PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
April 3, 2023
MEMORANDUM
TO: Jennifer Kwon, Responsible Partner, Capital Markets
FROM: Audrey Zhou, Working Associate, Capital Markets
RE: Optiwave Semiconductor Corp. — Rule 144A Offering Structure and Exemption Analysis for $250,000,000 2.75% Convertible Senior Notes due 2028
Matter No.: 1014-00001
Billing Code: 48710-001
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the addressee and other attorneys at Calderwood & Harkness LLP working on the above-referenced matter. Do not distribute or copy without the express authorization of the Responsible Partner.
I. Executive Summary
This memorandum analyzes the availability of exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"), for the proposed offering by Optiwave Semiconductor Corp. ("OWS" or the "Company") of $250,000,000 aggregate principal amount of 2.75% Convertible Senior Notes due 2028 (the "Notes"), together with a 15% over-allotment option providing for the sale of up to $37,500,000 additional aggregate principal amount of Notes, to be offered and sold to qualified institutional buyers ("QIBs") in reliance on Rule 144A under the Securities Act ("Rule 144A").
Based on the analysis set forth in this memorandum, it is our conclusion that the proposed offering may be structured to rely upon the exemption from registration provided by Section 4(a)(2) of the Securities Act for the initial sale of the Notes by OWS to the initial purchasers, and on Rule 144A for the immediate resale of the Notes by the initial purchasers to QIBs. No registration statement under the Securities Act is required to be filed in connection with the offering, and none will be filed. No registration rights agreement is being entered into with the initial purchasers or any holders of the Notes.
The Notes will be convertible into shares of OWS common stock, par value $0.001 per share (Nasdaq: OWS). The shares of common stock issuable upon conversion of the Notes will be issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act, which exempts from registration any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. This exemption is well-established and routinely relied upon in the context of convertible debt offerings.
In connection with the offering, OWS intends to enter into concurrent capped call transactions with Ridgepoint Capital Markets LLC ("Ridgepoint") and Northvane Financial Products LP ("Northvane"). These capped call transactions are separate privately negotiated derivative contracts that do not constitute "offers" or "sales" of securities within the meaning of Section 2(a)(1) of the Securities Act and accordingly fall outside the Securities Act registration framework. These transactions are discussed in greater detail in Section XI below.
The initial purchasers for the offering are Ridgepoint Capital Markets LLC (as lead initial purchaser and bookrunner), Harborstone Securities Inc. ("Harborstone"), and Velthorn Zanthor & Co. ("Velthorn Zanthor") (together with Ridgepoint, the "Initial Purchasers"), each of which is a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prescott Whitfield LLP serves as counsel to the Initial Purchasers, with Diana Castellano as lead engagement partner on the matter.
This memorandum is organized as follows: Section II provides a summary of the background of the Company and the proposed transaction. Section III discusses the statutory registration requirements of Section 5 of the Securities Act. Sections IV and V analyze the availability of the Section 4(a)(2) and Rule 144A exemptions, respectively. Section VI addresses the Section 3(a)(9) exemption for conversion shares. Section VII confirms that no Regulation S tranche is contemplated. Sections VIII and IX provide a detailed integration analysis and general solicitation analysis, respectively. Section X discusses the offering memorandum and information requirements. Section XI analyzes the capped call transactions under the Securities Act. Section XII summarizes our recommendations and identifies open items. Section XIII sets forth our overall conclusion.
II. Background and Transaction Overview
A. The Company
Optiwave Semiconductor Corp. is a Delaware corporation (Delaware Division of Corporations file number 5738291), with its principal executive offices located at 4800 Great America Parkway, Suite 1200, San Jose, California 95054. OWS is a fabless semiconductor company whose shares of common stock are listed and traded on the Nasdaq Global Select Market under the ticker symbol "OWS." The Company's SEC Central Index Key is 0001823467.
OWS is a reporting company under the Exchange Act and is current in all of its Exchange Act periodic reporting obligations, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. OWS's most recent Annual Report on Form 10-K, for the fiscal year ended December 31, 2022, was filed with the Securities and Exchange Commission (the "SEC") on February 27, 2023, and its most recent Quarterly Report on Form 10-Q, for the fiscal quarter ended September 30, 2022, was filed on November 7, 2022.
The Company's key financial metrics for fiscal year 2022 are as follows: revenue of approximately $812.4 million; adjusted EBITDA of approximately $198.7 million; and, as of March 3, 2023, an approximate market capitalization of $4.3 billion based on approximately 58.6 million fully diluted shares of common stock outstanding at a closing price of $73.38 per share.
The Company's senior management team and board leadership relevant to this transaction include the following individuals:
• Chief Executive Officer: Marcus Harding
• Chief Financial Officer: Priya Nandakumar
• General Counsel and Corporate Secretary: David Shih
• Treasurer: Rachel Fontaine
• Board Chair: Dr. Evelyn Matsuda (independent director)
We have been in contact with David Shih and Rachel Fontaine regarding the structure of the offering and have received relevant corporate documentation from their offices. Our analysis herein is based on the facts and circumstances as communicated to us by management and as reflected in the Company's public filings.
B. The Proposed Offering
OWS proposes to offer and sell $250,000,000 aggregate principal amount of 2.75% Convertible Senior Notes due 2028, with a 15% over-allotment option available to the Initial Purchasers providing for the purchase of up to $37,500,000 additional aggregate principal amount of Notes, resulting in a potential total offering size of $287,500,000 aggregate principal amount. The Notes will be offered and sold to QIBs in reliance on Rule 144A under the Securities Act. No Regulation S tranche is contemplated; the offering will be made exclusively in reliance on Rule 144A.
Initial Purchasers and Economics. The Initial Purchasers for the offering are:
• Ridgepoint Capital Markets LLC — lead initial purchaser and sole bookrunner
• Harborstone Securities Inc. — co-manager and initial purchaser
• Velthorn Zanthor & Co. — co-manager and initial purchaser
The Initial Purchasers' discount will be 2.00% of the aggregate principal amount of Notes sold in the offering. In addition, a structuring fee of 0.25% of the aggregate principal amount of the base offering (i.e., $625,000) is payable to Ridgepoint in its capacity as sole bookrunner and structuring agent. The Initial Purchasers will purchase the Notes from OWS pursuant to a Purchase Agreement (the "Purchase Agreement"), the first draft of which was circulated by Calderwood & Harkness LLP on May 1, 2023.
Indenture and Trustee. The Notes will be issued pursuant to an Indenture (the "Indenture") to be entered into between OWS and Broadmere Trust Company, N.A., as Trustee (the "Trustee"). The Indenture will be governed by New York law. A first draft of the Indenture was circulated by Calderwood & Harkness LLP on April 21, 2023, and is currently under review by Prescott Whitfield LLP.
Form and Depository. The Notes will be issued in global form and deposited with Broadmere Trust Company, N.A. as custodian for The Depository Trust Company ("DTC"). The assigned CUSIP number for the Notes is 683742AA5, and the ISIN is US683742AA53. Beneficial interests in the Notes will be represented through book-entry positions in DTC's systems and will be transferable through DTC's book-entry transfer system, subject to the transfer restrictions described in Section V.C below.
Key Terms of the Notes. The principal economic terms of the Notes, as currently contemplated, are summarized below:
Capped Call Transactions. Concurrently with the pricing of the Notes, OWS will enter into privately negotiated capped call transactions (the "Capped Call Transactions") with two counterparties: Ridgepoint Capital Markets LLC (allocated 60% of the notional amount, or $172,500,000 notional) and Northvane Financial Products LP (allocated 40% of the notional amount, or $115,000,000 notional). The Capped Call Transactions will have a lower strike price equal to the initial conversion price of the Notes (approximately $94.50 per share) and a cap price of $110.07 per share, representing a 50% premium over the reference price of $73.38 per share. The aggregate cost of the Capped Call Transactions is estimated at approximately $28,750,000. The Capped Call Transactions will be documented as confirmations under the 2002 ISDA Master Agreement framework and will be governed by New York law.
Use of Proceeds. OWS intends to use the net proceeds of the offering as follows:
(i) approximately $28,750,000 to fund the aggregate cost of the Capped Call Transactions;
(ii) approximately $75,000,000 to repay outstanding borrowings under the Company's existing revolving credit facility (the "Revolving Credit Facility") with Crestline National Bank, N.A. as administrative agent; and
(iii) the remainder for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions.
C. No Registration Statement to Be Filed; No Registration Rights
OWS does not intend to file a registration statement (whether on Form S-1, Form S-3, or any other form) under the Securities Act for the resale of the Notes or the shares of common stock issuable upon conversion of the Notes. No registration rights agreement will be entered into with the Initial Purchasers or any holders of the Notes.
This approach — offering convertible notes under Rule 144A without granting registration rights — is consistent with prevailing market practice for 144A convertible notes offerings by Exchange Act reporting issuers. Reporting issuers that maintain current Exchange Act filings provide a sufficient public information base to support secondary market trading in the Notes under Rule 144A (to QIBs) and, following the applicable holding period, under Rule 144 (to the general market). The absence of registration rights will be prominently disclosed in the risk factors section of the Offering Memorandum.
III. Statutory Framework: Section 5 Registration Requirements
Section 5 of the Securities Act is the cornerstone provision that mandates registration of securities offerings. In relevant part, Section 5(a) provides that, unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise. Section 5(c) further prohibits any person from offering to sell or offering to buy, through the use or medium of any prospectus or otherwise, any security unless a registration statement has been filed as to such security.
The registration requirements of Section 5 are broadly construed. The terms "offer" and "sale" are defined expansively in Section 2(a)(3) of the Securities Act to include every contract of sale, disposition of, solicitation of an offer to buy, or attempt to dispose of a security or interest in a security, for value. The term "security" is defined in Section 2(a)(1) of the Securities Act and encompasses, among other things, notes, bonds, debentures, and stock.
As applied to the proposed transaction, the Notes constitute "securities" within the meaning of Section 2(a)(1), as they are convertible debt instruments evidencing an obligation to pay a principal sum and interest, and are convertible into shares of OWS common stock. The shares of OWS common stock issuable upon conversion of the Notes likewise constitute "securities" under Section 2(a)(1).
Accordingly, OWS must identify and comply with an applicable exemption from the registration requirements of Section 5 for each step in the offering process, specifically:
(a) the initial sale of the Notes by OWS to the Initial Purchasers (an issuer transaction requiring an issuer exemption, specifically Section 4(a)(2));
(b) the immediate resale of the Notes by the Initial Purchasers to QIBs (a non-issuer transaction for which Rule 144A provides a safe harbor); and
(c) subsequent resales of the Notes by holders to other QIBs or otherwise (for which Rule 144A, Rule 144, and other exemptions may be available).
We address each of these steps in the sections that follow. The Section 3(a)(9) exemption for shares issued upon conversion is addressed separately in Section VI below.
IV. Section 4(a)(2) Private Placement Exemption — Sale to Initial Purchasers
A. Statutory Basis
Section 4(a)(2) of the Securities Act exempts from the registration requirements of Section 5 "transactions by an issuer not involving any public offering." This exemption is the principal statutory basis on which issuers rely when selling securities in private placement transactions, including in the context of initial sales of securities to initial purchasers in Rule 144A offerings.
The scope and application of the Section 4(a)(2) exemption have been elaborated in a substantial body of case law and SEC interpretive guidance. The seminal authority is SEC v. Ralston Purina Co., 346 U.S. 119 (1953), in which the Supreme Court held that the availability of the private placement exemption turns on whether the particular class of persons affected needs the protection of the Securities Act, and that the exemption should be construed in light of the statutory purpose of making available adequate information to protect investors. The Court declined to adopt a bright-line numerical test, instead requiring an inquiry into whether the offerees are able to "fend for themselves" — i.e., whether they have access to the kind of information that registration would disclose and are sufficiently sophisticated to evaluate the risks of the investment.
Subsequent decisions, notably Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir. 1977), have further refined the analysis. In Doran, the Fifth Circuit articulated a multi-factor test for evaluating the availability of Section 4(a)(2), considering: (i) the number of offerees and their relationship to each other and the issuer; (ii) the number of units offered; (iii) the size of the offering; (iv) the manner of the offering (i.e., whether general solicitation was employed); and (v) the sophistication of the offerees and their access to information.
The SEC has also issued extensive interpretive guidance on the Section 4(a)(2) exemption, including in connection with the adoption of Regulation D (providing safe harbor conditions for private placements) and in various no-action letters. While Regulation D provides a non-exclusive safe harbor for offerings that comply with its terms, the Section 4(a)(2) exemption remains available as a standalone exemption outside of Regulation D, subject to compliance with the judicially developed standards discussed above.
B. Application to OWS Offering
The sale of the Notes by OWS to the Initial Purchasers constitutes a "transaction by an issuer not involving any public offering" within the meaning of Section 4(a)(2), based on the following analysis:
Limited Number of Purchasers. The Notes will be sold by OWS to only three Initial Purchasers: Ridgepoint Capital Markets LLC, Harborstone Securities Inc., and Velthorn Zanthor & Co. This is a highly limited group of purchasers, well within the parameters that courts and the SEC have found consistent with the private placement exemption.
Sophistication and Financial Resources of the Purchasers. Each of the three Initial Purchasers is a registered broker-dealer under the Exchange Act and is an institutional investor with substantial financial resources and extensive experience in securities markets and capital markets transactions. Their relevant details are as follows:
Ridgepoint Capital Markets LLC is a Delaware limited liability company and an SEC-registered broker-dealer, with its principal office at 383 Madison Avenue, 22nd Floor, New York, New York 10179. Ridgepoint is a leading investment bank with extensive experience in structuring and distributing convertible debt securities and other complex capital markets products.
Harborstone Securities Inc. is a Delaware corporation and an SEC-registered broker-dealer, with its principal office at 200 Vesey Street, Suite 3100, New York, New York 10281. Harborstone maintains a significant institutional client base and routinely participates as initial purchaser and co-manager in Rule 144A offerings.
Velthorn Zanthor & Co. is a New York general partnership and an SEC-registered broker-dealer, with its principal office at 750 Seventh Avenue, 18th Floor, New York, New York 10019. Velthorn Zanthor is a well-established investment banking firm with deep expertise in equity-linked and derivative securities.
Each Initial Purchaser possesses the financial sophistication and experience necessary to evaluate the merits and risks of an investment in the Notes and does not require the protections afforded by the registration requirements of the Securities Act. The Initial Purchasers are capable of "fending for themselves" within the meaning of Ralston Purina.
No General Solicitation or General Advertising. The offering of the Notes will not be marketed through any form of general solicitation or general advertising. OWS will not publish or cause to be published any advertisement, article, notice, or communication in any newspaper, magazine, or similar media (including the internet), nor will it broadcast any communication over television or radio, nor will it conduct any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, in connection with the initial sale of the Notes to the Initial Purchasers or in connection with the offering more broadly. The Preliminary Offering Memorandum and Final Offering Memorandum will be distributed only to persons reasonably believed to be QIBs, and all investor communications (including investor calls and presentations) will be conducted on a confidential basis with pre-qualified institutional investors. This is discussed in greater detail in Section IX below.
Access to Information. OWS is a reporting company under the Exchange Act and is current in all of its periodic reporting obligations. The Initial Purchasers therefore have access — through OWS's publicly filed reports and through the detailed Offering Memorandum — to the kind of information that registration under the Securities Act would make available. In addition, the Offering Memorandum will contain comprehensive information regarding OWS's business, financial condition, results of operations, and the terms of the Notes and the Capped Call Transactions, including audited financial statements prepared by OWS's independent registered public accounting firm, Aldgate & Finch LLP.
Investment Intent and Transfer Restrictions. The Purchase Agreement will contain representations and warranties by each Initial Purchaser confirming that it is purchasing the Notes for resale to QIBs in reliance on Rule 144A and not with a view to a distribution of the Notes other than in accordance with Rule 144A. The Notes and any shares of common stock issuable upon conversion will bear customary restrictive legends (as described in Section V.C below) indicating that the securities have not been registered under the Securities Act and may not be resold absent registration or an applicable exemption from registration.
C. Conclusion on Section 4(a)(2)
Based on the foregoing analysis, the sale of the Notes by OWS to the Initial Purchasers satisfies the requirements of the Section 4(a)(2) private placement exemption, assuming compliance with the terms and conditions of the Purchase Agreement (first draft circulated by Calderwood & Harkness LLP on May 1, 2023, and currently under negotiation with Prescott Whitfield LLP) and the conditions and safeguards described herein. The transaction involves a limited number of highly sophisticated institutional purchasers, no general solicitation or general advertising, full access to information, and appropriate transfer restrictions.
V. Rule 144A — Resale Exemption for Initial Purchasers and Subsequent Holders
A. Overview of Rule 144A
Rule 144A was adopted by the SEC in 1990 to establish a non-exclusive safe harbor from the registration requirements of Section 5 of the Securities Act for resales of "restricted securities" to QIBs. The rule was designed to enhance the liquidity of privately placed securities by facilitating an efficient institutional resale market, while maintaining investor protection through the requirement that purchasers be sophisticated institutional investors.
It is important to note at the outset that Rule 144A is not technically an "issuer" exemption. Rather, it provides a resale exemption for persons other than the issuer of the securities. In the context of the proposed OWS offering, the transaction is structured in the customary two-step manner: (i) OWS, as issuer, sells the Notes to the Initial Purchasers in a private placement transaction exempt from registration under Section 4(a)(2) of the Securities Act, and (ii) the Initial Purchasers immediately resell the Notes to QIBs in transactions exempt from registration under Rule 144A. Subsequent holders who are not affiliates of OWS may also resell the Notes in reliance on Rule 144A (or, if applicable, Rule 144 or another available exemption).
This two-step structure — a Section 4(a)(2) private placement from the issuer to the initial purchasers, followed by Rule 144A resales by the initial purchasers — is the standard and well-established transactional framework for offerings of this type and has been utilized in countless convertible notes transactions since the adoption of Rule 144A.
B. Key Conditions of Rule 144A
The availability of Rule 144A is subject to several conditions, each of which is analyzed below in the context of the proposed OWS offering.
1. Eligible Securities (Rule 144A(d)(3)). Rule 144A(d)(3) provides that, at the time of issuance, the securities being offered and sold must not be of the same class as securities listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted on a U.S. automated inter-dealer quotation system.
OWS's shares of common stock are listed on the Nasdaq Global Select Market (ticker: OWS). However, the Notes are a separate and distinct class of securities — specifically, convertible debt instruments with a unique CUSIP (683742AA5) and ISIN (US683742AA53) — that are not listed on any national securities exchange or quoted on any automated inter-dealer quotation system. The Notes possess fundamentally different economic terms and legal characteristics from OWS common stock, including a stated maturity date, a fixed coupon rate, a conversion feature, redemption and put provisions, and a ranking as senior unsecured obligations. Accordingly, the Notes are not "of the same class" as the listed OWS common stock for purposes of Rule 144A(d)(3).
Conclusion: The Notes satisfy the "eligible securities" requirement of Rule 144A(d)(3).
We note that shares of OWS common stock issuable upon conversion of the Notes may themselves be listed on the Nasdaq Global Select Market (OWS anticipates filing a supplemental listing application with Nasdaq); however, this does not affect the Rule 144A analysis, as Rule 144A applies to the resale of the Notes themselves (the restricted securities), not to the underlying common stock that may be delivered upon conversion.
2. Qualified Institutional Buyers (Rule 144A(a)(1)). Rule 144A(a)(1) defines QIBs to include several categories of institutional investors, including:
(a) Any entity (other than a bank, savings and loan association, or registered broker-dealer) that, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity (the "$100 million threshold");
(b) Any registered broker-dealer that, in the aggregate, owns and invests on a discretionary basis at least $10 million in securities of issuers that are not affiliated with the broker-dealer;
(c) Any bank (as defined in Section 3(a)(2) of the Securities Act) or savings and loan association (as defined in Section 3(a)(5)(A) of the Securities Act) that has an audited net worth of at least $25 million and that, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the institution; and
(d) Any entity, all of the equity owners of which are QIBs.
Each of the Initial Purchasers is an SEC-registered broker-dealer. We understand that each of the Initial Purchasers owns and invests on a discretionary basis at least $10 million in securities of unaffiliated issuers, and therefore each qualifies as a QIB under the broker-dealer threshold set forth in Rule 144A(a)(1)(ii).
The Offering Memorandum will be distributed only to persons that the Initial Purchasers reasonably believe to be QIBs. The Purchase Agreement will require each Initial Purchaser to represent and warrant that it will offer and sell the Notes only to persons it reasonably believes to be QIBs purchasing for their own account or for the account of a QIB.
3. Seller's Reasonable Belief (Rule 144A(d)(1)). Rule 144A(d)(1) requires that the seller of the securities take reasonable steps to ensure that the purchaser is aware that the seller may rely on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. In addition, the seller must reasonably believe that the buyer is a QIB and is purchasing for its own account or for the account of a QIB.
To satisfy this condition, the offering materials and the Purchase Agreement will include customary QIB certification and representation letters. Specifically:
(a) The cover page of the Offering Memorandum will include a prominent notice that the Notes are being offered and sold only to QIBs in reliance on Rule 144A under the Securities Act;
(b) Each purchaser of Notes will be required to certify that it is a QIB and that it is purchasing the Notes for its own account or for the account of a QIB;
(c) The Offering Memorandum will contain a detailed notice to investors section describing the transfer restrictions applicable to the Notes and the requirement that resales be made only to QIBs in compliance with Rule 144A; and
(d) The Purchase Agreement will contain representations and warranties from each Initial Purchaser regarding its QIB status and its obligation to sell only to QIBs.
These procedures are consistent with established market practice and provide a sufficient basis for each seller to form a reasonable belief that each purchaser is a QIB.
4. Information Requirement (Rule 144A(d)(4)). Rule 144A(d)(4) imposes an information requirement designed to ensure that holders and prospective purchasers of Rule 144A securities have access to reasonably current information about the issuer. The precise nature of the information required depends on the issuer's reporting status:
(i) If the issuer is a reporting company under Sections 13 or 15(d) of the Exchange Act, the information requirement is deemed satisfied automatically, provided the issuer is current in its Exchange Act filings. Rule 144A(d)(4)(i).
(ii) If the issuer is not a reporting company, it must furnish, upon request of a holder or prospective purchaser, specified information including the nature of the issuer's business, its financial statements, and certain other data. Rule 144A(d)(4)(ii).
OWS is a reporting company under Section 13 of the Exchange Act (SEC CIK: 0001823467) and is current in all periodic filings required thereunder. Accordingly, the information requirement of Rule 144A(d)(4)(i) is deemed satisfied automatically. OWS's public filings — including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K — provide a comprehensive and continuing flow of financial and business information to the market.
We further note that OWS's independent registered public accounting firm, Aldgate & Finch LLP (engagement partner: Robert Nishimura), is registered with the Public Company Accounting Oversight Board ("PCAOB"), ensuring compliance with applicable auditing standards and enhancing the reliability of OWS's audited financial disclosures that are incorporated by reference into or included in the Offering Memorandum.
5. No General Solicitation (Rule 144A(d)(1) and Section 4(a)(2) Coordination). The interaction between Rule 144A and the prohibition on general solicitation merits careful analysis. Rule 144A itself does not contain an express prohibition on general solicitation. Indeed, following the enactment of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") and the SEC's implementing amendments to Rule 144A (effective September 23, 2013), offers of securities to persons other than QIBs are not precluded under Rule 144A, provided that the actual sales are made only to persons that the seller and any person acting on behalf of the seller reasonably believe to be QIBs. This means that, as a technical matter, Rule 144A resales may be preceded by general solicitation under certain circumstances.
However, the underlying Section 4(a)(2) exemption for the issuer's sale of Notes to the Initial Purchasers does require the absence of general solicitation and general advertising. If general solicitation were employed in the marketing of the Notes, it could jeopardize the issuer's Section 4(a)(2) exemption, even if Rule 144A would otherwise be available for resales. Because the two-step structure of the offering depends upon the availability of Section 4(a)(2) for the initial sale, the offering must be conducted without general solicitation to preserve the exemption at the issuer level.
Accordingly, the offering will be conducted entirely without general solicitation. Marketing activities will be limited to the confidential distribution of the Preliminary Offering Memorandum (to be finalized on May 18, 2023) to persons reasonably believed to be QIBs, and confidential investor calls and presentations will be arranged by the Initial Purchasers exclusively with pre-qualified, wall-crossed QIB investors. OWS board members and management, including CEO Marcus Harding and CFO Priya Nandakumar, will participate in investor calls only with pre-qualified QIBs and will not make any public statements or presentations regarding the offering.
This point is discussed in greater detail in Section IX below.
C. Transfer Restrictions and Legends
Securities sold in reliance on Rule 144A are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act. As restricted securities, the Notes and any shares of common stock issuable upon conversion of the Notes will be subject to transfer restrictions under the Securities Act, and resales will be permitted only pursuant to an available exemption from registration (such as Rule 144A, Rule 144, or any other applicable exemption) or pursuant to an effective registration statement.
Restrictive Legends. The Notes and any certificates representing shares of common stock delivered upon conversion will bear customary restrictive legends substantially to the following effect:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT."
Indenture Transfer Restrictions. The Indenture will contain provisions restricting transfers of the Notes to persons who are QIBs (or to the Company) and requiring certification of QIB status in connection with any transfer. These provisions will be enforceable through the terms of the Indenture and the global form of the Notes.
DTC Book-Entry Transfer Procedures. The Notes will be issued in global form and deposited with Broadmere Trust Company, N.A., as custodian for DTC (DTC Participant No. 2174). Beneficial interests in the Notes will be transferable only through DTC's book-entry transfer system to accounts of DTC participants that have certified their QIB status or the QIB status of the beneficial owner on whose behalf the transfer is being made. This procedural mechanism provides an effective means of ensuring ongoing compliance with Rule 144A transfer restrictions.
D. Conclusion on Rule 144A
Based on the foregoing analysis, and assuming compliance with the conditions and procedures described above and set forth in the Purchase Agreement and the Offering Memorandum, the resales of the Notes by the Initial Purchasers to QIBs, and subsequent resales by holders of the Notes to QIBs, will be exempt from the registration requirements of Section 5 of the Securities Act under Rule 144A. The Notes satisfy the eligible securities requirement, the offering will be made exclusively to QIBs, appropriate seller reasonable belief procedures will be implemented, the information requirement is automatically satisfied by virtue of OWS's status as an Exchange Act reporting company, and no general solicitation will be employed that could jeopardize the underlying Section 4(a)(2) exemption.
VI. Conversion Shares — Section 3(a)(9) Exemption
Section 3(a)(9) of the Securities Act provides an exemption from the registration requirements of Section 5 for "any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange."
The conversion of the Notes into shares of OWS common stock constitutes an exchange of one security (the Notes) for another security (shares of common stock) by the issuer (OWS) with its existing security holders (the holders of the Notes). No commission or other remuneration will be paid or given, directly or indirectly, for soliciting the conversion. The conversion will be effected pursuant to the terms of the Indenture, and the election to convert will be at the initiative of the holder, not at the solicitation of any intermediary or agent.
We note that OWS intends to include a net share settlement election in the Indenture, under which OWS may elect to satisfy its conversion obligations through a combination of cash (for the principal amount of the converted Notes) and shares of common stock (for the conversion value in excess of the principal amount). The availability of net share settlement does not affect the analysis under Section 3(a)(9), as the delivery of shares upon conversion — whether in a full physical settlement or a net share settlement — continues to represent an exchange of the Notes for common stock by the issuer with its existing security holders without the payment of any commission or remuneration.
Freely Tradable Status of Conversion Shares. Shares of common stock delivered upon conversion of the Notes will be freely tradable (i.e., not "restricted securities" within the meaning of Rule 144(a)(3)) to the extent that the converting holder:
(a) is not, and has not been within the preceding three months, an "affiliate" of OWS (as defined in Rule 144(a)(1)); and
(b) has held the Notes for at least the applicable holding period under Rule 144 (currently six months for reporting companies).
If the converting holder is an affiliate of OWS or has not satisfied the applicable holding period, the conversion shares will be subject to the volume, manner of sale, and other limitations of Rule 144 upon resale.
Nasdaq Supplemental Listing Application. OWS intends to file a supplemental listing application with the Nasdaq Global Select Market for the shares of common stock issuable upon conversion of the Notes. Based on the maximum aggregate principal amount of $287,500,000 (assuming full exercise of the over-allotment option) and the initial conversion rate of 10.5820 shares per $1,000 principal amount, the maximum number of shares issuable upon conversion would be approximately 3,042,325 shares. The supplemental listing application is currently planned to be filed on or about May 25, 2023. Listing of the conversion shares on Nasdaq will facilitate orderly secondary market trading in the common stock received upon conversion.
VII. Regulation S — No Offshore Tranche
We note for the record that no Regulation S tranche is contemplated for this offering. All Notes will be offered and sold solely within the United States (or to U.S. persons) to QIBs in reliance on Rule 144A. No separate offshore tranche under Regulation S (Rules 901 through 905 under the Securities Act) will be established, and no Regulation S Global Note will be issued.
Notwithstanding the absence of a Regulation S tranche, the Offering Memorandum will contain appropriate selling restriction legends for jurisdictions outside the United States. These legends are included as a precautionary measure to mitigate the risk of non-compliance with foreign securities laws in the event that any Notes are subsequently resold to investors located outside the United States. The selling restrictions will address, at a minimum, the applicable requirements in the United Kingdom, the European Economic Area (under the EU Prospectus Regulation), Canada, Hong Kong, Japan, and Singapore, in each case in accordance with customary market practice for Rule 144A offerings.
VIII. Integration Analysis
A. Integration Doctrine Overview
Under the Securities Act integration doctrine, ostensibly separate securities offerings may, under certain circumstances, be "integrated" and treated as a single offering. Integration of two or more offerings may have adverse consequences for the availability of exemptions from registration. For example, if a Rule 144A offering were integrated with a prior or concurrent registered public offering, the combined offering might not satisfy the conditions of the private placement exemption under Section 4(a)(2), thereby potentially requiring registration of the entire combined offering.
The SEC has codified the integration doctrine in Rule 152 under the Securities Act (as amended effective March 15, 2021). Rule 152 establishes a general principle of integration, together with several safe harbors that provide certainty as to when separate offerings will not be integrated. The relevant provisions are discussed below.
Under Rule 152(a), the general principle is that, for any offering made in reliance on an exemption from registration, the issuer must have a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering, that the issuer either (i) does not have any other offering that might be integrated with the subject offering, or (ii) satisfies the conditions of one of the safe harbors set forth in Rule 152(b).
Rule 152(b) sets forth four non-exclusive safe harbors from integration:
(1) Any offering made more than 30 calendar days before the commencement of, or more than 30 calendar days after the termination or completion of, any other offering will not be integrated, provided that, for an exempt offering for which general solicitation is not permitted, the purchasers in the exempt offering were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the exempt offering (Rule 152(b)(1));
(2) Offers and sales made in compliance with Rule 701 or pursuant to employee benefit plans will not be integrated with other offerings (Rule 152(b)(2));
(3) Offers and sales made in compliance with Regulation S will not be integrated with domestic offerings (Rule 152(b)(3)); and
(4) Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated with another offering for which general solicitation is permitted (Rule 152(b)(4)).
Additionally, Rule 152(a) provides that a Section 4(a)(2) offering to initial purchasers and the subsequent Rule 144A resales by the initial purchasers are treated as the same transaction for purposes of integration analysis and are not separately analyzed.
B. Application to OWS
We have considered whether the proposed convertible notes offering could be integrated with any other OWS securities offering — whether past, concurrent, or contemplated — such that the Section 4(a)(2) and Rule 144A exemption framework would be unavailable.
No Recent Registered Offerings. We have confirmed with David Shih, General Counsel of OWS, that the Company has not conducted a registered public offering of debt or equity securities within the six months preceding the anticipated date of the offering. OWS's most recent registered public offering was an underwritten secondary offering of common stock completed in October 2021, which occurred more than eighteen months prior to the proposed convertible notes offering.
No Contemplated Registered Offerings. OWS does not currently contemplate any registered public offering of debt or equity securities in the near term. There are no pending shelf registration statements, and OWS has not initiated any discussions with underwriters or financial advisors regarding a potential follow-on equity offering or any other registered securities offering.
Capped Call Transactions. The Capped Call Transactions with Ridgepoint and Northvane Financial Products LP are separate privately negotiated derivative contracts. As discussed in greater detail in Section XI below, these transactions do not involve an "offer" or "sale" of securities under Section 2(a)(1) of the Securities Act. The Capped Call Transactions are documented as confirmations under the 2002 ISDA Master Agreement framework and are settled in cash or, in certain circumstances, shares of common stock. Because the Capped Call Transactions do not constitute a securities offering, they are not subject to integration analysis and cannot be integrated with the convertible notes offering.
Revolving Credit Facility. OWS maintains an existing revolving credit facility in the aggregate committed amount of $300,000,000 with Crestline National Bank, N.A. as administrative agent. Drawings under the revolving credit facility are bank loans that do not constitute "securities" for purposes of the Securities Act (under Reves v. Rowan Whitfield CPAs LLP, 494 U.S. 56 (1990), and the related "family resemblance" test, bank participation loans typically are not securities), and accordingly the revolving credit facility is not a securities offering subject to integration analysis.
Rule 152 Safe Harbors. Even assuming, arguendo, that any other OWS activity could be characterized as a separate offering, the proposed convertible notes offering would satisfy the safe harbors of Rule 152(b):
(i) Temporal Safe Harbor (Rule 152(b)(1)): The convertible notes offering will occur more than 30 calendar days before and more than 30 calendar days after any other offering by OWS. As noted, OWS's last registered offering was completed in October 2021, and no near-term registered offering is contemplated.
(ii) Rule 144A/QIB Safe Harbor: Rule 152(b)(1) further provides that an offering to QIBs under Rule 144A is generally exempt from integration with registered offerings, provided the purchasers in the exempt offering were not solicited through general solicitation or established a substantive pre-existing relationship with the issuer. The proposed offering satisfies this condition, as the Notes will be offered only to QIBs through confidential distribution channels, without general solicitation.
C. Conclusion on Integration
Based on the foregoing analysis, no integration risk is present with respect to the proposed convertible notes offering. The offering will not be integrated with any past, concurrent, or contemplated securities offering by OWS. The temporal separation from prior offerings, the absence of any contemplated registered offering, the non-securities nature of the Capped Call Transactions and the revolving credit facility, and the availability of Rule 152 safe harbors all support this conclusion.
IX. General Solicitation — Detailed Analysis
The preservation of the Section 4(a)(2) exemption for the initial sale of Notes by OWS to the Initial Purchasers requires that no general solicitation or general advertising be employed in connection with the offering. This section provides a detailed analysis of the general solicitation prohibition and its application to the proposed offering.
A. Pre-Offering Period
OWS and the Initial Purchasers must not engage in any form of general solicitation or general advertising prior to or during the offering period. Rule 502(c) of Regulation D, which is applicable by analogy to Section 4(a)(2) offerings conducted outside the Regulation D safe harbor, prohibits any "advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television, radio, or the Internet" and any "seminar or meeting whose attendees have been invited by any general solicitation or general advertising."
The SEC and courts have construed the general solicitation prohibition broadly. Any communication — whether written, oral, or electronic — directed to the general public or to persons with whom neither the issuer nor the initial purchasers have a pre-existing substantive relationship may be deemed general solicitation if it is made in connection with the offering. This includes, without limitation, mass mailings, internet postings, social media announcements, press releases (other than those permitted under Rule 135c), and presentations at public conferences.
B. Permissible Marketing Activities
The following marketing activities are permissible and consistent with the Section 4(a)(2) exemption:
Distribution of Preliminary and Final Offering Memoranda. The Preliminary Offering Memorandum (currently in draft form, circulated on April 14, 2023, and planned to be finalized on May 18, 2023) and the Final Offering Memorandum will be distributed solely to persons whom the Initial Purchasers reasonably believe to be QIBs. Distribution will be effectuated through confidential channels, including direct electronic delivery through secure platforms and physical delivery by courier, and will not involve any public posting or broadcast distribution.
Confidential Investor Calls and Presentations. The Initial Purchasers will arrange confidential investor calls and presentations with "wall-crossed" QIB investors — that is, institutional investors who have been pre-qualified as QIBs and who have agreed to receive material non-public information regarding the offering in advance of public announcement. These calls and presentations will be conducted on a confidential, invitation-only basis and will not be open to the general public.
Testing the Waters. Under the JOBS Act, an "emerging growth company" (as defined in Section 2(a)(19) of the Securities Act) may engage in oral or written communications with QIBs and institutional accredited investors to "test the waters" and gauge interest prior to filing a registration statement. Although OWS may or may not qualify as an emerging growth company (this determination is not material here, as no registration statement will be filed), the JOBS Act's liberalization of pre-offering communications is relevant only to the extent it reflects the regulatory trend toward permitting targeted institutional communications. Regardless of OWS's emerging growth company status, the confidential marketing activities described above are permissible under Section 4(a)(2) and do not constitute general solicitation.
Press Releases. OWS must exercise caution regarding any public announcements in connection with the offering. A brief factual press release upon pricing or closing of the offering is permissible under Rule 135c under the Securities Act, which provides a safe harbor for notices of unregistered offerings. Rule 135c requires that the notice (i) state that the securities have not been registered under the Securities Act and may not be offered or sold absent registration or an applicable exemption, (ii) not be used for the purpose of conditioning the market for the securities, and (iii) include only limited factual information (such as the name of the issuer, the title and aggregate amount of the securities, and a brief description of the transaction). We will prepare or review any proposed press release to ensure compliance with Rule 135c.
C. Gun-Jumping and Publicity Risks
As a reporting company under the Exchange Act, OWS routinely publishes information about its business, financial condition, and results of operations through periodic reports, earnings releases, conference call transcripts, and investor presentations. OWS may continue to publish information in the ordinary course of its business during the offering period without violating the general solicitation prohibition, provided that such communications are not made for the purpose of, or could not reasonably be viewed as, "conditioning the market" for the Notes.
We recommend the following precautionary measures to mitigate gun-jumping and publicity risks:
(a) Any press release, investor presentation, or other public communication by OWS during the offering period that is not in the ordinary course of business should be reviewed by Calderwood & Harkness LLP prior to publication or dissemination.
(b) Forward-looking statements by OWS management in scheduled earnings calls, industry conferences, or other public forums should not reference the convertible notes offering, the terms of the Notes, or the Capped Call Transactions. Management should be briefed by Calderwood & Harkness LLP on these limitations prior to any such public appearances.
(c) OWS employees, officers, and directors should be instructed not to discuss the offering on social media or in any other public forum.
D. Conclusion on General Solicitation
Provided the offering is marketed exclusively to QIBs through confidential distribution channels, and provided OWS and the Initial Purchasers refrain from any form of general solicitation or general advertising as described herein, the Section 4(a)(2) exemption for the initial sale of Notes by OWS to the Initial Purchasers will not be jeopardized. The permissible marketing activities described above are consistent with established market practice and with the requirements of Section 4(a)(2) and Rule 502(c) of Regulation D (by analogy).
X. Information Requirements and Offering Memorandum Considerations
A. Scope and Content of Offering Memorandum
Although no registration statement is required to be filed under the Securities Act in connection with the proposed offering, market practice for Rule 144A convertible notes offerings by reporting issuers requires the preparation and distribution of a comprehensive offering memorandum. The offering memorandum serves a dual purpose: it provides QIB purchasers with the information necessary to make an informed investment decision, and it creates a disclosure record that supports the availability of the Section 4(a)(2) and Rule 144A exemptions and mitigates potential liability under the antifraud provisions of the federal securities laws (principally Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 12(a)(2) of the Securities Act to the extent applicable).
The Preliminary Offering Memorandum was circulated in initial draft form on April 14, 2023, and is targeted for finalization on May 18, 2023. The Final Offering Memorandum will be prepared following pricing of the Notes and will reflect the final economic terms (including the coupon rate, conversion rate, conversion price, and any adjustments to the over-allotment option).
The Offering Memorandum will contain information substantially similar to what would be included in a registration statement on Form S-1 or Form S-3 under the Securities Act, including the following sections:
• Summary of the offering and the Notes
• Risk factors (including risks relating to the Notes, the conversion feature, the Capped Call Transactions, and the absence of registration rights)
• Use of proceeds
• Capitalization
• Description of the Notes and the Indenture (including conversion mechanics, net share settlement, optional redemption, fundamental change provisions, and events of default)
• Description of the Capped Call Transactions
• Description of OWS capital stock
• Material U.S. federal income tax consequences for U.S. holders and non-U.S. holders
• Selling restrictions (domestic and international)
• Notice to investors regarding transfer restrictions and QIB eligibility
• Financial statements of OWS for the most recent fiscal year and interim period, audited and reviewed, respectively, by Aldgate & Finch LLP
A comfort letter will be requested from Aldgate & Finch LLP covering the financial data included in the Offering Memorandum, consistent with the standards set forth in Statement on Auditing Standards No. 72 (Letters for Underwriters and Certain Other Requesting Parties) and the guidance of the American Institute of Certified Public Accountants. Although a comfort letter is not technically required for an unregistered offering, it is standard market practice and provides additional assurance to the Initial Purchasers regarding the accuracy and reliability of the financial information in the Offering Memorandum.
B. Exchange Act Reporting Status
OWS's ongoing Exchange Act reporting obligations provide a continuous flow of financial and business information to the public market, which enhances the information environment for holders and prospective purchasers of the Notes. Specifically:
• Annual Reports on Form 10-K: OWS files annual reports containing audited financial statements, management's discussion and analysis of financial condition and results of operations, and other material business disclosures.
• Quarterly Reports on Form 10-Q: OWS files quarterly reports containing unaudited interim financial statements and management's discussion and analysis.
• Current Reports on Form 8-K: OWS files current reports to disclose material events, including the consummation of significant transactions.
As discussed in Section V.B.4 above, OWS's Exchange Act reporting status automatically satisfies the information requirement of Rule 144A(d)(4)(i). OWS will file a Current Report on Form 8-K to report the closing of the offering and the entry into the Indenture, in accordance with its reporting obligations.
C. Absence of Registration Rights
As noted in Section II.C above, OWS will not enter into a registration rights agreement with the Initial Purchasers or any holders of the Notes. Holders who wish to resell the Notes following the offering will need to do so pursuant to:
(a) Rule 144A (resales to QIBs);
(b) Rule 144, if the applicable holding period and other conditions are met (including the current public information, holding period, volume limitation, manner of sale, and notice filing requirements, as applicable); or
(c) another available exemption from the registration requirements of the Securities Act (such as Section 4(a)(1-1/2) or Regulation S for offshore resales).
The absence of registration rights is a material consideration for prospective purchasers, as it may limit the liquidity of the Notes relative to registered securities. This risk factor will be prominently disclosed in the Offering Memorandum, including the following disclosures:
(i) that no registration statement has been or will be filed under the Securities Act with respect to the Notes or the underlying common stock;