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T+1 Settlement — Revisiting Ongoing ATM Programs

On May 28, 2024, the standard settlement cycle for most broker-dealer transactions was shortened from a two business day settlement period (T+2) to one business day (T+1). Under the T+1 settlement cycle, most securities transactions are required to settle within one business day of the transaction date, unless another settlement period is expressly agreed at the time of the transaction. The change was adopted by the Securities and Exchange Commission (“SEC”) in February 2023 as part of the amendments to Exchange Act Rule 15c6-1(a).

What does this mean for ongoing at-the-market (“ATM”) equity programs?

In a typical ATM offering, an issuer sells equity securities into an existing trading market over time at then-prevailing market prices. The issuer uses an effective shelf registration statement, and one or more broker-dealers act as the issuer’s agent for the sales. Many ATM programs also permit sales to the sales agents as principals for their own account at prices agreed upon at the time of sales. ATM programs allow an issuer to sell securities in small amounts over time through individual “takedowns” from the issuer’s shelf, rather than all at once. The issuer can adjust the timing, size, and price of each takedown in light of market conditions and demand. Because ATM offerings provide this kind of flexibility, they are appealing to issuers looking to raise capital in volatile markets.

The equity distribution agreement (sometimes called the sales agreement or something similar) defines the relationship between the issuer and the agents in an ATM program. These agreements typically delineate how issuers will instruct agents to make sales, how much discretion the agents have in making those sales, and how much commission the agents will earn. Generally, the equity distribution agreement remains in effect until a specified date or after a specified aggregate amount of securities has been sold.

Once the equity distribution program is in place, the issuer does not need to renegotiate terms for each sale under the ATM program. But, in advance of each sale under the program, the issuer provides a chosen agent with details on price, number of shares, and timing for the sale, generally through a placement notice. For ATM programs established prior to the effectiveness of the newly implemented T+1 settlement cycle, the settlement period may be hardwired into the equity distribution agreement to occur on a T+2 basis.

Accordingly, ATM program participants should review the settlement terms of their equity distribution agreements and ensure that the parties understand the interplay between those agreements and the newly implemented T+1 settlement rules.

Depending on the usage and potential expiration of the ATM program, amending an equity distribution agreement that provides for hardwired T+2 settlements may not be the most efficient option to address T+1 settlement, as an amendment could require further SEC disclosure and coordination with a host of broker-dealers who may all be agents under the program. As an alternative, ATM program participants should consider reaching out to other participants and flagging the current settlement terms and discussing how T+1 settlement will be addressed, so as to avoid timing confusion if the ATM program is utilized. It may be as simple as clarifying T+1 settlement in future placement notices. Looking ahead, when negotiating new ATM programs, program participants should ensure that the settlement provisions in their equity distribution agreements are compatible with the new T+1 settlement rules.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.