December 01, 2007
By Corey Chivers and Alison Cole
On November 12, 2007, a group of Wall Street firms and The Nasdaq Stock Market announced an intention to form The PORTAL Alliance, a trading platform designed to serve the market for 144A equity securities. The PORTAL Alliance is intended to facilitate resales pursuant to Rule 144A of unregistered equity securities by providing an industry-standard facility for the private offering, trading, shareholder tracking and settlement of those securities. The PORTAL Alliance, which is subject to a definitive agreement and regulatory approvals, will replace competing platforms previously announced by some of its members, including the Goldman Sachs Tradable Unregistered Equity, or GS TRuE, platform. Nasdaq officials expect The PORTAL Alliance to be operational in the first quarter of 2008.
The PORTAL Alliance is designed to take advantage of the significant growth in recent years in the private-placement market, which has grown in part due to the flexibility provided under U.S. securities laws by Rule 144A. Under Rule 144A, equity offerings limited to so-called “QIBs” (qualified institutional buyers who typically hold more than $100 million in securities) may be made without complying with the more onerous SEC registration requirements. Recently, notable 144A offerings by private equity sponsors include the initial offerings of equity securities in Oaktree Capital Management LLC and Apollo Management LP, both of which are traded through the GS TRuE platform, and the initial offering of equity securities in J.G. Wentworth LLC, a portfolio company of JLL Partners, which trades on the Bear Stearns Best Markets platform.
If successful, The PORTAL Alliance would allow private equity sponsors and other enterprise owners to raise equity capital in a more liquid private placement market in advance of, or potentially in lieu of, an SEC registered initial public offering. For sponsors effecting an initial 144A offering of a portfolio company in lieu of an SEC-registered initial public offering with a stock exchange listing, a 144A offering traded through The PORTAL Alliance may have the following advantages:
- A 144A offering may put sponsors in a better position than an SEC-registered public offering to avail themselves of favorable market opportunities to issue or sell securities of portfolio companies as they will be able to eliminate the timing delays and uncertainty inherent in the SEC review process
- A 144A offering will also permit sponsors to avoid compliance with Sarbanes-Oxley and NYSE/Nasdaq corporate governance requirements which could provide substantial time and cost savings to issuers
- To the extent The PORTAL Alliance leads to significant growth in trading volumes for unregistered equity securities, as Nasdaq officials have predicted, this would create a more liquid and transparent market for these securities which may reduce the pricing discount of these securities compared to registered securities
- The PORTAL Alliance will allow issuers the ability to track the number of shareholders they have to monitor compliance with the exemption from registration under the Securities Exchange Act of 1934 (and related ongoing reporting and Sarbanes-Oxley obligations) which is available to the extent an issuer has less than 500 shareholders
Despite these advantages, there are also certain limitations that private equity sponsors should consider in analyzing the potential utility of a 144A offering, including the following:
- An SEC-registered public offering and stock exchange listing is still likely to provide the greatest potential liquidity and optimal valuation by allowing the offering to be made to the widest range of investors (i.e., not simply QIBs) and The PORTAL Alliance, with “indicative pricing” posted by dealers over the system, may not provide the price transparency of existing stock exchanges
- Currently, many investors, including QIBs, have limitations under their constituent documents on their ability to purchase unregistered securities, which could limit the potential liquidity of securities where the intention is that they will trade “PORTAL-for-life”
- Rule 144A is not available for unregistered equity sales by issuers who are already listed on a U.S. stock exchange, and while it may be available for offerings of convertible securities of a listed issuer, The PORTAL Alliance platform is not currently anticipated to accommodate convertible securities
While the emergence of The PORTAL Alliance, supported by a number of Wall Street firms, holds out the promise of being a significant development to provide flexibility in capital formation to private equity sponsors and others by giving them a viable alternative to SEC registration and a stock exchange listing, it remains to be seen how broadly this alternative will be embraced.