. 2 is a flowchart illustrating a conventional process for raising equity capital.  
         [0016]    [0016]FIG. 3 shows an exemplary system which may be utilized to implement the Firm Underwritten Equity Facility process according to the present invention.  
         [0017]    [0017]FIGS. 4 a  and  4   b  illustrated a flowchart showing a process for raising capital utilizing the Firm Underwritten Equity Facility process according to the present invention.  
     
    
     DETAILED DESCRIPTION  
       [0018]    The present invention relates to a system which gives a Issuer  10  greater control over the process of rasing equity capital. In particular, a Firm Underwritten Equity FaciLity (“FUEL”) process, as shown in FIGS. 3 and 4, streamlines the offering process for the Issuer  10  and allows the Issuer  10  to exercise more complete control over the Offerings. In addition, under the system according to the present invention the Issuer  10  will receive a firm commitment that it may raise capital, if so desired, in accordance with the Issuer  10 &#39;s agreement with the Underwriter  20 .  
         [0019]    [0019]FIG. 3 shows an exemplary system for the FUEL process according to the invention. Participants in the system according to the present invention may include a Issuer  10  seeking capital, an Underwriter  20  willing to raise the capital and a Capital Company  25 . The Capital Company  25  provides an assurance to the Issuer  10  that if the Underwriter  20  fails to sell the Issuer  10 &#39;s shares according to a predetermined agreement, the Capital Company  25  will remedy the Underwriter  20 &#39;s failure.  
         [0020]    As shown in FIGS. 4 a  and  4   b , once the Issuer  10  has determined that it would like the control and flexibility of the FUEL process (step  203 ), the Issuer  10  may file a shelf registration statement (e.g., an S-3 registration) with a Regulatory Agency  30  for a primary issuance of common stock (step  205 ). Alternately, the Issuer  10  may utilized an existing shelf registration. The registration statement may or may not include agreements with the Underwriter  20  or the Capital Company  25 . When approved by the Regulatory Agency, the registration statement is declared effective.  
         [0021]    Subsequently, the Issuer  10  and the Underwriter  20  negotiate an Underwriting Agreement (step  210 ). In the Underwriting Agreement, the Issuer  10  and the Underwriter  20  must describe in detail how the Underwriter  20  will sell shares of stock in the Issuer  10 . In particular, the Underwriting Agreement may set forward multiple terms, conditions, structures and options for the Offer using key variables (e.g., price, volume and timing of the Offering) in any number of variations. The multiple terms, conditions, structures and options may be tied to a particular event such as, e.g., a predefined drop in the Dow Jones Index, a predetermined increase in the price the Issuer  10 &#39;s stock, etc. The Underwriting Agreement may also specify that the Underwriter  20  agrees to sell the shares on the behalf of the Issuer  10  on “a best effort” basis.  
         [0022]    The Underwriting Agreement may specify a time period (“Commitment Period”) during which it is in effect. During the Commitment Period, the Issuer  10  may instruct the Underwriter  20  to raise capital in accordance with the terms and conditions set forth in the Underwriting Agreement or in the Capital Demand Notice. The Commitment Period may be of a predetermined length (e.g., one year) or it may expire upon occurrence of predefined events. For example, the Underwriting Agreement may terminate within 60 days of the sale by the Underwriter  20  of one million shares of the Issuer  10 &#39;s stock.  
         [0023]    In addition, the Underwriting Agreement may indicate that whenever the Issuer  10  wants to raise capital by selling securities, the Issuer  10  will send a Capital Demand Notice to the Underwriter  20 . The Capital Demand Notice may be issued at any time during the Commitment Period. However, there may be a predefined time period between two consecutive Capital Demand Notices. Such predefined time period may be specified in the Underwriting Agreement and may vary depending, e.g., on market conditions or an internal event of the Issuer  10 .  
         [0024]    The Capital Demand Notice may specify (a) a time period for the offering (“Offering Period”); (b) a minimum price at which the shares are to be offered (“Floor Price”); and (c) a minimum amount of capital to be offered during the Offering Period (“Offering Volume”). For example, the Capital Demand Notice may specify an Offering Period of ten days beginning on Jul. 20, 2000 and an Offering Volume of one million shares at a Floor Price of $24.00 per share. The Issuer  10  may set each of the terms of the Offering for each Capital Demand Notice. Depending on the specific terms of the Capital Demand Notice, the Underwriter  20  may be required to sell a predetermined percentage of the shares traded at or above the Floor Price during the Offering Period. The Capital Demand Notice may specify, for example, minimum and maximum capital amounts to be raised by the Underwriter, under specified conditions, during the Offering Period. The Capital Demand Notice is considered effective upon delivery by the Issuer  10  to the Underwriter  20 .  
         [0025]    The Underwriter Agreement may also specify that the Underwriter  20  will perform a Due Diligence on the Issuer  10  and specify the terms of such review. For example, the Underwriting Agreement may specify the conditions under which the Due Diligence is to be performed and the criteria the Underwriter  20  may use to determine whether or not the results are satisfactory.  
         [0026]    The Underwriting Agreement may also specify a list of documents to be supplied by the Issuer  10  to the Underwriter  20  or which must otherwise be obtained by the Underwriter  20  to complete the due diligence review.  
         [0027]    Furthermore, the Underwriting Agreement may specify a period of time allowed to the Underwriter  20  for the performance of the due diligence review of the Issuer  10  as related to each particular Capital Demand Notice (“the Due Diligence Period”). In particular, the Underwriting Agreement may specify, for example, when the Due Diligence Period is to begin and end, or otherwise define the length of such period. For example, the Underwriting Agreement may specify that the Due Diligence Period must end before the Offering Period begins. Alternatively, the Underwriting Agreement may specify that the Due Diligence Period for a particular Capital Demand Notice begins when the Issuer  10  delivers or otherwise makes available all materials necessary for performing the due diligence review. For example, the Due Diligence Period may be specified as seven business days long, beginning on a specified day.  
         [0028]    Simultaneously with the Underwriting Agreement, the Issuer  10  executes with a Capital Company  25  a Standby Agreement that provides that the Capital Company  25  will guarantee fulfillment of the Underwriting Agreement in case the Underwriter  20  fails to comply with its obligations under the Capital Demand Notice. For example, if the Capital Demand Notice specifies that the Underwriter  20  has agreed to sell 2,000 shares of stock in the Issuer  10  within thirty days but, due to market conditions, the Underwriter  20  is able to sell only 1,200 shares, the Capital Company  25  will be notified and, according to the Standby Agreement, will be required to purchase the remaining 800 shares at the Floor Price or other price specified in the Capital Demand Notice.  
         [0029]    Those skilled in the art will understand that the Standby Agreement may be “flexible” and may include a plurality of conditions and terms. For example, the Standby Agreement may state that, if the market price for the shares of stock in the Issuer  10  drops below a predefined mark, then the Capital Company  25  may have to buy shares at a ten percent discount in comparison to the price specified in the Capital Demand Notice.  
         [0030]    After the Underwriting Agreement and the Standby Agreement have been executed, the Issuer  10  is required to file with the Regulatory Agency  30  a prospectus and a supplement (i.e., a post-effective amendment) to the previously filed shelf registration (step  215 ).  
         [0031]    At this point, the Issuer  10  has complete control over the key terms of the Offering. The Issuer  10  is under no obligation to utilize the FUEL process once it is in place. If the Issuer  10  desires to use the FUEL process, the Issuer  10  sends a Capital Demand Notice to the Underwriter  20  in accordance with the Underwriting Agreement (step  225 ). The Capital Demand Notice generally indicates the Floor Price, the Offering Volume and the Offering Period for this particular Capital Demand Notice.  
         [0032]    Upon receipt of the Capital Demand Notice, the Underwriter  20  conducts the due diligence review of the Issuer  10  during the Due Diligence Period specified in the Underwriting Agreement (step  230 ). During the due diligence review, the Underwriter  20  may review, for example, (1) whether the Issuer  10  has an effective registration statement with the Regulatory Agency  30 ; (2) whether the Issuer  10 &#39;s representations and warranties are accurate; (3) the performance of the Issuer  10  and its prospects for the future; (4) the existence of adverse legal actions, rulings, injunctions, etc.; and (5) the existence of regulatory suspensions, etc.  
         [0033]    Upon satisfactory completion of the due diligence review of the Issuer  10 , the Underwriter  20  accepts the obligations of the Capital Demand Notice under the terms, conditions, structures and options of the Underwriting Agreement (step  235 ). At this point the Issuer  10  may be required to provide certain documents and materials to the Underwriter  20  before the Underwriter  20  begins selling the shares (step  240 ). For example, the Issuer  10  may be required to deliver an Officer&#39;s Certificate, predefined Legal Opinions, an Accountant&#39;s Letter, Transfer Agent Instructions, Clearing Broker Instructions, Issuer  10 &#39;s bank/brokerage account, etc.  
         [0034]    In step  245 , the Underwriter  20  sells shares in the Issuer  10  during the Offering Period. As described above, the Offering Period, as well as other terms, may be specified in the Underwriting Agreement. For example, the Offering Period may start a day after the Issuer  10  has delivered all of the required papers specified in step  240  and continue for a length of time specified in the Underwriting Agreement.  
         [0035]    Upon selling a portion of the shares of stock in the Issuer  10 , the net capital is delivered to the Issuer  10  via a predetermined mechanism. For example, the raised capital may be automatically deposited in the brokerage account of the Issuer  10  with the Underwriter  20 . The net capital may, for example, be equal to a number of shares sold multiplied by the selling price, minus the Underwriter  20 &#39;s commission.  
         [0036]    During the Offering Period, the Underwriter  20  may deliver to the Issuer  10  Underwriter Sales Notices as the shares are sold. An Underwriter Sales Notice may be provided to the Issuer  10  each day or at predefined time periods during the Offering Period. The Underwriter Sales Notices indicates the actual volume and price of the shares sold during the time period to which it pertains, and additional information including, e.g. the Underwriter  20 &#39;s commission, etc. The Underwriter  20 &#39;s commission may be calculated based upon a formula agreed upon and specified, e.g., in the Underwriting Agreement.  
         [0037]    During the Offering Period, the Issuer  10  may be required to notify the Underwriter  20  of the occurrence of any of a plurality of predefined Blocking Events (step  250 ). A Blocking Event may, for example, be an event which discharges the Underwriter  20  partially or completely from its obligations under the current Capital Demand Notice. For example, a withdrawal or suspension of the Issuer  10 &#39;s registration by the Regulatory Agency  30 ; a predetermined breach of the Underwriting Agreement by the Issuer  10 ; failure of the Issuer  10  to deliver shares; the occurrence of predefined market conditions, etc. may be set forth in the Underwriting Agreement as Blocking Events. Whether or not the Issuer  10  is required to make such notice, or the conditions and content of such notice may also optionally be defined in the Underwriting Agreement.  
         [0038]    As mentioned above, a particular Blocking Event may completely or partially discharge certain obligations of the Underwriter  20 . For example, the Underwriting Agreement may specify a drop in a particular market index of 10% or more as a Blocking Event and may further specify that, upon occurrence of this Blocking Event, the Underwriter  20  is required to sell only a predefined portion of the shares specified in the Capital Demand Notice. The Underwriting Agreement may further specify that the Issuer  10  has an opportunity to remedy specific Blocking Events, providing specifics for the method and timing of acceptable remedies and the required reaction of the Underwriter  20  in response to remedy employed by the Issuer  10 . For example, if the Regulatory Agency  30  suspends the Issuer  10 &#39;s registration, the Issuer  10  may have ten days to remedy the suspension by obtaining a reinstatement of the registration or a vacation of the previous suspension of registration. The Underwriting Agreement may then specify new time limits for the actions of the Underwriter  20  in response to the completion of this remedy.  
         [0039]    During the Offering Period, the Underwriter  20  may exercise a Purchase Option by delivering a Purchasing Option Notice to the Issuer  10  (step  255 ). The Purchase Option which may be detailed in the Underwriting Agreement, defines an Underwriter  10 &#39;s right to purchase additional shares above the amount of shares which, under the terms of the Capital Demand Notice, the Underwriter  20  is required to sell.  
         [0040]    By the end of the Offering Period, the Issuer  10  determines whether the Underwriter  20  has fulfilled the terms of the Capital Demand Notice (step  260 ). For example, the Issuer  10  may check whether the Underwriter  20  has sold the Offering Volume specified in the Capital Demand Notice. If the Underwriter  20  has failed to sell the Offering Volume specified in the Capital Demand Notice, the Capital Company  25  is notified and is required to remedy the Underwriter&#39;s shortcomings (step  265 ) in accord with the Standby Agreement. For example, if the Underwriter  20  has sold less than the Offering Volume, the Standby Agreement may specify that the Capital Company  20  is obligated to purchase the remaining amount of shares or perform other steps defined in the Standby Agreement to remedy the Underwriter  20 &#39;s failure.  
         [0041]    The Issuer  10  may repeat steps  225  through  265  as often as desired by executing additional Capital Demand Notices with new terms at any desired Floor Price, Offering Volume and for any desired Offering Period (step  270 ).  
         [0042]    One of the advantages of the present invention is that it provides the Issuer  10  with system under which a firm commitment to raise capital (secured by the Standby Agreement) is available to the Issuer  10  on terms which the Issuer  10  controls. In particular, the Issuer  10  sets the price, timing, volume and amount of capital to be raised. The Issuer  10  may, for example, determine multiple points at which to sell its equity.  
         [0043]    In addition, the present invention simplifies the process of raising capital for the Issuer  10 . This system facilitates compliance with existing laws and regulations, and may avoid supplemental filings required by current capital-rasing methods under which some of the relevant numbers (e.g., share price and number of shares) in the prospectus may not be definitively calculated prior to completion of the Offering. Furthermore, the present invention allows for a completely scalable product offering that can be rolled out en masse with essentially the same terms.  
         [0044]    Those skilled in the art will recognize that the system and method according to the present invention may be implemented electronically via, e.g, a communications network such as the Internet. In other words, communications between the Issuer  10 , the Underwriter  20 , the Capital Company  25 , the Regulatory Agency  30  and the public markets  40  may be made via the Internet or other data network through the transmission of digital files including the required data. In addition, any or all of the transactions making up this system (e.g., the selling of shares, the transferring of raised capital, etc.) may be completed electronically.  
         [0045]    Thus, the FUEL process allows the Underwriter  20  to act as an agent for the Issuer  10  while eliminating any motivation to act against the interests of the Issuer  10 . As described above, under prior arrangements where an underwriter acts as a principal, an underwriter may make money without raising any capital for an issuer by selling the issuer&#39;s shares short to apply downward pressure on the price of those shares. Then, when the price of issuer&#39;s shares has fallen below the floor price, the underwriter may cover the short sales by purchasing at the deflated price. The present system (i.e., FUEL) completely eliminates this conflict of interest and ensures that the Issuer  10  will raise the desired amount of capital on the terms set forth in the Capital Demand Notice. Furthermore, the Issuer  10  may open an account with the Underwriter  20  and can then monitor the progress and terms of the sale of its equity on a daily basis. Under the prior system, the Issuer  10  was unable to monitor the progress of the private placements until after the transactions were complete and an average sale price was calculated by the underwriter and communicated to the issuer.  
         [0046]    There are many modifications to the present invention which will be apparent to those skilled in the art without departing from the teaching of the present invention. The embodiments disclosed herein are for illustrative purposes only and are not intended to describe the bounds of the present invention which is to be limited only by the scope of the claims appended hereto.