CALDERWOOD & HARKNESS LLP
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Jennifer Kwon, Responsible Partner, Capital Markets
FROM: Brendan Walsh, Lead Associate, Capital Markets Natasha Forbes, Working Associate, Capital Markets
DATE: April 25, 2022
RE: FINRA Rule 5110 Compliance Analysis — Proposed Initial Public Offering of Common Stock of Calloway-Briggs Renewables Inc.
MATTER NO.: C&H Matter No. 1015-00001
FINRA FILING NO.: 20221129-01
This memorandum is prepared for internal use by Calderwood & Harkness LLP and is protected by the attorney-client privilege and as attorney work product. It is intended solely for the use of the addressee and other authorized Calderwood & Harkness personnel. This memorandum should not be disclosed, distributed, or otherwise made available to any third party without the prior written consent of the responsible partner. Nothing herein constitutes legal advice to any party other than the firm's client in connection with the referenced matter.
I. Executive Summary and Purpose
The purpose of this memorandum is to analyze the proposed initial public offering of the common stock of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") for compliance with Financial Industry Regulatory Authority ("FINRA") Rule 5110, commonly known as the "Corporate Financing Rule," which governs the terms and arrangements of underwriting compensation and other aspects of public offerings in which FINRA member firms participate as underwriters. This memorandum addresses each material element of the proposed offering structure, identifies and quantifies all items of value constituting underwriting compensation, evaluates the lock-up and related provisions against applicable FINRA standards, and assesses whether any conflicts of interest under FINRA Rule 5121 are present.
The proposed offering contemplates the sale of approximately $600,000,000 in aggregate offering proceeds (inclusive of the full exercise of the overallotment option) of shares of common stock, par value $0.01 per share, of CBR, to be listed on the New York Stock Exchange under the ticker symbol "CBRI." The assumed midpoint initial public offering price used throughout this analysis is $22.00 per share. The offering includes both primary shares being sold by the Company and secondary shares being sold by the Company's largest pre-IPO stockholder, Pinnacle Vista Capital Partners III, LP.
The underwriting syndicate is led by Hargrove Keating & Co. as lead-left book-running manager, with Linden Pratt Securities LLC and Graymont Brothers Inc. serving as joint book-runners, and Barfield Stuart & Co. and Crane Whitley Capital LLC serving as co-managers. Underwriters' counsel in this transaction is the firm of Prescott, Danforth & Yee LLP, with Margaret Yee serving as lead partner on the engagement.
A corporate financing application was filed with FINRA's Corporate Financing Department under Filing No. 20221129-01 in connection with the proposed offering. As of the date of this memorandum, the filing is pending FINRA review, and a no-objection letter has not yet been obtained.
Overall Conclusion. Based on our thorough review of the proposed offering terms, the near-final draft of the underwriting agreement, the form of lock-up agreement, the Registration Rights Agreement, the FINRA corporate financing application and supporting schedules, and the representations provided by each of the five participating underwriters and by the selling stockholder, we conclude that the proposed offering terms and underwriting compensation arrangements are consistent with the requirements of FINRA Rule 5110, subject to the specific observations and recommendations detailed in Sections IV through X below. In particular, total underwriting compensation of approximately 5.56% of offering proceeds is well within the range that FINRA considers fair and reasonable, no unreasonable or prohibited terms have been identified in the underwriting documentation, and no conflicts of interest under FINRA Rule 5121 are triggered.
This memorandum should be read in conjunction with the FINRA filing supporting schedules (Schedules A through D to the corporate financing application) and the near-final draft of the underwriting agreement dated April 18, 2022 (the "Draft UA"), copies of which are maintained in the firm's document management system under Matter No. 1015-00001. Where this memorandum references specific provisions of the Draft UA, citations are to the April 18 draft unless otherwise noted.
II. Background on the Offering and Participants
A. The Issuer
Calloway-Briggs Renewables Inc. is a Delaware corporation headquartered at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746. The Company was founded in 2014 by Garrett Calloway and Elaine Briggs, who continue to serve as Chief Executive Officer and President, respectively. CBR is a developer, owner, and operator of utility-scale solar photovoltaic generation facilities, onshore wind generation facilities, and battery energy storage systems across the United States, with a growing presence in select international markets.
As of the end of its most recently completed fiscal year (December 31, 2021), CBR reported total revenue of $487.3 million and Adjusted EBITDA of $218.6 million, reflecting substantial growth from the prior fiscal year. The Company's total assets as of December 31, 2021, were $3.94 billion, supported by a diversified portfolio of operational and development-stage projects. CBR currently has approximately 3.8 gigawatts ("GW") of operating generation and storage capacity, 1.4 GW of capacity under active construction, and a development pipeline of approximately 6.2 GW.
The Company's Employer Identification Number is 83-4027615, and its SEC Central Index Key is 0001948372. CBR qualifies as an "emerging growth company" ("EGC") as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), as its fiscal year 2021 revenue of $487.3 million is below the $1.235 billion annual revenue threshold applicable for purposes of EGC status. As an EGC, the Company is entitled to certain accommodations in the registration and reporting process, including reduced financial statement and executive compensation disclosure requirements, and the ability to engage in confidential submissions of draft registration statements with the U.S. Securities and Exchange Commission (the "SEC").
B. Pre-IPO Ownership Structure
The Company's pre-IPO capitalization is dominated by its principal stockholder, Pinnacle Vista Capital Partners III, LP ("PVCP III" or "Pinnacle Vista"), a Delaware limited partnership that holds approximately 62% of the fully diluted pre-IPO common stock of CBR. The general partner of PVCP III is Pinnacle Vista Capital Management LLC, a Delaware limited liability company whose co-founders and managing partners are Hugh Pemberton and Diane Kovac. Pinnacle Vista maintains its principal office at 900 Park Avenue, 38th Floor, New York, New York 10021.
Pinnacle Vista's investment in CBR was made through its Series III Fund, a $4.8 billion fund (2016 vintage) focused on growth equity and buyout investments in the energy, infrastructure, and industrial technology sectors. Pinnacle Vista made its initial investment in CBR in 2017 in the aggregate amount of $385 million, acquiring a controlling equity position in the Company. A follow-on investment of $120 million was completed in 2019 to support the Company's expansion into battery storage and international project development. The total invested capital by Pinnacle Vista in CBR is therefore approximately $505 million.
The Company's founders and members of the management team collectively hold approximately 24% of the fully diluted pre-IPO common stock, with Garrett Calloway and Elaine Briggs being the largest individual holders within this group. Earlier-stage investors (including certain angel investors and strategic partners who participated in pre-Series A and Series A financing rounds) and current and former employees holding vested equity awards collectively account for the remaining approximately 14% of the fully diluted pre-IPO equity.
Prior to the IPO, the Company intends to complete a reclassification of its capital structure, converting all outstanding preferred stock into common stock on a one-for-one basis and effecting a forward stock split such that the total number of shares of common stock outstanding on a fully diluted basis immediately prior to the IPO (giving effect to the reclassification and split) will be 100,000,000 shares.
C. Offering Structure
The proposed offering is structured as a firm-commitment underwritten initial public offering, with the following key parameters based on the assumed midpoint IPO price of $22.00 per share:
Base Offering. The base offering contemplates the sale of approximately 23,713,636 shares of common stock at an aggregate offering amount of approximately $521,700,000. Of this total, approximately 16,895,455 shares (representing approximately $371,700,000 in aggregate offering proceeds) will be primary shares sold by the Company, with the net proceeds to be used by CBR for the purposes described in the Registration Statement. The remaining approximately 6,818,182 shares (representing approximately $150,000,000 in aggregate offering proceeds) will be secondary shares sold by Pinnacle Vista, with the net proceeds (after deduction of the underwriting discount) flowing directly to Pinnacle Vista.
Overallotment Option. The underwriting agreement grants to the underwriters a 30-day option to purchase up to an additional 3,559,091 shares of common stock (representing 15% of the base offering shares) at the public offering price, less the underwriting discount, solely to cover overallotments. The aggregate dollar value of the overallotment option at the assumed midpoint price is approximately $78,300,000. The overallotment shares will be primary shares issued and sold by the Company.
Total Offering (Full Exercise). Assuming full exercise of the overallotment option, the total number of shares to be sold in the offering would be 27,272,727, representing total aggregate offering proceeds of approximately $600,000,000. Post-IPO shares outstanding on a base offering basis would be 123,713,636 shares; assuming full exercise of the overallotment option, post-IPO shares outstanding would be 127,272,727 shares.
D. Participating Underwriters
The following table sets forth the five participating underwriters, their respective allocations, and the key personnel identified in connection with the offering:
All five participating underwriters are registered as broker-dealers with the SEC and are member firms of FINRA. Each is organized under the laws of the State of Delaware. Each underwriter has provided representations in connection with the FINRA corporate financing application confirming its FINRA membership status, CRD number, and other required information.
III. Overview of FINRA Rule 5110
A. Scope and Applicability
FINRA Rule 5110 (the "Corporate Financing Rule") applies to any public offering of securities in which a FINRA member firm participates as an underwriter. The rule was most recently amended effective September 18, 2020, with certain technical amendments and clarifications taking effect in 2021. The primary objectives of Rule 5110 are to ensure that the terms and conditions of underwriting compensation in public offerings are fair and reasonable and do not result in unfair or abusive arrangements that could disadvantage public investors.
Under Rule 5110, FINRA reviews all items of value received or to be received by participating FINRA member firms, their associated persons, and their affiliates in connection with a public offering. The term "items of value" is broadly construed to encompass not only the underwriting discount or gross spread, but also expense reimbursements, warrants or other securities, finder's fees, consulting fees, rights of first refusal, and any other form of compensation directly or indirectly related to the offering.
A corporate financing application must be filed with FINRA's Corporate Financing Department at least one business day prior to the anticipated effective date of the registration statement with the SEC. The filing includes detailed schedules quantifying all items of underwriting compensation, descriptions of all related-party transactions and affiliate relationships, copies of the underwriting agreement and other relevant documents, and representations from each participating underwriter. FINRA Filing No. 20221129-01 was submitted in connection with the proposed CBR offering in compliance with this requirement.
FINRA's Corporate Financing Department reviews the filing and, if satisfied that the offering terms comply with Rule 5110, issues a "no-objection" letter. This letter is a prerequisite to the SEC declaring the registration statement effective (as a practical matter, the SEC will not declare a registration statement effective for an offering involving FINRA member firms without confirmation that FINRA has completed its review or indicated that it has no objection to the proposed terms).
B. Key Provisions Relevant to This Offering
The following provisions of FINRA Rule 5110 are the most relevant to our analysis of the proposed CBR offering:
Rule 5110(b) — Maximum Underwriting Compensation. This subsection sets forth the framework for calculating total underwriting compensation and requires that all items of value be aggregated and assessed for fairness and reasonableness. While Rule 5110 does not impose a single fixed numerical cap on total compensation, FINRA has developed general guidelines that serve as benchmarks. Total compensation that exceeds approximately 8–10% of offering proceeds in offerings of this size is generally considered presumptively unfair. FINRA evaluates the totality of the circumstances, including the size, nature, and risk characteristics of the offering.
Rule 5110(c) — Unreasonable Terms and Arrangements. This subsection identifies specific terms and arrangements that FINRA considers unreasonable if included in an underwriting arrangement. These include, among others: overallotment options exceeding 15% of the offering amount; non-accountable expense allowances exceeding 3% of offering proceeds; rights of first refusal with a duration exceeding three years from the effective date; and certain tail-fee provisions and compensation arrangements that extend beyond the offering period.
Rule 5110(d) — Prohibited Terms and Arrangements. This subsection identifies terms and arrangements that are outright prohibited, regardless of reasonableness. Prohibited terms include, among others: the receipt by underwriters of demand registration rights or piggyback registration rights in connection with the offering; compensation that extends for an excessive duration; and certain other arrangements deemed inherently unfair to the investing public.
Rule 5110(e) — Lock-Up Restriction on Securities. This subsection restricts the sale, transfer, assignment, pledge, or hypothecation of securities of the issuer acquired by participating FINRA members in connection with the offering for a period of 180 days following the effective date of the registration statement. The restriction applies to securities received as compensation (such as warrants or other compensation securities) but does not apply to securities acquired by underwriters solely in their capacity as underwriters for resale to the public. This subsection also addresses the appropriateness of lock-up provisions imposed on insiders and the issuer.
Rule 5110(f) — Exemptions and Exceptions. This subsection provides certain exemptions and exceptions from the filing requirements and compensation limitations of the rule. Of particular relevance to the CBR offering is the exception under Rule 5110(f)(2)(C) for securities acquired by FINRA members or their affiliates as venture capital or private equity investments prior to the offering, which are not treated as items of underwriting compensation.
IV. Analysis of Underwriting Compensation (Rule 5110(b))
A. Components of Underwriting Compensation
A central requirement of FINRA Rule 5110(b) is the identification and quantification of every "item of value" received or to be received by participating FINRA member firms, their associated persons, and their affiliates in connection with the public offering. We have conducted a comprehensive review of the Draft UA, the FINRA filing supporting schedules, and the representations provided by each participating underwriter to identify all items of value. Our analysis of each identified component follows.
1. Gross Spread (Underwriting discount)
The underwriting discount (commonly referred to as the "gross spread") is the single largest component of underwriting compensation in the proposed offering. As set forth in Section 2 of the Draft UA, the gross spread is fixed at 5.50% of the public offering price per share.
The gross spread calculations, based on the assumed midpoint IPO price of $22.00 per share, are as follows:
• Base offering: $521,700,000 × 5.50% = $28,693,500
• Overallotment option (full exercise): $78,300,000 × 5.50% = $4,306,500
• Total (full exercise): $600,000,000 × 5.50% = $33,000,000
The gross spread is further allocated among the underwriters in accordance with the economics customarily applicable to underwriting syndicates. Section 2(b) of the Draft UA provides for the following internal allocation of the gross spread:
• Management fee: 20% of the total gross spread = $6,600,000 (full exercise)
• Underwriting fee: 20% of the total gross spread = $6,600,000 (full exercise)
• Selling concession: 60% of the total gross spread = $19,800,000 (full exercise)
The management fee is payable to the lead-left book-running manager (Hargrove Keating & Co.) and, to a lesser extent, the joint book-runners (Linden Pratt Securities LLC and Graymont Brothers Inc.) in recognition of their lead-management responsibilities. The underwriting fee compensates the underwriters for the underwriting risk assumed in the firm-commitment offering. The selling concession is allocated among all syndicate members based on the number of shares each underwriter places with investors.
Market Comparison. A gross spread of 5.50% is within the customary range for initial public offerings in the $500 million to $750 million size range. Based on our review of comparable IPOs completed in the twelve months preceding the date of this memorandum in the energy, utilities, and renewable energy sectors, gross spreads for offerings in this size range have typically ranged from 4.50% to 7.00%, with a median of approximately 5.75%. We note that the so-called "7% solution" (a 7.00% gross spread that was historically prevalent in U.S. IPOs) has become less common in larger offerings, and 5.00% to 6.00% is the more typical range for offerings exceeding $400 million. Accordingly, the proposed 5.50% gross spread is consistent with market practice. While Rule 5110 does not impose a fixed cap on the gross spread in isolation, the overall fairness-and-reasonableness analysis takes into account the size of the offering, the nature of the securities, the risk profile of the issuer, and comparable market transactions.
2. Expense Reimbursement
Section 5(e) of the Draft UA provides that the Company will reimburse the underwriters for certain out-of-pocket expenses incurred in connection with the offering, subject to an aggregate cap of $350,000 (the "Expense Reimbursement Cap"). The reimbursable expenses are limited to FINRA-related filing fees and expenses, road show expenses (including travel, lodging, and presentation materials), blue-sky filing fees, and other reasonable and documented out-of-pocket costs.
Under FINRA Rule 5110(b)(1)(B), reimbursement of out-of-pocket accountable expenses is treated as an item of underwriting compensation to the extent actually paid. The $350,000 Expense Reimbursement Cap is included in our total compensation calculation at its full amount, notwithstanding that the actual reimbursement may be lower. This conservative approach ensures that the total compensation figure reflects the maximum potential compensation payable.
We note that the Expense Reimbursement Cap is structured on an accountable basis — meaning that the underwriters are required to provide documentation and receipts for all expenses claimed, and any portion of the cap not supported by actual documented expenses will not be paid. Non-accountable expense allowances (which are payable without the requirement of documentation) would be treated more critically under Rule 5110(c) and are limited to 3% of offering proceeds in any event. No non-accountable expense allowance is included in the Draft UA, and the underwriters have confirmed that none will be sought.
We further note that under Rule 5110(b)(1)(B)(ii), reimbursement of expenses incurred in connection with FINRA filing fees is excludable from the total compensation calculation. However, for purposes of this analysis, we have conservatively included the full $350,000 cap without deducting any FINRA filing fee component, as the precise amount of FINRA filing fees reimbursable under the cap has not yet been determined. The inclusion of this amount does not affect our overall compliance conclusion.
No qualified independent underwriter ("QIU") is involved in this offering (as discussed in Section VII below), and accordingly no QIU-related fees or expenses are applicable.
3. Right of First Refusal
We have reviewed the Draft UA, the engagement letter between CBR and Hargrove Keating & Co. dated November 15, 2021, and the engagement letters with each of the other participating underwriters. None of these documents contains a right of first refusal ("ROFR") in favor of any underwriter or its affiliates for participation in future offerings by the Company or its affiliates.
Under FINRA Rule 5110(d)(6), a ROFR granted to an underwriter or its affiliates in connection with a public offering is a prohibited term if it extends beyond three years from the effective date of the offering. Even a ROFR with a duration of three years or less is treated as an item of underwriting compensation under Rule 5110(b) and would need to be valued and included in the total compensation calculation.
Because no ROFR is present in any of the offering documents, this provision is fully compliant with Rule 5110, and no additional compensation attribution is required.
4. Other Potential Items of Value
We have conducted a comprehensive review to identify any additional items of value that may constitute underwriting compensation under Rule 5110(b). Our review encompasses the following categories:
Warrants and Securities. No warrants, options, convertible securities, or other equity-linked instruments of CBR are being issued or granted to any underwriter, any associated person of any underwriter, or any affiliate of any underwriter in connection with the offering. This has been confirmed by each of the five participating underwriters in their respective FINRA filing representation letters.
Finder's Fees, Consulting Fees, and Advisory Fees. No finder's fees, consulting fees, advisory fees, or similar payments are being made by CBR, Pinnacle Vista, or any of their respective affiliates to any FINRA member firm or associated person of a FINRA member in connection with the offering. We have specifically inquired with CBR's Chief Financial Officer (Rajesh Bhatt) and Pinnacle Vista's outside counsel (Whitfield Archer & Doss LLP) to confirm the absence of any such arrangements.
Non-Accountable Expense Allowances. As discussed in Section IV.A.2 above, no non-accountable expense allowance is included in the Draft UA or in any related engagement letter.
Other Compensation. Each of Hargrove Keating & Co., Linden Pratt Securities LLC, Graymont Brothers Inc., Barfield Stuart & Co., and Crane Whitley Capital LLC has represented in its FINRA filing representation letter that it has not received and will not receive any compensation from CBR, Pinnacle Vista, or their respective affiliates in connection with the offering other than the gross spread and expense reimbursement described above. We have reviewed each such representation letter and have no basis to question the accuracy of these representations.
We also note that Hargrove Keating & Co. has served as financial advisor to CBR in connection with certain acquisition transactions in the past (specifically, the acquisition of the Mesquite Wind project in 2020), for which it received customary advisory fees. Those advisory fees were paid in connection with a separate, arm's-length engagement unrelated to the IPO, and they were paid more than eighteen months prior to the filing of the registration statement. Accordingly, such fees do not constitute items of value "in connection with" the offering and are not includable in the underwriting compensation calculation under Rule 5110(b). This conclusion is consistent with FINRA Regulatory Notice 15-17 and the interpretive guidance provided in the FINRA Corporate Financing Rule FAQs.
B. Total Compensation Calculation
Aggregating all identified items of value, the total underwriting compensation in the proposed offering is as follows:
• Gross spread (full exercise): $33,000,000
• Expense reimbursement (cap): $350,000
• Warrants / options / securities: $0
• Finder's / advisory / consulting fees: $0
• Non-accountable expense allowances: $0
• Right of first refusal: $0
• Other items of value: $0
• Total underwriting compensation: $33,350,000
Expressed as a percentage of total offering proceeds (assuming full exercise of the overallotment option): $33,350,000 ÷ $600,000,000 = approximately 5.56%.
FINRA's general guidelines, as reflected in its published interpretive materials and informal review standards, indicate that total underwriting compensation in excess of approximately 8% to 10% of offering proceeds for offerings in this size range would be presumptively unfair and would require heightened scrutiny and justification. The proposed total compensation of approximately 5.56% is well within these parameters and, in our judgment, clearly satisfies the "fair and reasonable" standard of Rule 5110(b).
We note that if the actual pricing of the offering results in a lower price per share (and therefore lower total offering proceeds), the percentage of total compensation would increase accordingly. However, even at the low end of the currently anticipated pricing range ($19.00 per share), the total compensation percentage would remain below 6.50%, which is still well within acceptable limits. Conversely, pricing at the high end of the range ($25.00 per share) would further reduce the compensation percentage. In all reasonably anticipated pricing scenarios, total compensation remains compliant.
V. Analysis of Lock-Up Provisions (Rule 5110(e))
A. Lock-Up on Underwriter Securities
FINRA Rule 5110(e)(1) restricts the sale, transfer, assignment, pledge, or hypothecation of securities of the issuer acquired by participating FINRA member firms, their associated persons, or their affiliates "in connection with a public offering" for a period of 180 days following the effective date of the registration statement. This restriction is commonly referred to as the "compensation securities lock-up" and is designed to prevent underwriters from profiting from the resale of below-market compensation securities during the period immediately following the offering, when retail investors are making their initial investment decisions.
In the proposed CBR offering, no securities of the Company are being issued, granted, or sold to any underwriter, associated person, or affiliate of any underwriter other than in the underwriters' capacity as underwriters — that is, for immediate resale to the public at the public offering price. As discussed in Section IV.A.4 above, no warrants, options, convertible securities, or other compensation securities are being granted to any underwriter or its affiliates.
Because no compensation securities exist, the lock-up restriction under Rule 5110(e)(1) is not separately triggered. The shares acquired by the underwriters under the underwriting agreement are acquired solely for the purpose of distribution to the public and are subject to the customary settlement and delivery mechanics of a firm-commitment underwriting, not to any lock-up restriction.
Conclusion: The lock-up provisions of Rule 5110(e)(1) are not implicated, as no compensation securities are being issued to any underwriter or its affiliates. This aspect of the offering is fully compliant.
B. Insider Lock-Up Agreements (Underwriting Agreement and Form of Lock-Up Agreement)
The Draft UA and the associated Form of Lock-Up Agreement (attached as Exhibit A to the Draft UA) provide for a 180-day lock-up period following the date of the final prospectus applicable to all directors, executive officers, Pinnacle Vista Capital Partners III, LP, and all holders of 1% or more of the pre-IPO common stock of CBR. Based on the lock-up signatory tracker maintained by the deal team, a total of approximately 18 persons and entities have been identified as required lock-up signatories.
As of the most recent update to the signatory tracker (dated June 17, 2022, the date on which the offering entered dormant status), 15 of the 18 required lock-up agreements had been duly executed and returned. Three lock-up agreements remain outstanding. We understand that the three outstanding signatories are minor holders who were in the process of executing their agreements when the offering was placed on hold. Upon reactivation of the offering, these three agreements should be obtained promptly, or the deal team should reassess whether each such signatory continues to meet the threshold requiring execution (for example, if any such holder has disposed of shares below the 1% threshold).
The Form of Lock-Up Agreement contains the following key provisions:
Lock-Up Period. The lock-up period commences on the date of the final prospectus and expires 180 days thereafter. During the lock-up period, each signatory agrees not to, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale of, or otherwise transfer or dispose of any shares of common stock of the Company, or any securities convertible into, or exercisable or exchangeable for, common stock, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock.
Carve-Outs. The lock-up restriction is subject to the following customary carve-outs:
(a) Transfers to affiliates (including, in the case of natural persons, transfers to family members, trusts, or other estate-planning vehicles), provided that the transferee agrees in writing to be bound by the terms of the lock-up agreement;
(b) Transfers for bona fide estate-planning purposes, including transfers to revocable trusts, family limited partnerships, or other estate-planning vehicles, subject to the same transferee agreement requirement;
(c) Establishment of a trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 (provided that no sales or other dispositions may be effected under any such plan during the lock-up period);
(d) Pledges of shares to a bona fide lender as collateral for a loan or other credit facility, provided that any foreclosure or disposition of pledged shares during the lock-up period shall be subject to the lock-up restrictions; and
(e) Transfers pursuant to a tender offer, merger, consolidation, or other similar transaction involving a Change of Control (as defined below) of the Company, provided that the lock-up agreement shall be reinstated and effective upon the completion of such transaction if such transaction does not result in a Change of Control.
Early Release. The lock-up may be released, in whole or in part, prior to the expiration of the 180-day period upon the written consent of Hargrove Keating & Co. (in its capacity as lead-left book-running manager) or upon the occurrence of a "Change of Control" of the Company (defined as the acquisition by any person or group of beneficial ownership of more than 50% of the total voting power of the Company's outstanding securities). The early-release provision is consistent with market practice and, to the extent exercised, would reduce, rather than extend, the lock-up period.
Issuer Lock-Up. The Draft UA also includes a 180-day issuer lock-up, pursuant to which CBR agrees not to, without the prior written consent of Hargrove Keating & Co., issue, sell, offer to sell, or otherwise dispose of any shares of common stock or securities convertible into common stock, or file any registration statement with the SEC with respect to any of the foregoing, during the 180-day period following the date of the final prospectus. The issuer lock-up is subject to customary exceptions, including issuances pursuant to the Company's employee equity incentive plans (the "2022 Equity Incentive Plan" and the "2022 Employee Stock Purchase Plan") and issuances in connection with business acquisitions, in each case subject to customary limitations.
Rule 5110(e)(2) Analysis. FINRA Rule 5110(e)(2) provides that lock-up restrictions imposed on insiders and the issuer that extend beyond 180 days may be deemed unreasonable under Rule 5110(c). Here, the lock-up period is precisely 180 days — the market-standard period and the threshold established by FINRA's guidance. FINRA has indicated, both in its published interpretive materials and informally through its Corporate Financing Department's review practices, that lock-up provisions of 180 days or less are not considered unreasonable under Rule 5110(c). The carve-outs included in the Form of Lock-Up Agreement are customary and do not, in our judgment, undermine the effectiveness of the lock-up in a manner that would raise concerns under the rule.
Conclusion: The lock-up provisions set forth in the Draft UA and the Form of Lock-Up Agreement are compliant with FINRA Rule 5110(e) and are consistent with market practice. The 180-day duration does not exceed the threshold that would trigger heightened FINRA scrutiny, and the carve-outs are narrowly tailored and consistent with those routinely approved in comparable offerings.
VI. Venture Capital / Private Equity Exception Analysis (Rule 5110(f))
A. Applicability of the Exception
FINRA Rule 5110(f)(2)(C) provides an exception from the filing requirements and compensation limitations otherwise applicable under the rule for offerings of securities of issuers where a participating FINRA member firm, or an affiliate of a participating FINRA member firm, acquired securities of the issuer as a venture capital or private equity investment prior to the commencement of the offering process. This exception recognizes that bona fide venture capital and private equity investments made in the ordinary course of business, at arm's length, and without any connection to the public offering, should not be treated as items of underwriting compensation merely because the investor (or its affiliate) also participates in the underwriting syndicate.
Pinnacle Vista Capital Partners III, LP is the Company's largest pre-IPO stockholder, holding approximately 62% of the fully diluted pre-IPO common stock. Pinnacle Vista is selling approximately $150,000,000 of secondary shares in the base offering. The relevance of the venture capital/private equity exception to this offering turns on whether Pinnacle Vista (or any of its affiliates) is a FINRA member firm, and, if so, whether its pre-IPO equity investment would need to be characterized as underwriting compensation.
Pinnacle Vista's investment in CBR is indisputably a bona fide private equity investment. The Series III Fund ($4.8 billion, 2016 vintage) made its initial investment of $385 million in CBR in 2017, approximately five years before the IPO process commenced in March 2022. The follow-on investment of $120 million was made in 2019, approximately three years before the IPO process commenced. Both investments were made in the ordinary course of Pinnacle Vista's private equity business, were negotiated at arm's length, and were approved by the fund's investment committee in accordance with its customary investment process. There is no indication that either investment was made in anticipation of, or conditioned upon, a future public offering.
B. FINRA-Member Affiliation Analysis
The critical threshold question for the venture capital/private equity exception analysis is whether Pinnacle Vista Capital Partners III, LP, its general partner Pinnacle Vista Capital Management LLC, or any of their respective affiliates is a FINRA member firm, or whether Hugh Pemberton, Diane Kovac, or any other natural person associated with Pinnacle Vista is an "associated person" of a FINRA member firm (as that term is defined in Section 3(a)(18) of the Securities Exchange Act of 1934 and FINRA's By-Laws, Article I).
We have reviewed the following materials in connection with this analysis:
(a) The selling stockholder questionnaire completed by Pinnacle Vista Capital Partners III, LP (through Pinnacle Vista Capital Management LLC, its general partner), dated March 8, 2022;
(b) The representation letter provided by Pinnacle Vista through its outside counsel, Whitfield Archer & Doss LLP (partner: Sarah Whitfield), dated March 22, 2022, addressed to Calderwood & Harkness LLP and Prescott, Danforth & Yee LLP;
(c) FINRA BrokerCheck searches conducted for Hugh Pemberton and Diane Kovac (yielding no results as of April 12, 2022); and
(d) Public filings (including SEC Form D filings and Schedule 13D/A filings) relating to Pinnacle Vista's investment activities.
Based on our review of these materials, we have confirmed the following:
(i) Neither Pinnacle Vista Capital Partners III, LP nor Pinnacle Vista Capital Management LLC is registered as a broker-dealer with the SEC or is a member firm of FINRA.
(ii) Neither Hugh Pemberton nor Diane Kovac is an associated person of a FINRA member firm. Neither has held any securities industry registrations (Series 7, 63, or otherwise) at any point in time.
(iii) No affiliate of Pinnacle Vista (including any other fund managed by Pinnacle Vista Capital Management LLC, any portfolio company of any such fund, or any officer, director, or employee of Pinnacle Vista Capital Management LLC) is a FINRA member firm or an associated person of a FINRA member firm.
(iv) No participating underwriter has disclosed any affiliation with Pinnacle Vista or its affiliates.
Analysis. Because Pinnacle Vista is not a FINRA member firm and has no FINRA-member affiliates, its pre-IPO equity holdings in CBR do not constitute "underwriting compensation" under Rule 5110(b) in the first instance. The venture capital/private equity exception under Rule 5110(f)(2)(C) would be relevant only if Pinnacle Vista were a FINRA member or an affiliate of a FINRA member — in which case, the exception would operate to exclude the pre-IPO equity from the compensation calculation, provided the investment met the exception's requirements. Here, the exception is available as an additional safeguard, but it is not needed: Pinnacle Vista's status as a non-FINRA-member private equity fund means that its holdings are simply outside the scope of the compensation analysis altogether.
Pinnacle Vista's secondary shares are being sold at the public offering price, with the same 5.50% gross spread applicable to both primary and secondary shares. The net proceeds from the sale of the secondary shares (after deduction of the underwriting discount) will flow to Pinnacle Vista, not to any FINRA member firm. Pinnacle Vista's receipt of these proceeds does not constitute underwriting compensation and does not implicate any provision of Rule 5110.
Conclusion: The venture capital/private equity exception under Rule 5110(f)(2)(C) is available to the extent needed, but is not strictly necessary because Pinnacle Vista is not a FINRA member or an affiliate of a FINRA member. Pinnacle Vista's pre-existing equity holdings in CBR do not constitute underwriting compensation and do not implicate Rule 5110 compensation limits.
C. Pre-IPO Shares Held by FINRA Members
A separate but related inquiry is whether any participating underwriter, or any affiliate of a participating underwriter, holds pre-existing equity in CBR. If a FINRA member or its affiliate holds equity in the issuer, such equity could constitute an item of underwriting compensation under Rule 5110(b) unless it was acquired in a bona fide investment transaction meeting the requirements of the venture capital/private equity exception.
We have reviewed the representations set forth in Section 8(o) of the Draft UA and in the FINRA filing supporting schedules (Schedule B — Related Parties and Affiliations). Each of the five participating underwriters — Hargrove Keating & Co., Linden Pratt Securities LLC, Graymont Brothers Inc., Barfield Stuart & Co., and Crane Whitley Capital LLC — has represented that neither it nor any of its affiliates holds any equity interest in CBR as of the date of the filing. These representations are consistent with the information provided in each underwriter's FINRA filing representation letter.
We have also conducted independent due diligence to verify these representations, including a review of CBR's transfer agent records (provided by Adriatic Health IT) and the Company's stockholder list, and have identified no equity holdings by any FINRA member firm or its affiliates.
Conclusion: No participating underwriter or affiliate of any participating underwriter holds any pre-existing equity interest in CBR. No FINRA-member pre-existing equity positions need to be disclosed or accounted for under Rule 5110.
VII. Related-Party Provisions and Conflict-of-Interest Analysis
A. FINRA Rule 5121 — Conflicts of Interest
FINRA Rule 5121 (the "Conflicts of Interest Rule") applies when a FINRA member firm participating in a public offering has a "conflict of interest" as defined in the rule. A conflict of interest exists where, among other circumstances: (a) the FINRA member or its affiliates will receive 5% or more of the net offering proceeds (other than underwriting compensation permitted under Rule 5110); (b) the offering is of securities of the FINRA member; (c) the FINRA member controls, is controlled by, or is under common control with, the issuer; or (d) certain other specified relationships exist.
If Rule 5121 is triggered, additional safeguards are required, including, in certain cases, the appointment of a "qualified independent underwriter" that will assume the responsibility of conducting due diligence and setting the public offering price.
We have analyzed the planned use of proceeds from the offering to determine whether any FINRA member or its affiliates will receive 5% or more of the net offering proceeds:
Use of Proceeds. Based on the Registration Statement and the Company's representations, the estimated use of net proceeds from the primary offering (assuming the midpoint IPO price and after deduction of underwriting discounts and estimated offering expenses) is as follows:
• Approximately $200,000,000 to repay a portion of the outstanding principal balance under the Company's Term Loan B facility with Veltrano National Bank, N.A. (as administrative agent);
• Approximately $100,000,000 to fund the construction and development of the Cimarron Solar project (a 450 MW solar photovoltaic facility in Cimarron County, Oklahoma);
• Approximately $71,700,000 for general corporate purposes, including working capital, potential acquisitions, and general capital expenditures.
We have confirmed that Veltrano National Bank, N.A. — the administrative agent under CBR's corporate credit facility (consisting of a $300 million revolving credit facility and a $500 million Term Loan B) — is not an affiliate of any participating underwriter. Veltrano is a national banking association headquartered in Charlotte, North Carolina, and is not a FINRA member firm. None of the participating underwriters has disclosed any affiliate relationship with Veltrano.
We have also confirmed the following with respect to other financial institutions that are parties to the Company's financing arrangements:
• Prairie Commercial Bank, N.A., which serves as lender under the project finance facilities for the Mesquite Wind project ($165 million term loan) and the Cimarron Solar project ($143 million construction-to-term loan), is not an affiliate of any participating underwriter.
• Veltara Basin Financial LLC, which serves as tax-equity investor in connection with the Solaris West solar portfolio ($280 million tax equity commitment), is not an affiliate of any participating underwriter.
Based on the foregoing, no FINRA member firm or affiliate thereof will receive 5% or more of the net offering proceeds (other than as underwriting compensation). No other conflict-of-interest trigger under Rule 5121 is present. None of the participating underwriters controls, is controlled by, or is under common control with, CBR.
Conclusion: FINRA Rule 5121 is not triggered by the proposed offering. No conflict of interest, as defined in the rule, exists. No qualified independent underwriter is required, and no additional disclosures or safeguards under Rule 5121 are necessary.
B. Related-Party Transactions Disclosure
We have reviewed the related-party transactions described in the Registration Statement and the Company's disclosure materials to assess whether any such transactions implicate FINRA Rule 5110. The principal related-party transactions are as follows:
Pinnacle Vista Management-Services Agreement. CBR is party to a management-services agreement with Pinnacle Vista Capital Management LLC, pursuant to which Pinnacle Vista provides certain strategic advisory, financial oversight, and portfolio management services to the Company in exchange for an annual fee of $2.4 million. The management-services agreement will terminate upon the closing of the IPO, at which time no further payments will be due. This arrangement is a related-party transaction between the Company and its controlling stockholder; it does not involve any FINRA member firm and does not constitute underwriting compensation. The termination of the agreement upon IPO closing eliminates any ongoing economic relationship between CBR and Pinnacle Vista that could be characterized as compensation to a party connected to the offering.
Founder Employment Agreements. Garrett Calloway and Elaine Briggs are each party to employment agreements with the Company providing for base salary, annual cash bonus, and equity incentive compensation. These are ordinary-course employment arrangements between the Company and its executive officers and do not involve any FINRA member firm.
Board Designation Rights. The Stockholders' Agreement among CBR, Pinnacle Vista, and certain other stockholders provides that, following the IPO, Pinnacle Vista will have the right to designate a specified number of directors to the Company's board of directors, with the number of designees scaling based on Pinnacle Vista's percentage ownership of outstanding common stock. These board designation rights are customary for sponsor-backed IPOs and do not involve any FINRA member firm.
Conclusion: None of the identified related-party transactions involves a FINRA member firm, constitutes underwriting compensation, or otherwise presents Rule 5110 compliance issues. The related-party transactions are properly disclosed in the Registration Statement and do not require any adjustment to the underwriting compensation calculation.
VIII. Review of Specific Unreasonable and Prohibited Terms (Rules 5110(c) and (d))
A. Unreasonable Terms (Rule 5110(c))
We have reviewed the Draft UA and all ancillary offering documents for the presence of terms and arrangements that FINRA considers "unreasonable" under Rule 5110(c). Our analysis of each relevant category follows.
Overallotment Option. The overallotment option (greenshoe) granted to the underwriters under Section 4 of the Draft UA provides for the purchase of up to 3,559,091 additional shares of common stock, representing 15% of the base offering shares. Rule 5110(c)(3) provides that an overallotment option exceeding 15% of the amount of securities offered in the public offering is deemed unreasonable. The proposed 15% overallotment option is at the precise boundary of the permitted amount and is fully compliant with the rule. The 30-day exercise period is standard and does not raise any concerns.
Expense Reimbursement. As discussed in Section IV.A.2, the expense reimbursement is capped at $350,000 on an accountable basis. Rule 5110(c) deems non-accountable expense allowances exceeding 3% of offering proceeds to be unreasonable. Because the reimbursement in this offering is on an accountable basis (documented, receipted expenses only), this provision is compliant. Moreover, even if the $350,000 were treated as a non-accountable allowance (which it is not), it would represent only 0.06% of total offering proceeds, well below the 3% threshold.
Right of First Refusal. No right of first refusal is included in the Draft UA or in any engagement letter. Rule 5110(c)(4) deems a ROFR with a duration exceeding three years to be unreasonable, and Rule 5110(d)(6) prohibits such a provision altogether. Because no ROFR exists, this provision is fully compliant.
Tail Fee / Tail Compensation. No tail-fee provision is included in the Draft UA or any engagement letter. A tail fee (a provision entitling an underwriter to compensation if the issuer completes a public offering within a specified period after the termination of the underwriter's engagement) can constitute an item of underwriting compensation under Rule 5110(b) and, depending on its terms, may be considered unreasonable under Rule 5110(c). The absence of any such provision eliminates this concern.
Stabilization Activities. Section 6 of the Draft UA contains standard provisions authorizing the underwriters to engage in stabilization transactions, short-covering transactions, and penalty bids in connection with the offering. These provisions are consistent with Regulation M under the Securities Exchange Act of 1934 and with FINRA's rules governing stabilization activities. The stabilization provisions do not create any additional items of underwriting compensation and are not unreasonable under Rule 5110(c).
B. Prohibited Terms (Rule 5110(d))
We have also reviewed the offering documents for the presence of any terms or arrangements that are outright prohibited under Rule 5110(d). Our analysis addresses each relevant category.
Demand Registration Rights in Favor of Underwriters. Rule 5110(d)(3) prohibits the grant of demand registration rights to a participating underwriter or its affiliates in connection with a public offering. We have reviewed the Registration Rights Agreement dated as of the expected closing date of the IPO, which grants demand registration rights and customary piggyback registration rights to Pinnacle Vista Capital Partners III, LP and its permitted transferees. Importantly, no registration rights of any kind — whether demand, piggyback, or otherwise — are granted to any underwriter or affiliate of any underwriter. The Registration Rights Agreement is a stockholder-level agreement between CBR and its pre-IPO equity holders, not an underwriting-related arrangement. This provision is fully compliant with Rule 5110(d).
Excessive Compensation Duration. Rule 5110(d) prohibits underwriting compensation arrangements that extend for an excessive or unreasonable duration. All compensation in this offering — consisting solely of the gross spread and expense reimbursement — is payable at or promptly following the closing of the offering. No ongoing advisory fees, consulting fees, monitoring fees, or other forms of continuing compensation are payable to any underwriter or its affiliates following the closing. This provision is fully compliant.
Right to Receive Compensation in Future Offerings for More Than Three Years. Rule 5110(d)(6) prohibits any arrangement pursuant to which a participating underwriter is entitled to receive compensation in connection with future public offerings by the issuer for a period exceeding three years from the effective date of the current offering. No such arrangement exists in the Draft UA or any engagement letter. This provision is fully compliant.
Conclusion: No unreasonable or prohibited terms have been identified in the Draft UA or any ancillary offering document. The proposed offering terms are fully compliant with Rules 5110(c) and 5110(d).
IX. FINRA Filing and Review Process
A. Filing Status
The FINRA corporate financing application for the proposed CBR offering was filed with FINRA's Corporate Financing Department under Filing No. 20221129-01. The filing was prepared and submitted in advance of the anticipated effective date of the registration statement, in compliance with FINRA's requirement that the application be filed at least one business day prior to the anticipated SEC effective date.
As of the date of this memorandum, the offering is in active preparation. We note, however, that as of June 17, 2022, the offering was placed in dormant status due to market conditions, and no FINRA no-objection letter had been obtained at that time. The filing remains on file with FINRA, but FINRA's review may have been suspended or placed on hold in light of the offering's dormant status.
Upon reactivation of the offering, it will be necessary to communicate with FINRA's Corporate Financing Department to confirm the status of the pending filing and to submit any updates to the filing materials reflecting changes to the offering terms, if any, that may have occurred during the dormancy period. FINRA's initial review of a corporate financing application typically requires three to five business days from the date of a complete filing submission, although the review period may be extended if FINRA has follow-up questions or if the filing is complex.
B. Documents Submitted to FINRA
The following documents were submitted to FINRA as part of the corporate financing application package under Filing No. 20221129-01:
1. Underwriting agreement (near-final draft dated April 18, 2022);
2. Form of lock-up agreement (attached as Exhibit A to the Draft UA);
3. Registration Statement on Form S-1 (initially submitted as a draft registration statement ("DRS") on a confidential basis, as amended through Amendment No. 2 filed publicly with the SEC);
4. Supporting schedules, consisting of:
(a) Schedule A — Detailed Underwriting Compensation Calculations (itemizing the gross spread, expense reimbursement, and all other items of value);
(b) Schedule B — Related Parties and Affiliations (disclosing all relationships between participating underwriters and the issuer, selling stockholders, and their respective affiliates);
(c) Schedule C — Lock-Up Terms and Signatory List (describing the material terms of the lock-up agreements and identifying all required signatories);
(d) Schedule D — Pre-Existing Equity Holdings (confirming the absence of any pre-existing equity holdings by FINRA members or their affiliates);
5. Representation letters from each of the five participating underwriters (Hargrove Keating & Co., Linden Pratt Securities LLC, Graymont Brothers Inc., Barfield Stuart & Co., and Crane Whitley Capital LLC) regarding FINRA membership status, CRD numbers, affiliations, pre-existing equity holdings, and other items of value; and
6. Representation letter from Pinnacle Vista Capital Partners III, LP (through Whitfield Archer & Doss LLP) regarding FINRA-member affiliation status.
C. Outstanding Items for Reactivation
Upon recommencement of the offering, the following FINRA-related items will require attention:
1. Updated FINRA Filing. If any offering terms have changed during the dormancy period (including, but not limited to, changes in the anticipated price range, offering size, underwriter allocation percentages, gross spread, expense reimbursement, or syndicate composition), the FINRA filing will need to be updated to reflect such changes. An amended or supplemented filing should be prepared and submitted promptly upon reactivation.
2. Confirmation of No-Objection. FINRA must issue its no-objection letter prior to the SEC declaring the registration statement effective. The deal team should allow sufficient time (a minimum of three to five business days, and potentially longer) for FINRA to complete its review following the submission of any updated filing materials.
3. Updated Representations from Underwriters. Each of the five participating underwriters should be asked to reconfirm or update its FINRA filing representation letter to reflect any changes in affiliations, pre-existing equity holdings, or other items of value that may have arisen during the dormancy period. This is particularly important if any underwriter has undergone a change of control, merger, or reorganization, or if any personnel changes have occurred that could affect the affiliation analysis.
4. Re-Confirmation of Lock-Up Execution Status. As of June 17, 2022, 15 of the 18 required lock-up agreements had been executed. Three agreements remain outstanding. Upon reactivation, the deal team should (a) confirm that the three outstanding signatories continue to meet the criteria requiring execution of a lock-up agreement (i.e., that they remain directors, executive officers, or holders of 1% or more of pre-IPO common stock), (b) obtain executed lock-up agreements from those signatories promptly, and (c) circulate an updated signatory tracker to all parties.
5. Coordination with Underwriters' Counsel. The deal team should coordinate with Margaret Yee and Scott Halverson at Prescott, Danforth & Yee LLP regarding any FINRA comments or requests for additional information received during the dormancy period, and to ensure alignment on the FINRA filing update process.
X. Summary of Conclusions and Recommendations
A. Overall Compliance Assessment