Selling common shares before an initial public offering is usually indicative of some illegal activity. But in rare occurrences, companies are able to offer shares to investors, but not trade them publicly. Such was the case with home-equity and subprime lender Saxon Capital Inc., which recently filed to raise $321 million in an IPO, but whose shares had already been sold three months ago.

When Saxon's former parent, Dominion Resources, merged with Consolidated Natural Gas Co. in 2000, the company became subject to the Public Utility Holding Co. Act of 1939, requiring that any public utility company must siphon off unrelated businesses within three years after a merger. For Dominion, this meant spinning off its financial services divisions, which included Dominion Capital as well as Saxon.

To speed the process along, Glen Allen, Va.-based Saxon, an originator, purchaser, and servicer of nonconforming mortgages, sold 28 million shares to Friedman, Billings, Ramsey & Co. (FBR) at $9.30 each. In turn, the firm sold the same shares on July 5 to investors in a Rule 144A transaction at $10 per share. The private offering did not require registration with the Securities & Exchange Commission.

As a result of the sale, FBR had to register these shares with the SEC, leading to the Oct. 5 S-1 filing. Currently, these shares have not been publicly traded, though they are available in the private domain for users of the PORTAL (Proprietary Order Routing Trade Algorithm Logic) system.

Going public

According to a source close to the deal, Saxon chose to conduct the 144A offering before the S-1 registration in order to complete the spinoff as quickly as possible, and not have to wait for the lengthy SEC approval process.

The company will receive no proceeds from the upcoming IPO but has already netted $260 million from the 144A transaction. Proceeds were used to purchase its assets from Dominion and for general working purposes. Previously, Saxon accessed the corporate debt and asset-backed securities markets for funding, securitizing $9.5 billion of mortgage loans into fixed-income markets on a quarterly basis, since its 1996 inception.

In effect, the IPO, which will occur upon SEC approval, is a resale of shares by the stockholders to the public. Upon approval of the shelf, which could take a few months, all 31.8 million of Saxon shares outstanding will be eligible for public trade, starting at $10.10 per share. The selling shareholders will reap all proceeds from the offering. They also have the option of retaining their shares. Saxon will act as lead manager for the offering, using the underwriting skills of FBR, who is Saxon's largest shareholder at 3.4 million shares.

Rounding out the top four shareholders are Franklin Mutual Shares, with 3.1 million shares; Dominion Capital, with 2.7 million shares; and Wasatch Advisors, with 1.6 million shares. Saxon's executive officers and directors hold a combined total of 75,100 shares.

As of late Saxon has experienced higher delinquencies on its mortgages and has seen profits deteriorate over the past two years. Since netting profits of $36.6 million in 1999, the company posted a net loss of $48.5 million in 2000 and a loss of $27.5 million for the first six months of 2001.

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