Securities transactions conducted by public companies that involve selling securities to a limited number of institutional or accredited investors may offer a number of advantages. Common examples of such transactions include registered direct offerings (RDOs) and private placements in public equity (PIPEs).

In a PIPE transaction, a public company’s equity or equity-linked securities are sold to a handful of sophisticated investors by a placement agent engaged by the company. The potential investors are wall-crossed, meaning they have agreed to certain confidentiality provisions and trading restrictions. A standard investor script, called a wall cross script, is used to share confidential information with investors, or bring them “over the wall.”

As an alternative to being wall-crossed, the potential investors may execute a non-disclosure agreement (NDA) with the company. The private placement is made pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933. After the closing of the PIPE transaction, the company will be obligated to file a resale registration statement with the Securities and Exchange Commission (SEC) in order to make the restricted securities freely tradeable. In a PIPE transaction, the company’s securities are typically sold to investors at a notable discount to the market price.

A registered direct offering has features of both a private placement transaction and a public offering. Like in a PIPE transaction, in a registered direct offering, securities of a public company are marketed and sold by a placement agent engaged by the company to select institutional and accredited investors. Also similar to a PIPE transaction, potential investors are wall-crossed or sign an NDA.

There are a number of key distinctions between registered direct offerings and private placements. In a registered direct offering, the company usually already has an effective shelf registration statement on file prior to the offering. The offering is conducted pursuant to the company’s effective registration statement in what is known as a shelf takedown. The company will file a prospectus supplement that describes the key terms of the registered direct offering. In a PIPE transaction, on the other hand, the resale registration statement usually is filed and declared effective by the SEC only after the PIPE transaction closes.

A registered direct offering is conducted on a best-efforts basis. This is unlike a traditional underwritten offering, which is conducted on a firm commitment basis. In a traditional underwritten offering, the underwriters will purchase securities directly from the company and then resell them to investors. By contrast, in a registered direct offering, the investors purchase securities directly from the company. The role of the placement agent in a registered direct offering is to introduce the company to potential investors.

In a private placement, the company enters into subscription or purchase agreements with investors. The purchase agreement specifies a fixed price for purchasing a specified quantity of securities. It is not typical to have a subscription or purchase agreement in a registered direct offering.

Reverse inquiries can occur both in the context of a registered direct offering and a private placement. A reverse inquiry occurs when a particular investor calls a broker’s syndicate desk and asks if the broker would be interested in purchasing a large amount of a particular company’s stock. This is the opposite of a traditional RDO or PIPE situation in which a company engages one or more investment bankers to act as placement agents. The placement agents then identify and solicit interest from sophisticated investors.