Article in The DealFlow Report, April 29, 2014 issue, on Ironridge Global Partners, LLC and its Liability for Equity (LIFE) program that relies on the fairness hearing exemption of Section 3(a)(10) of the Securities Act.
Article in The DealFlow Report, April 29, 2014 issue, on Ironridge Global Partners, LLC and its Liability for Equity (LIFE) program that relies on the fairness hearing exemption of Section 3(a)(10) of the Securities Act.
Article in The DealFlow Report, April 29, 2014 issue, on Ironridge Global Partners, LLC and its Liability for Equity (LIFE) program that relies on the fairness hearing exemption of Section 3(a)(10) of the Securities Act.
Being sued by Ironridge Global Partners LLC may be a good
thing for some companies.
The fling of lawsuits is part of an innovative fnancing structure, offered by the investment manager, that turns liabilities such as debts for unsold inventory into equity. San Francisco-based Ironridge, which is led by Richard Kreger, Brendan ONeil and John Kirkland, launched the so-called Li- ability for Equity program, or LIFE program, in 2011 and has, since, completed more than 50 such transactions and put to work tens of millions of dollars. The LIFE program allows public companies to satisfy trade pay- ables, debts and other liabilities in exchange for unregistered common stock using a Section 3(a)(10) fairness hearing. Section 3(a)(10) of the Securities Act is an exemption from re- quirements to register securities for sale in some exchange trans- actions. Unregistered securities can be issued under Section 3(a) (10) in exchange for other securities, claims or property inter- ests. The fairness of the terms and conditions of a Section 3(a) (10) exchange must be approved by a court or other government entity. In a LIFE program transaction, Ironridge acquires an outstand- ing debt owed to a microcap company vendor, fles a lawsuit against the company and asks a judge to convert the debt into stock under Section 3(a)(10). Sometimes Ironridge is approached by the creditor to initiate such transactions, and sometimes it is approached by the securi- ties-issuing company, Kirkland told The Deal. In either case, we call the other side to see if its workable, he said. We only do consensual deals. Were the Warren Buffett of microcap fnancing. Next, Ironridge sues the microcap company, usually in Los An- geles County Superior Court, and uses the Section 3(a)(10) fair- ness hearing process to get a judge to approve the transaction. THE STRATEGY is controversial. Steve Winters, managing part- ner of Gemini Strategies LLC in Encinitas, Calif., has said that Ironridge is abusing the Section 3(a)(10) exemption and fairness hearing process at the expense of investors in more common forms of private investments in public equity, or PIPEs. They may be technically correct but we believe theyre misap- plying Section 3(a)(10), he said. Most PIPE investments, in which accredited investors buy un- registered shares in public companies, rely on the Securities and Exchange Commissions Rule 144. Securities issued under Rule 144 cannot be sold into the public market until certain condi- tions are met. The restrictions are meant to limit the risk to pub- lic market investors of issuing securities without the disclosures required in a registration statement. Those restrictions include a six-month holding period for securi- ties issued by companies that meet the SECs reporting require- ments. Meanwhile, securities issued under Section 3(a)(10) are immedi- ately freely tradable. When you invest in a convertible debt PIPE, the premise is youre taking risk by waiting for the six-month period for Rule 144 shares to be tradable, Winters said. If youre going to mis- apply the rule, what youre doing is problematic. Kirkland responded that such concerns are often raised by rivals who have unsuccessfully tried to copy Ironridges strategy. I always say we are super compliance oriented, said Kirkland, a former attorney who led the securities law practice at Luce For- ward Hamilton & Scripps LLP and the securities group in the Los Angeles offce of Greenberg Traurig LLP. We get a legal opinion on every transaction, plus a legal opin- ion from the transfer agent, the clearing service and the broker- dealer, he said. Every deal clears six lawyers at minimum and as many as 12 at maximum. IronrIdge breathes LIFe Into debt exchanges by dan LonkevIch REPRINT FROM April 25, 2014 Kirkland also said that Ironridge is not the only investment man- ager structuring fnancings using Section 3(a)(10), although he declined to identify rivals. Section 3(a) (10) is a deceptively simple statute, he said. Its a very broad exception that, if used properly, can be a godsend to an issuer. As far as I can see, were the only ones doing it right, he said. Scores of attorneys tell me Im doing it right. We think were as compliant as compliance gets. To be sure, Kirkland said Ironridge has never requested what is known as a no-action letter from the SEC. In transactions that raise regulatory questions, frms sometimes request such letters from the commission as confrmation that the SEC was aware of the deal and chose not to take regulatory action. The deals happen too quickly, Kirkland said. The advantage of the LIFE Program is speed and cost. Instead of two months to fle a registration, it takes two weeks, and instead of costing $200,000 in legal fees, it costs $20,000. Most LIFE program transactions are done with the smallest of microcap companies and involve fnancing amounts of less than $3 million. They have ranged from as small as $250,000 to as large as $15 million. Ironridge invested $1.27 million last May in Jammin Java Corp., which sells coffee under the Marley Coffee brand. In February 2013, Ironridge invested $800,000 in Axiologix Inc., a Sarasota, Fla.-based developer of cloud computing services. In 2012, Ironridge invested $2.2 million in Rapid Fire Marketing Inc., a Carson City, Nev.-based maker of vapor inhalers. The frm also invested $2.5 million in Atlanta-based technology company East Coast Diversifed Corp. In 2011, Ironridge invested $1.12 million in Gillette, Wyo.-based High Plains Gas Inc. Weve done them literally overnight, though not typically, Kirkland said. Usually it takes two or three weeks and up to a month. It depends on how much the issuer has its act together. He said that Ironridge does considerable due diligence with both the issuer and the creditor. We need to see the note, evidence of the wire transfer, notation of the debt in fnancial statements, proof of delivery of a prod- uct, Kirkland said. If its a widget company, we need to see evi- dence the widgets were delivered. WHILE IRONRIDGE gets contacted by issuers and creditor alike, typically its the creditors who approach most frequently. Were often contacted by lawyers and auditors, Kirkland said. Theyre our two most common creditors. Landlords also. Typically, Ironridge pays creditors for their liabilities up front, Kirkland said. Normally, we wire the money after signing the agreement, he said. To do other otherwise, as some rivals do, could raise questions about the legitimacy and legality of the claim on the liability and make such a transaction look more like underwriting, he said. And acting as an unlicensed underwriter is a sure way of getting into regulatory trouble. Just because youre exempt from registration doesnt mean youre exempt from everything else, Kirkland said. If youve just been assigned a debt and are selling the shares you receive to pay the debt, it sounds a lot like what an underwriter does. We routinely pay ahead of time. Were out the money. Were na- ked. We frequently do it conditionally, however, which means if I cant get a court approval I can get out. Our obligation starts the moment the approval comes. After Ironridge acquires stock, it treats it as a long investment, with an eye toward buying low and selling high, Kirkland said. Were like any long shareholders. Well hold or sell depending on whether we think we should own it or sell it and buy Apple instead. The goal is to invest for the long term. We always sell some, but we rarely sell all. We try to break even on every transaction and hit a grand slam every now and then. Weve had a few. Sometimes the stock explodes out the gate, sometimes we have to wait. Nothing we can do except write the checks and wait. Kirkland said that Ironridge also has had a couple of whacka- doodle clients who breached their duties and later threatened to complain to the SEC, although he declined to identify them. We think we do everything right, he said. People say, Well call the SEC. We tell them, Go ahead. Call now. Well wait on the line. Kirkland noted that Ironridge has heard rumors that the SEC is investigating frms that take advantage of the Section 3(a)(10) exemption. He said that although such an investigation would be disruptive, it ultimately might be necessary to weed out bad ac- tors. Many of those bad actors who are trying to copy Ironridge, he said, even going so far as to copy its transaction documents. In every case Ive seen, they take our documents word for word, Kirkland said. Even the typos are the same. They change two or three things and they always end up violating the law by making the changes. When you get a few bad apples it spoils it for everybody else. www.ThedeAl.com AS FEATURED ON TheDeal.com(ISSN 1547-7584) is published by The Deal. Copyright 2014 The Deal. The Copyright Act of 1976prohibits the reproduction by any means of any portion of this publication except with the permission of the publisher.