Wall-crossing is a method of confidentially pre-marketing a securities offering to a select group of sophisticated investors. It is a popular way to build interest in a potential offering prior to its public announcement. Companies that pre-market offerings by wall crossing investors should be careful to make sure that the process does not run afoul of U.S. securities laws.

In a wall cross offering, the company’s underwriters will reach out to certain potential investors, asking them if they would like to receive details about a securities offering on a confidential basis. In this initial inquiry, the underwriters will not reveal the name of the company, but instead will provide general information about the company and the deal such as its relative size and industry. This initial outreach often occurs by phone. The underwriters closely follow a script agreed upon by the company, known as a wall cross script.

If the investor expresses an interest in receiving the confidential information, it must first agree to keep the information confidential and not to trade in the company’s securities for a specified period of time. It is critical that the investors agree to keep the disclosed information confidential in order to be compliant with Regulation FD, a rule promulgated by the Securities and Exchange Commission (SEC) that regulates the selective disclosure of material, non-public information (MNPI). Once the investor expressly agrees to these conditions, the underwriters will confirm this agreement in writing via email. This is known as wall-crossing the investor.

After an investor is wall-crossed, the underwriters can reveal the name of the company and further details about the deal. This may be done by phone or via email. The target investors in a wall cross offering are typically large institutional investors such as hedge funds, private equity firms, and other large asset management firms.

The wall crossing process can be applied to both registered and unregistered securities offerings. SEC Rule 241 permits oral or written solicitations of investor interest in unregistered securities offerings, such as private placement transactions.

Once the underwriters have reached out to enough investors and built a book of interest in the deal, the company may publicly announce or “launch” the offering. The company will generally issue a press release and file a Form 8-K with the SEC announcing the launch of the offering. At this point, the wall-crossed investors are no longer subject to a non-disclosure obligation since the information disclosed to them is now public. The offering launch is followed by pricing of the offering, in which a specific price is assigned to the securities based on market conditions. Closing of the offering will typically occur a few days after the pricing date.

The federal court case SEC v. Cuban established the importance of making sure that investors participating in a wall cross offering are expressly subject to restrictions on trading the company’s stock for a specified period of time. In the case, the SEC alleged that Mark Cuban had engaged in illegal insider trading. Shortly after being confidentially informed by the CEO of Mamma.com that the company planned to conduct a private offering of the company’s securities, Cuban sold a large number of the company’s shares. The court ultimately ruled that Cuban was not liable for insider trading under U.S. securities laws because the SEC could not demonstrate that Cuban had agreed not to trade on the confidentially disclosed information. The court noted that the trader must have expressly agreed both not to disclose the MNPI as well as not to trade on such MNPI. The case serves as a precautionary reminder to companies to follow proper procedures during the wall cross process.