Securities Law Commentary
DECEMBER 2004
SEC Proposes Significant Public Securities
Offering Reforms
I.
EXECUTIVE SUMMARY1
The Securities and Exchange Commission has recently proposed the most significant changes to the registered
securities offering regime under the Securities Act of 1933 since its much-criticized (and never adopted) “Aircraft
Carrier” proposal in 1998. While the Aircraft Carrier Release had contemplated the wholesale replacement of
the then-existing registered offering process, the current Proposal represents, in the Commission’s words, only
an “incremental” change in the regulatory structure and offering process which builds upon rather than replaces
the integrated disclosure system currently in place.2 The comment period ends on January 31, 2005.
The Proposal is intended to relax restrictions on communications related to registered securities offerings and to
facilitate timely access by issuers to the capital markets. The most fundamental changes proposed by the
Commission primarily relate to:
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Communications—expanding permissible communications prior to and during a registered offering of
securities while imposing the requisite liability for their contents.
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Registration Process—streamlining the procedures for the registration of securities for most issuers.
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Prospectus Delivery—expanding the means of delivering information to investors in connection with a
public offering, including delivery through access and notice.
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Liability Timing—rationalizing the timing for determining the liabilities of offering participants under
Sections 12(a)(2) and 17(a).
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Exchange Act Reports—expanding required disclosures.
Communications Related to Registered Securities Offerings
The Proposal liberalizes the use of written communications by issuers in securities offerings by modifying the
“gun-jumping” provisions under the Securities Act, which currently restrict the types of communications that
issuers or underwriters may use to communicate with prospective investors during a registered public offering.
The following communications would be permissible under the modified gun-jumping provisions:
„
A new category of issuer, a Well-Known Seasoned (Reporting) Issuer, would be permitted to make oral
and written communications at any time, before or after the filing of a registration statement, including
the use of “free writing prospectuses,” subject to certain conditions;
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Reporting Issuers would be permitted to issue “regularly released factual business information and forwardlooking statements” at any time, regardless of a pending securities offering;
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Non-Reporting Issuers would be permitted to issue factual business information that is regularly released to
persons other than in their capacity as investors or potential investors;
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communications made by any issuer more than 30 days before the filing of a registration statement that do not
reference a securities offering would not be considered offers;
„
all eligible issuers and their offering participants would be permitted to use “free writing prospectuses” after
the filing of a registration statement, subject to certain conditions;
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Rule 134 would be amended to expand the information permitted to be included in announcements issued after
the filing of a registration statement, such as communications about the schedule for an offering or about
account-opening procedures; and
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exemptions for the issuance of research reports by broker-dealers would be expanded.
In essence, the Proposal allows issuers, subject to certain conditions, to make written offers using communications
that are not themselves complete prospectuses, without violating the gun-jumping rules.
The Proposal also provides clarity on the treatment of electronic communications in the new regulatory scheme.
Improvements to Securities Registration Procedures
The Commission proposes to streamline the shelf registration process for most types of Reporting Issuers to permit
such issuers to access the markets more quickly. The Proposal:
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expands the types of information that may be omitted from the base prospectus of a shelf registration statement
at the time of effectiveness and included later;
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codifies the methods by which issuers may add information in the final prospectus;
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replaces the requirement that issuers register only securities they intend to offer within two years with a
requirement that the issuer update shelf registration statements every three years;
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eliminates restrictions on “at-the-market” offerings;
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permits immediate takedowns of securities off of a shelf;
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permits issuers to use prospectus supplements (rather than post-effective amendments) to make material changes
to the plan of distribution section of a prospectus;
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permits seasoned issuers with a $75 million public float to identify selling securityholders in prospectus
supplements (rather than in a post-effective amendment), where the securities to be sold are outstanding when
the shelf registration statement is filed; and
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establishes a significantly more flexible version of shelf registration, referred to as “automatic shelf registration”
for offerings by Well-Known Seasoned (Reporting) Issuers that would feature automatic effectiveness and
pay-as-you-go registration fees.
Automatic shelf registration allows eligible Well-Known Seasoned (Reporting) Issuers to register unspecified amounts
and types of securities for both primary and secondary offerings on automatically-effective Form S-3 registration
statements. Immediate effectiveness would avoid the timing uncertainty inherent with the filing of registration statements
that are subject to review by the Commission. The Proposal permits more information to be excluded from the base
prospectus in automatic shelf registration statements than from a regular shelf. The omitted information could then be
included in a prospectus supplement or incorporated by reference (e.g., from an Exchange Act report). This information
could include the offer price, the description of the securities offered, whether the offering is primary or secondary, the
identity of the underwriters and sellers, and the plan of distribution.
The Proposal also provides that Forms S-1 and F-1 would be amended to permit expanded use of incorporation by
reference to Exchange Act filings, subject to certain contitions. Consequently, additional disclosures are being included
in Exchange Act reports (see below).
Prospectus Delivery Reforms
The Proposal adopts an “access equals delivery” model for final prospectuses. Under the Proposal, the obligation to
have a final prospectus precede or accompany a security for sale could be satisfied by filing the final prospectus with
the Commission within the required time period. In addition, to preserve an investor’s ability to trace securities to a
registered offering, the Proposal includes a separate requirement to notify investors that they purchased securities in a
registered offering.
Liability Timing Issues
The Proposal clarifies the proposition that, for purposes of determining liability under Section 12(a)(2) and Section
17(a)(2) of the Securities Act, the assessment of whether a material misstatement or omission exists would be based on
the information available to an investor at the time of the sale or contract for sale, and would not take into account
information conveyed or filed after that time, including information filed in any subsequently prepared prospectus or
prospectus supplement.
Expanded Disclosure in Exchange Act Reports
The Proposal requires issuers to add the following disclosures to their Exchange Act periodic reports:
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Risk factor disclosure in annual reports on Form 10-K and registration statements on Form 10; quarterly
updates would be required only if necessary to report material changes.
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For “accelerated filers,” disclosure in Form 10-K of written Staff comments in connection with its review of a
company’s Exchange Act reports that the company believes are material, were issued more than 180 days
before the end of the fiscal year covered by the Form 10-K and are unresolved at the time of filing the
Form 10-K.
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Disclosure on the Form 10-K cover page if the company is a “voluntary” filer of Exchange Act reports.
Application to Asset-Backed Transactions
The Commission also discusses the harmonization of the communications reforms in the Proposal with Proposed
Regulation AB released earlier in the year.
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Miscellaneous
The Commission did not address in the Proposal the effect of the new regulatory framework on private offerings or the
relationship between the public and private offering process. The Director of the Division of Corporation Finance,
however, stated recently that exempt offerings such as private placements under Regulation D and Rule 144A
transactions, are still under consideration for a future proposal. Business combinations which are already regulated
under Regulation M-A also are not covered in the Proposal.
II. CATEGORIES OF ISSUERS
The degree of freedom and flexibility afforded issuers under the Proposal relating to communications and the registration
and offering processes is based on the characteristics of the issuer, including the type of company it is, its Exchange
Act reporting history, its common equity market capitalization and its registered debt offering history. The type of
issuer that would benefit the most under the Proposal falls into a brand new category which the Commission has
dubbed a “Well-Known Seasoned Issuer.”5 This type of issuer is generally comprised of large reporting companies
that are widely followed by sophisticated institutional and retail investors, members of the financial press and numerous
buy-side and sell-side analysts that actively seek new information on a continual basis. Consequently, these companies
are most likely to produce Exchange Act reports and other communications that not only are reliable but also are
scrutinized by a broad group of people. In the Commission’s view, these attributes are not present for all Form S-3/F3 eligible companies. Rather than raise the Form S-3/F-3 eligibility requirements for all issuers, the Commission
created this new category, which is, in effect, a step toward the “company registration” concept introduced in the
Aircraft Carrier Release.
The Proposal divides issuers into five categories:
Well-Known Seasoned (Reporting) Issuers. A company qualifies as a Well-Known Seasoned Issuer if, as of the
relevant date of determination,6 it:
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has been required to file reports under Section 13(a) or 15(d) under the Exchange Act for the preceding
12 calendar month period;
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has been current in its reporting obligations under the Exchange Act for the preceding 12 calendar month
period;
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is eligible to register a primary offering of its securities on Form S-3 or F-3;
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has either:
a minimum of $700 million of common equity outstanding and held by non-affiliates,7 or issued $1 billion in
aggregate principal amount of registered debt over the past three years and is currently offering only nonconvertible debt securities via the new “Automatic Shelf Registration Statement” rules;
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is not an “Ineligible Issuer;” and
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is not an “asset-backed issuer” or an issuer that is not required to but nevertheless files Exchange Act reports
voluntarily.
Seasoned (Reporting) Issuers. These are companies that are:
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required to file reports under the Exchange Act;
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eligible to use Form S-3 or F-3 to register a primary offering of securities; and
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not “Ineligible Issuers.”
Unseasoned (Reporting) Issuers. These are issuers that:
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file reports under the Exchange Act (whether required or voluntary) but are not eligible to use Form S-3 or F3 to register a primary offering of securities; and
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are not “Ineligible Issuers.”
Non-Reporting Issuers. These are issuers that are:
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not required to file reports pursuant to Section 13 or 15(d) under the Exchange Act and do not do so voluntarily;
and
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not “Ineligible Issuers.”
Ineligible Issuers.8 A company is defined as an Ineligible Issuer if it:
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is required to file reports under the Exchange Act but is not current in its filings or has not included all required
material in its filings (such as certifications);
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received a “going concern” opinion from its auditors for the most recent fiscal year;
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filed for bankruptcy or insolvency within the past three years;
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has been the subject of any proceeding or examination or the subject of a refusal or stop order under Section 8
of the Securities Act within the past three years;
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has been found to have committed a felony or misdemeanor involving certain violations of the federal securities
laws, has entered into a settlement agreement with any government agency involving allegations of violations
of federal securities laws or has been made the subject of a judicial or administrative decree or order prohibiting
certain conduct or activities regarding the federal securities laws within the past three years;
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is a registered investment company or a business development company;
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is or was, within the past three years, a blank check company, a shell company or an issuer of penny stock;
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is registering an offering relating to a business combination;
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is a limited partnership selling securities in a non-firm commitment underwriting; or
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is registering securities on Form S-8.
III. BROADENING COMMUNICATIONS AROUND THE TIME
OF A REGISTERED OFFERING
The existing rules concerning impermissible communications in connection with a registered offering ( “gun-jumping”)
derive from the statutory proscriptions of Section 5 of the Securities Act. The prohibition is clear in articulation—all
communications that may be considered to constitute offers of securities are prohibited in a period prior to the filing
of a registration statement; written offers other than those contained in a statutory prospectus that complies with
Section 10 of the Securities Act are prohibited after filing; written communications are prohibited post-effectiveness
unless they are preceded or accompanied by a final prospectus satisfying the requirements of Section 10(a) of the
Securities Act—but difficult in application. Questions frequently arise concerning what material might be considered
an offer, what kind of ordinary business communications (media interviews, advertising, industry conferences, etc.)
might be viewed in hindsight to fall into a prohibited class and what kind of third-party communications, such as
research reports or articles, could be deemed to be “conditioning the market.” Violation of the restrictions can cause
delay in the offering and result in liability for the issuer. Consequently, the surrounding uncertainty has in practice
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forced many issuers to be even more restrictive in their communications while they are “in registration” than is
intended by the Securities Act. The Commission is also seeking to accommodate modern communication technology
within the securities laws.
Communications Made at Any Time While “In Registration”
The Proposal establishes two safe harbors from the gun-jumping rules for regularly released factual business information,
essentially codifying what generally has been the practice of the Staff. The safe harbor provided by Proposed Rule
168 applies to Well-Known Seasoned (Reporting) Issuers, Seasoned (Reporting) Issuers and Unseasoned (Reporting)
Issuers (not including Ineligible Issuers). The safe harbor provided by Proposed Rule 169 applies to Non-Reporting
Issuers (except Ineligible Issuers).
Proposed Rule 168—Safe Harbor for Regularly Released Factual Business Information and Regularly Released
Forward-Looking Information
Under Proposed Rule 168, communications involving Regularly Released Factual Business Information and Regularly
Released Forward-Looking Information may be communicated by eligible reporting issuers at any time. The Proposed
Rule 168 safe harbor, however, does not permit the communication of any information about the registered offering
itself.
Factual Business Information. This term includes:
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factual information about the issuer or some aspect of its business;
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advertisements of, or other information about, the issuer’s products or services;
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factual information about business or financial developments with respect to the issuer;
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dividend notices; and
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factual information set forth in an Exchange Act report;
but specifically excludes:
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information about the registered offering or information released as part of offering activities; and
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forward-looking information.
Factual Business Information would continue to be subject to the provisions of Regulation FD, Regulation G, Regulation
S-K¸ Item 10 and Item 2.02 of Form 8-K.
Forward-Looking Information. This term includes:
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projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends,
capital structure, or other financial items;
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statements about management’s plans and objectives for future operations, including plans or objectives relating
to the products or services of the issuer;
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statements about the issuer’s future economic performance, including statements of the type contemplated by
MD&A; and
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assumptions underlying or relating to any of the foregoing information.
The premise for this prong of the safe harbor is that Regulation FD encourages release of earnings guidance and
similar information, and Item 2.02 of Form 8-K reflects the Commission’s intention of making such guidance and
similar information public.
Regularly Released. Information will be considered regularly released or disseminated if:
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the issuer is releasing or disseminating the information in the ordinary course of its business;
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the issuer has previously released or disseminated the same type of information in the ordinary course of its
business; and
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the timing, method and form in which the information is being released or disseminated is materially consistent
with the issuer’s similar past releases or disseminations.
The Commission did not set forth any guideline regarding the length of an issuer’s track record of releasing the
particular type of information. There are some common-sense guideposts, however, which are used by practitioners
even today. For example, an issuer’s release of new types of financial information or projections just before or during
a registered offering would likely prevent a conclusion that the issuer regularly released that type of forward-looking
information in the ordinary course of its business. If an issuer has consistently released certain forward-looking
information on a quarterly basis through ordinary course press releases, it could not satisfy the condition if it instituted
an accelerated media campaign just before or during an offering to release that type of forward-looking information on
a different basis or with different timing.
Non-Offering Related Information. As noted above, Proposed Rule 168 does not permit communications about the
securities offering itself. Publication of information about an offering outside the registration statement continues to
be limited to statements allowed under Rule 134 (which is proposed to be expanded), Rule 1359 and other exemptions
or safe harbors, or, in respect of Well-Known Seasoned (Reporting) Issuers, contained in a Free Writing Prospectus.
Information released as part of offering activities also would be excluded from the proposed safe harbor.
The safe harbor would be unavailable, for example, for a copy of a press release that originally had been regularly
released in accordance with the safe harbor but that was specifically provided to investors or potential investors as part
of offering activities. An issuer would be able to rely on the proposed safe harbor for the publication of an earnings
release consistent with past practice subject to compliance with the “Regularly Released” Condition, or for posting
and maintaining the earnings release on its web site, whether or not located in a separate section of the web site set
aside for historical information only. However, the use of that earnings release (or its contents) by an underwriter or
dealer participating in a distribution, for example, by providing it to potential investors as part of the marketing
activities, would be outside the scope of the proposed safe harbor.
Liability. The permitted communications under Proposed Rule 168, unlike the additional forms of communication
that would constitute Free Writing Prospectuses (discussed below), would not be deemed to be offers for purposes of
Section 5 and, consequently, would not be subject to liability under Section 12(a)(2) and Section 17(a) of the Securities
Act.10
Proposed Rule 169—Safe Harbor for Factual Business Information That is Regularly Released to Persons
Other Than in Their Capacity as Investors or Potential Investors
Under Proposed Rule 169, this information may be communicated at any time before the filing of the registration
statement (provided the release or dissemination is not made in connection with an Ineligible Offering). This is a
much narrower safe harbor than that set forth under Proposed Rule 168. Given that this type of issuer would most
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likely be conducting its initial public offering, the rule reflects the Commission’s concern about the potential for abuse
in using the information as a way to condition the market for the issuer’s offering.
Proposed Rule 169 would provide a safe harbor for a Non-Reporting Issuer’s release or dissemination of regularly
released ordinary course factual business information to persons such as customers and suppliers. Because the
condition involves the manner and timing of the communication, the same issuer employees who have historically
been responsible for providing the information to, for example, customers and suppliers, should continue to communicate
any information provided in reliance on this safe harbor. Unlike the safe harbor of Proposed Rule 168, the safe harbor
for Non-Reporting Issuers would not cover:
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forward-looking information;
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factual information set forth in an Exchange Act report; or
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dividend notices.
In all other respects, Regularly Released Factual Business Information would be defined in the same manner as for
purposes of the Rule 168 safe harbor discussed above.
Communications Prior to Filing a Registration Statement
Currently
All offers, oral and in writing, are prohibited under Section 5(c) of the Securities Act from the date an issuer is “in
registration” (a question of fact which typically is viewed as commencing with the date the issuer has an “organizational
meeting” for its securities offering) until the filing of a registration statement covering the securities.11 The question
of what kind of communication may constitute a prohibited offer is a question of fact and circumstance.
Proposal
The Proposal provides two exclusions from the gun-jumping prohibitions in the Pre-Filing Period:
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communications made by any issuer (other than Ineligible Issuers) more than 30 days prior to filing the registration
statement; and
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communications made by Well-Known Seasoned (Reporting) Issuers at any time prior to filing the registration
statement.
Communications Made More Than 30 Days Prior to Filing—All Issuers:12
Proposed Rule 163: 30-Day Safe Harbor
This new bright line test provides that all written and oral communications by all but Ineligible Issuers made more than
30 days prior to the filing of the registration statement and that satisfy certain conditions do not constitute prohibited
offers under Section 5(c).13
Proposed Rule 163A—Conditions for Use of the 30-Day Safe Harbor
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the communication must not reference a securities offering;
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the communication must be made by or on behalf of the issuer which means that the issuer, an agent of the
issuer or a representative of the issuer authorized and approved the use of the communication before its release
or dissemination (the same definition as under current Rule 146); accordingly, other communications, such as
those by a prospective underwriter, would not be covered by the safe harbor;
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the issuer must take reasonable steps within its control to prevent further distribution or publication of the
communication during the 30-day period covered by the safe harbor (for example, if an issuer or its representative
gave an interview to the press prior to the 30-day period, they would not be able to rely on the exclusion if the
interview was published during the 30-day period); and
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the offering may not involve an Ineligible Offering. 14
Communications Made at Any Time Prior to Filing—Applicable Only to Well-Known
Seasoned (Reporting) Issuers:
Proposed Rule 163—Use of Free Writing Prospectuses
Any oral or written communication by these issuers, no matter what the content, may be made at any time (including
during the 30-day period) before the filing of the registration statement, subject to satisfaction of the following conditions:
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all written communications must have been made by or on behalf of the issuer;
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all written communication must contain the Legend15 required for Free Writing Prospectuses which, among
other things, would alert prospective investors to the availability and location of a statutory prospectus (failure
to satisfy this condition and the following condition is subject to a cure provision);16
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the communication must be filed by the issuer with the Commission promptly after the issuer files the registration
statement or an amendment thereto;
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the communication must be retained by the issuer in its records for a period of three years from the initial bona
fide offering of the securities in question; and
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the communication may not be made in connection with an Ineligible Offering.
Liability. Written communications under the Free Writing Prospectus provisions of Proposed Rule 163 would not be
considered offers for purposes of Section 5 under the Securities Act but would be considered prospectuses (and offers)
for purposes of determining any liability that may attach to the content of such communications under the federal
securities laws. The other conditions discussed below for use of a Free Writing Prospectus in the Post-Filing Period
would not apply in the Pre-Filing Period. Oral and written communications would continue to be subject to liability
under Sections 12(a)(2) and 17(a) under the Securities Act and Section 10(b) and Rule 10b-5 under the Exchange Act.
Communications Between Filing and Effectiveness of a Registration Statement
Currently
Written offers are limited to a “statutory prospectus” conforming to the information requirements of Section 10 of the
Securities Act, in effect limiting written material to a preliminary prospectus or “red herring” meeting the requirements
of Section 10 which must be filed with the Commission. There is no prohibition on oral offers but statutory and
common law fraud constraints apply.
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Proposal
The amount and types of written communications that may be used by issuers and other offering participants in the
Post-Filing, Pre-Effective Period have been expanded by (i) allowing more information in the existing Rule 134 notice
and (ii) the permitted use of Free Writing Prospectuses pursuant to Proposed Rule 164.17
Proposed Amendment to Rule 134
Rule 134 applies to all issuers18 and was intended originally to provide an “identifying statement” that could be used
to locate persons that might be interested in receiving a prospectus. The existing Rule 134 notice would be modified
under the Proposal to:
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allow more information about the issuer and its business, including where to contact the issuer;
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allow more information about the terms of the securities being offered, the offering itself, including the identity
of any underwriters, the anticipated schedule for the offering and a description of marketing events such as road
show schedules and means of attending or otherwise accessing the road shows;
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allow more information about procedures for account opening and submitting indications of interest and
conditional offers to buy (such as auction or directed share program procedures);
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allow disclosure regarding credit ratings, if any, that are reasonably expected to be assigned to the security
being offered; and
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eliminate the current reference to state securities laws and the statement as to whether the financing is a new
financing or a refunding.
Rule 134 as amended would not permit, however, the kind of detailed information typically included in a term sheet.
In addition, Rule 134 would be expressly conditioned on the issuer having filed a Section 10(b) statutory prospectus
with the Commission (containing a preliminary prospectus or a base prospectus). In the case of an IPO, a statutory
prospectus is required to contain bona fide estimates of a price range and the maximum amount of securities to be
offered. The Staff is considering adding to the Proposal a provision allowing an issuer to release a more limited
announcement of an offer which could name the underwriters without having a price range on file.
Proposed Rule 164—Free Writing Prospectuses
If the communication satisfies the conditions for a Free Writing Prospectus contained in Proposed Rule 433, the
communication may be freely disseminated in the Post-Filing, Pre-Effective Period subject to certain conditions.19 As
noted above, any written communication that does not constitute a “statutory prospectus” under the Securities Act is
defined in the Proposal as a Free Writing Prospectus. See below under “Proposed Rule 433—Conditions to Permitted
Use of a Free Writing Prospectus.”
The Proposal also makes clear for the first time that all forms of communication other than purely oral communications
(oral includes telephonic) constitute written communications. A written communication is defined to be any
communication that is written, printed, broadcast, or a graphic communication. A graphic communication includes all
forms of electronic media, including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic
mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on
telephone answering or voice mail systems, computers, computer networks and other forms of computer
data compilation.
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Other Attributes of a Free Writing Prospectus
Under the Proposal, a Free Writing Prospectus:
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would not be required to contain any prescribed language (other than the Legend) and could include information
beyond the information that would be included pursuant to the line item disclosure required in the prospectus
that is filed as part of the registration statement; and
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would not, solely by virtue of containing information that is not included in the prospectus filed as part of the
registration statement, result in the registration statement being deemed to omit to state material facts—
however, the Free Writing Prospectus must not contain information that is inconsistent with the (i) information
contained in any prospectus or prospectus supplement included in the registration statement or otherwise filed
and not superseded or modified or (ii) information contained in the issuer’s Exchange Act reports filed or
furnished pursuant to Section 13 or 15(d) and not superseded or modified.
Web Sites. Information contained on an issuer’s web site or hyperlinked by the issuer from its web site to a third-party
web site could be considered a written offer of securities and, unless otherwise exempt, would be an Issuer Free
Writing Prospectus and would be subject to satisfying the Conditions described below. Information contained on or
hyperlinked from an offering participant’s web site would be similarly treated. For example, if a written communication
used to offer the issuer’s securities contained a hyperlink to a research report on a broker/dealer’s web site, the
research report would be considered part of the issuer’s written communication.
“Historical Issuer Information” that is properly identified and located in a separate section of the issuer’s web site
containing historical issuer information would not be deemed under the Proposal to be an offer of the issuer’s securities.
This historical information could include, but would not be limited to, Regularly Released Information that could fall
within one of the proposed safe harbors described above. The historical information also could include information
shown to have been previously published (for example, by bearing a date). To remain classified as “Historical Issuer
Information” the information could not, however, be incorporated or otherwise included in a prospectus or used,
identified, updated or modified in connection with the offering or otherwise.
Liability. A Free Writing Prospectus used in the Post-Filing Period complying with Proposed Rule 433 would be
governed by Section 10(b), which provides that a prospectus permitted under that Section, though filed as part of the
registration statement, is not subject to Section 11 liability. The Commission is modifying the Section 10(b) filing
requirement to provide that the Free Writing Prospectus would not be considered filed as part of the registration
statement regardless of its method of use or distribution and therefore would not be subject to Section 11 liability
unless the issuer elected to file it as part of the registration statement. A Free Writing Prospectus used other than in
accordance with the Proposed Rules would continue to be a prospectus for purposes of Section 12(a)(2) and the
antifraud provisions of the federal securities laws, and its use would violate Section 5. A communication would be a
Free Writing Prospectus only where it constituted an offer of a security under the Securities Act. Whether a particular
communication constitutes such an offer would, as today, be determined based on the particular facts and circumstances.
Communications that would not be considered offers or prospectuses for purposes of the gun-jumping provisions,
such as Rule 134 notices, Rule 135 communications, Regularly Released Factual Business Information and ForwardLooking Information and research reports falling within the safe harbors, would not be Free Writing Prospectuses.
Proposed Rule 433—Conditions to Permitted Use of a Free Writing Prospectus
All issuers other than Ineligible Issuers are permitted to use a Free Writing Prospectus in the Post-Filing, Pre-Effective
Period subject to satisfaction of certain conditions. These conditions vary depending on the type of issuer involved.
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Prospectus Availability or Delivery Condition
The ability of any person participating in the offer and sale of the securities to use a Free Writing Prospectus
under Proposed Rules 164 and 433 is conditioned (i) on the availability of the issuer’s most recently filed
statutory prospectus (other than a summary prospectus) satisfying the requirements of Section 10 and (ii)
with respect to certain issuers, on the prior or concurrent delivery of the issuer’s most recently filed statutory
prospectus. Seasoned Issuers have the most flexibility under this section of the Proposal.
Well-Known Seasoned (Reporting) Issuers and Seasoned (Reporting) Issuers
Availability of Prospectus and Legend Required, Not Delivery of Prospectus:
There is no requirement that these issuers deliver the preliminary prospectus on file to recipients of the Free
Writing Prospectus. Instead, only a registration statement containing a Section 10 preliminary prospectus
must be on file with the Commission, thus enabling prospective investors to have access to its contents. For
shelf offerings, this preliminary prospectus could be a base prospectus that satisfies the requirements of
Proposed Rule 430B.
The Free Writing Prospectus must contain the required Legend, which serves to notify the recipient as to
where he can access or hyperlink to the preliminary or base prospectus by providing the URL for the
prospectus.20 (For example, electronic road shows would need to include the language of the Legend).
Unseasoned (Reporting) Issuers and Non-Reporting Issuers
Availability of Prospectus and Legend Required:
Same as above.
Delivery of Prospectus Required Only if Communication is Prepared or Paid for by Issuer or Other
Offering Participant:
If the information in a Free Writing Prospectus was prepared or paid for by or on behalf of an issuer or other
offering participant or if consideration for the Free Writing Prospectus will be given by the issuer or another
offering participant, then the Free Writing Prospectus must be accompanied or preceded by the most recent
Section 10 statutory prospectus. Proposed Rule 433 specifically provides that a statutory prospectus would
be deemed to accompany an electronic Free Writing Prospectus if the latter contained a hyperlink to the
former.21
The condition that the statutory prospectus accompany or precede the Free Writing Prospectus would not
require that it be provided through the same medium, so long as it was provided at the required time.
Although the statutory prospectus would not have to be sent by the same means (paper or electronic) as the
Free Writing Prospectus, merely referring to its availability would not satisfy this condition. Once the
required statutory prospectus is sent or given to an investor, additional Free Writing Prospectuses could be
provided to such investor without having to provide an additional copy of the statutory prospectus, unless
there were material changes in the most recent statutory prospectus from that previously provided.22 For
example, electronic road shows undertaken by these issuers would be subject to the condition that the issuer’s
statutory prospectus accompany or precede the electronic road show. This could be satisfied by including in
the electronic road show a hyperlink to the issuer’s filed statutory prospectus in its registration statement.
12
Filing Condition
The filing requirement is triggered by the issuer’s connection to the material in the communication. Most
underwriter material need not be filed. There are different time frames for filing the Free Writing Prospectus.
Filing the Free Writing Prospectus or information contained in that prospectus with the Commission is
required in the following circumstances: 23
„
where a Free Writing Prospectus is prepared by or on behalf of the issuer (Issuer Free Writing Prospectus),
whether it is used by the issuer or any other person, that Free Writing Prospectus must be filed by the
issuer on or before the date of its first use;
„
where a Free Writing Prospectus is prepared by a party participating in the offering other than the issuer
and contains material information about the issuer or its securities that has been provided by or on behalf
of the issuer (Issuer Information) but which is not already contained or incorporated in the registration
statement or a filed Free Writing Prospectus, that information must be filed by the issuer with the
Commission on or before the date of its first use;24
„
where a Free Writing Prospectus prepared by a party other than the issuer or an offering participant is
distributed in a manner designed to lead to its broad unrestricted dissemination, such party must file the
Free Writing Prospectus on or before the date of its first use;
„
a Free Writing Prospectus that contains only a description of the terms of the securities being offered,
regardless of whether the issuer or other offering participant prepared or used it, would be subject to filing
only if it reflected the final terms of the securities being offered—the issuer would have to file the Free
Writing Prospectus within two days after the later of the date such terms became final or the date of its
first use—preliminary term sheets and other descriptive material containing only the terms of the securities
that do not reflect final terms of the securities or the transaction would not be subject to filing—all such
written offering materials, whether or not filed, would constitute Free Writing Prospectuses; and
„
a Free Writing Prospectus containing Issuer Information that is prepared by persons in the media who are
not affiliated with or paid by the issuer or an offering participant would be subject to filing by the issuer
or offering participant involved within one business day after first publication or first broadcast—persons
in the media would have no filing or other obligations under this provision.25
However, there is no requirement that underwriters or participating dealers file the Free Writing Prospectuses
that they prepare, including Free Writing Prospectuses prepared by them on the basis of, but not containing,
Issuer Information.26 Oral communications are not subject to any filing conditions.
Special Filing Situations
Electronic Road Shows. Electronic communications, including electronic road shows, are graphic
communications that fall within the proposed definition of written communication. Thus, an electronic road
show would be a written offer, a prospectus and also a Free Writing Prospectus. (Live road shows would
continue to be considered oral communications.)27
Electronic road shows can be transmitted via the
Internet, videos, e-mail, CD-ROM or any other medium. To date, these have proceeded in reliance on a
series of no-action letters granted by the Commission’s Staff.
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The Proposal permits the use of electronic road shows without many of the conditions imposed in the
electronic road show no-action letters, provided the issuer satisfies the conditions of Proposed Rule 433.28
The Commission is not proposing to require that electronic road shows be made available to unrestricted
audiences, though issuers and underwriters would be free to open road shows to all prospective investors.
Electronic road shows would have to contain the Legend discussed above and, for road shows involving a
Non-Reporting Issuer or Unseasoned (Reporting) Issuer, would be subject to the condition that the issuer’s
statutory prospectus accompany or precede it (which could be accomplish by a hyperlink to the issuer’s filed
statutory prospectus in its registration statement).
The electronic road show or its script would not be subject to filing, except for material Issuer Information
not previously included (including by incorporation by reference) in the registration statement or in a Free
Writing Prospectus related to the offering, provided the issuer does the following:
„
makes at least one version of a “bona fide electronic road show”29 readily available electronically to any
potential investor at the same time as the electronic road show; and
„
files any Issuer Free Writing Prospectus or material Issuer Information used on the electronic road show;
filing only the transcript of the road show would not be sufficient.
Media. Currently, interviews given by an officer or other representative of the issuer that are published
around the time of a registered offering run the risk of being deemed by the Commission in hindsight as
impermissible written offers. The Proposal permits these communications as Free Writing Prospectuses as
long as the Conditions of Proposed Rule 433 are satisfied.30 These conditions vary depending on whether
the issuer or other offering participant prepared the communication or paid for or provided other consideration
for the communication.
Media Communication Prepared or Paid for by Issuer or Other Offering Participant. The conditions to the
use of a Free Writing Prospectus must be satisfied at the time of the publication or broadcast.
„
For Well-Known Seasoned (Reporting) Issuers and Seasoned (Reporting) Issuers, the most recent statutory
prospectus (for purposes of Section 10(b) only; which includes a preliminary prospectus, base prospectus
or prospectus subject to completion) would have to be on file and the Free Writing Prospectus (the media
communication) would have to be filed by the issuer or other offering participant not later than the date of
its first publication or broadcast.
„
For Non-Reporting Issuers, a statutory prospectus satisfying Section 10(a) of the Securities Act (a final
prospectus as opposed to a preliminary prospectus, base prospectus or prospectus subject to completion)
would have to precede or accompany the media communication—the practical result of this would be
that in an IPO, the interview may not be published or broadcast and no written or broadcast advertisements,
“infomercials” or broadcast spots may be released about the Non-Reporting Issuer, its securities, or the
offering.
Media Communication Not Prepared or Paid for by Issuer or Other Offering Participant. An interview or
other media publication or broadcast in which an issuer or other offering participant participates (but does
not prepare the information used in or pay for the event) could be a Free Writing Prospectus. Such Free
Writing Prospectus must be filed by the issuer or other offering participant involved within one business day
after its first publication or broadcast. However, because of the media intervention, the Commission has
14
stated that no statutory prospectus would be required to precede or accompany the media communication,
although a statutory prospectus must be available. Persons in the media would have no filing or other
obligations under the Proposal. For example,
„
if an issuer or underwriter invited the press to attend a live or electronic road show, any article including
information obtained at that road show would be a Free Writing Prospectus of the issuer or underwriter
and its use would be subject to satisfaction of the applicable Conditions under Proposed Rule 433;
however, if the electronic road show is open to an unrestricted audience the article would not be treated as
a Free Writing Prospectus of the issuer or other offering participant due to the unrestricted and available
nature of the electronic road show.
„
if a chief executive of an Unseasoned (Reporting) Issuer or a Non-Reporting Issuer gave an interview to
a financial news magazine without payment to the magazine for the article, the publication of the article
after the filing of the registration statement would be a Free Writing Prospectus of the issuer that would
have to be filed by the issuer after publication; there is no requirement that a statutory prospectus precede
or accompany the article at the time of the publication.
Record Retention Condition
Issuers and offering participants, including underwriters and participating dealers, must retain all Free Writing
Prospectuses they have used for a period of three years following the initial bona fide offering of the subject
securities.
Communications After Effectiveness of a Registration Statement
Currently
Written offers may be made only through a statutory prospectus complying with Section 10(a) of the Securities Act but
additional written material may be used if a final prospectus that meets the requirements of Section 10(a) is delivered
to the offeree prior to or with that material.31 There is no prohibition on oral offers but statutory and common law
fraud concerns apply.
Proposal
The only difference under the Proposal is the concept of Access Equals Delivery discussed below, whereby the
requirement for the delivery of a statutory prospectus may be satisfied in certain circumstances by having a prospectus
on file with the Commission.
Proposed Amendments to Regulation FD
The Proposal contemplates that certain material nonpublic Issuer Information could be made public either through the
prospectus filed as part of a registration statement, filed Free Writing Prospectuses or, in the case of Reporting Issuers,
through the operation of Regulation FD.32 Because it is expanding the types of permissible communications around
the time of a public offering, the Commission intends to narrow somewhat the type of offering and the means of
communication that would be excluded from the operation of Regulation FD in connection with a registered securities
offering.
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Currently
Regulation FD excludes from its operation any oral or written communication made in connection with any registered
securities offering other than:
„
securities offered and sold solely by or on behalf of a person or persons other than the registrant, a subsidiary
of the registrant or a person of which the registrant is a subsidiary;
„
securities offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of
the registrant;
„
securities issued upon the exercise of outstanding options, warrants or rights; and
„
securities issued upon the conversion of other outstanding securities.
Proposal
The Proposal narrows the types of registered securities offerings eligible for the exclusion to those involving capital
formation for the account of the issuer and underwritten offerings that are both an issuer capital formation and a selling
securityholder offering, in addition to the existing exclusion for registered business combination transactions.
Communications made during or in connection with a registered offering and not contained in the enumerated
list of exceptions from Regulation FD—for example, the publication of Regularly Released Factual Business
Information or Regularly Released Forward-Looking Information or Pre-Filing communications—would be subject
to Regulation FD.
The Commission also proposes to modify the list of exclusions referred to above to cover only disclosures made in the
following types of communications:
„
a registration statement filed under the Securities Act, including a prospectus contained therein;
„
a Free Writing Prospectus satisfying the requirements of proposed Rule 433 used after the filing of the registration
statement or a communication falling within the exception to the definition of prospectus contained in Section
2(a)(10)(a);
„
any other Section 10(b) prospectus;
„
a notice permitted by Rule 135;
„
a communication permitted by Rule 134; and
„
an oral communication made in connection with the registered offering after filing of the registration statement.
Expanded Use of Research Reports Permitted (Proposed Amendments
to Rules 137, 138 and 139)
The Commission believes that the recent reforms relating to research analysts have addressed many past abuses and
that analyst information provides important information to the markets and potential investors. The Proposal limits the
current restrictions on the use of research reports and would permit the communication of research around the time of
a public offering under a broader range of circumstances than is currently the case.33
Rules 137, 138 and 139 are safe harbors under the Securities Act which describe the instances in which a broker or
dealer may publish research (in the Pre-Filing, Post-Filing and Post-Effective Periods) without having the communication
deemed an offer or prospectus in violation of Section 5 of the Securities Act. The Proposal makes modest changes to
16
these Rules and also, for the first time, contains a definition of “research report.” The Proposal also expands the
circumstances in which offering participants and non-offering participants could disseminate research reports during
a registered offering.
The safe harbor provisions of Rules 137, 138 and 139 would continue to be available only to broker/dealers. Issuers
could not use these safe harbor provisions or research reports prepared or distributed by brokers or dealers to directly
or indirectly communicate with potential investors about the offering (for example, a hyperlink on an issuer’s web site
during its registered offering to a research report). Issuers using research reports in this manner could be deemed to
have adopted the contents of such reports and, under the Proposal, the reports would be considered Free Writing
Prospectuses and must satisfy the related Conditions at the time of first use in order to avoid a violation of Section 5
of the Securities Act. The issuer would of course be liable for the contents of the research report.
The distribution of independent research would continue to be permitted within the safe harbor provisions.34 Existing
rules permit the distribution of independent research subject to certain conditions. For brokers and dealers subject to
the Global Research Analyst Settlement, the ability to distribute independent research during a registered securities
offering would depend on whether the broker or dealer would be able to rely on any of the research safe harbors for its
own research. For example, independent research that is prepared by an analyst not participating in an offering but
that is paid for by a broker or dealer participating in the offering would be considered to be distributed by an offering
participant and thus would not satisfy the requirements of the Rule 137 safe harbor. A research report constituting an
offer and not falling within a safe harbor would be considered a Free Writing Prospectus.
Definition of Research Report Added
To assure consistency between Regulation AC requiring analyst certifications and the research safe harbors contained
in Rules 137, 138 and 139, the Proposal would define “research report” for purposes of the safe harbors in the same
manner as the definition of “research report” in Regulation AC but would also include media broadcasts. A “research
report” for purposes of the safe harbors is defined as a written communication that includes an analysis of a security or
an issuer and provides information reasonably sufficient upon which to base an investment decision. This definition
is intended to encompass all types of research reports, whether issuer specific or industry compendiums separately
identifying the issuer.
Research Report Proposals in Connection with Regulation S and Rule 144A Offerings and Proxy Solicitations
The restrictions in Regulation S on directed selling efforts and offshore transactions and in Rule 144A on offers to
non-QIBs and general solicitation have resulted in brokers and dealers withholding regularly published research that
they have prepared with a view towards promoting the offering to investors in those types of offerings. The Proposal
would provide that research reports meeting the conditions of Rule 138 and Rule 139 will not be considered offers,
general solicitations or general advertising in connection with offerings relying on Rule 144A, or constitute directed
selling efforts for purposes of, or otherwise be inconsistent with, the offshore transaction requirements of Regulation
S. The Commission noted in commentary, however, that the Proposal would not apply to private placements under
Regulation D.
The Commission also proposes to codify a staff position that the publication or distribution of research under the
conditions set forth in Rules 138 and 139 is permitted in connection with a registered securities offering that is subject
to the proxy rules under the Exchange Act.
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Rule 137—Analyst (Affiliate) Not Participating in Offering
Currently
A broker or dealer that is not participating in an issuer’s public offering but who publishes or distributes research will
not be considered to be engaged in a distribution of the issuer’s securities and would therefore not be deemed to be an
underwriter in the offering.
Proposal
The Rule 137 safe harbor would be expanded to apply to securities of any issuer, including Non-Reporting Issuers
(with exceptions for blank check companies, shell companies and penny stock issuers). Rule 137 would continue to
be available only to brokers and dealers (and their affiliates) and, if different, the person (and any affiliate) that has
published the report:
„
that are not participating in the registered offering of the issuer’s securities;
„
that publish or distribute the research report in the regular course of their business;
„
that are not receiving and have not received consideration35 directly or indirectly from, and are not acting under
any direct or indirect arrangement or understanding with;
†
the issuer of the securities;
†
a selling security holder;
†
any participant in the distribution of the securities; or
†
any other person interested in the securities that are or will be the subject of the registration statement.
Rule 138—Analyst (Affiliate) Participating in Offering—Report Covers Different Security
Currently
Rule 138 currently:
„
permits a broker or dealer participating in a distribution of an issuer’s securities (for example, common stock)
to publish or distribute research that is confined to another type of security of that issuer (for example, fixed
income securities), and vice versa;36
„
applies only to brokers or dealers that publish or distribute the research in the regular course of their business;
and
„
applies only in respect of offerings of domestic issuers that are eligible to use Form S-3.37
Proposal
The proposed amendment to Rule 138 would:
„
18
expand the categories of offerings covered to all Reporting Issuers that are current in their periodic Exchange
Act reports on Forms 10-K, 10-KSB, 10-Q, 10-QSB and 20-F at the time of reliance on the exemption; and
„
require that the broker or dealer must have previously published or distributed research reports on the same
types of securities that are the subject of the report in the regular course of its business (as opposed to the
current Rule which does not require that the broker or dealer have published or distributed research on the
same type of securities in the ordinary course of its business).
Upon satisfaction of the conditions set forth in the proposed amendment to Rule 138, a broker’s or dealer’s publication
or distribution of research reports about securities of an issuer in registration will not be deemed for purposes of
Sections 2(a)(10) and 5(c) of the Securities Act to constitute an offer even if the broker or dealer is participating or will
participate in the registered offering of the issuer’s securities.
Rule 139—Analyst (Affiliate) Participating in Offering—Regularly Distributed Report
Covering Same Securities
Currently
The Rule permits a broker or dealer participating in a distribution of securities by a Seasoned (Reporting) Issuer (that
satisfies a public float test) or by a large foreign private issuer (that satisfies either the $75 million public float test or
is issuing only non-convertible investment grade securities and whose equity securities have been publicly traded
abroad for at least 12 months) to publish research concerning the issuer or any class of its securities, if that research is
in a publication distributed with reasonable regularity in the normal course of its business.
Proposal
Amended Rule 139 would add a safe harbor for distributions by even smaller Seasoned (Reporting) Issuers, if the
broker or dealer complies with additional restrictions on the nature of the publication and the opinion or recommendation
expressed in it.
Issuer-Specific Research Reports.
„
the report may only cover issuers with at least a one-year reporting history that are current and timely in
their Exchange Act reports and are eligible to register a primary offering of securities on Form S-3 or
F-3, based on the $75 million minimum public float or investment grade securities provisions of those
forms (penny stock issuers, blank check companies, and shell companies are, as usual, excluded);
„
the report must be published or distributed in the regular course of the broker/dealer’s business; however,
the requirement of publication with reasonable regularity would not be retained and the Commission has
not proposed any minimum time period for the broker/dealer to have distributed or published the research;
„
the broker or dealer must, at the time of use, also have distributed or published research reports about the
issuer or its securities—this new requirement would retain the most important element of the “reasonable
regularity” requirement, namely that the report initiating coverage of an issuer not benefit from an exemption
under Rule 139;
„
there would be no minimum time period for the broker or dealer to have distributed or published research
reports; and
„
there would be no requirement that the previously published or distributed research report cover the same
securities that are the subject of the registered offering.
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Industry-Related Reports.
„
the report may only cover issuers required to file reports pursuant to Exchange Act Section 13 or Section
15(d) or satisfying the conditions to use by foreign private issuers;
„
the safe harbor is extended to registered offerings of any Reporting Issuer, not only reporting issuers
eligible to register securities on Form S-3 or Form F-3;
„
Non-Reporting Issuers would not benefit from the exemption;
„
broker/dealers would not be precluded from making a more favorable recommendation than the one
made in the last publication;
„
the report need not include any prior recommendations; and
„
the report must contain similar types of information about the issuer or its securities as was contained in
prior reports.
IV. SECURITIES ACT REGISTRATION REFORMS
In this section of the Proposal, the Commission has adopted much of the Aircraft Carrier’s concept of “company
registrations” without the baggage of its accompanying proposal for wholesale changes to the disclosure system which
plagued the Aircraft Carrier itself.
Shelf Registrations
The Commission proposes to streamline the shelf registration process for most types of Reporting Issuers by proposing
two new Rules (Rule 430B and Rule 430C), codifying existing practice and amending Rules 415, 418, 424 and 430A
and Forms S-3 and F-3. The Proposal would:
„
clarify and codify the information that may be included in or omitted from a base prospectus in a registration
statement;
„
codify the manner of adding information to a final prospectus;
„
amend the treatment of prospectus supplements; and
„
liberalize the requirements under Rule 415, including:
†
eliminating the two-year limit for offerings on a delayed basis;
†
eliminating the prohibition against immediate takedowns off delayed offering shelfs;
†
eliminating “at the market” offering restrictions; and
†
making conforming changes to Rule 424 regarding the filing of prospectus supplements.
Proposed Rule 430B—Means of Adding Information to a Base Prospectus in a Shelf Registration Statement
After the Effective Date
Proposed Rule 430B is intended to be a shelf registration corollary to Rule 430A under the Securities Act and is
largely consistent with current practice for delayed offerings on Forms S-3 and F-3.
20
Currently
Primary offerings by an issuer on a delayed basis may be registered only by issuers eligible to use Form S-3 or F-3
(essentially Well-Known Seasoned (Reporting) Issuers and Seasoned (Reporting) Issuers in the parlance of the Proposal).
Many of the offerings contemplated by Rule 415 involve the use of prospectuses that are complete at the time of
effectiveness of the related registration statement and therefore may not need to be supplemented for additional
information about the offering. For example, the terms of the securities and the plan of distribution are often complete
at the time of effectiveness and not subject to change.
However, where the issuer is not eligible to use Form S-3 or F-3, updating information regarding the issuer cannot be
included by means of incorporating later Exchange Act reports and therefore must be added to the prospectus by
means of a post-effective amendment. In such case, the new form of prospectus included in the amended registration
statement is then complete at the new effective date (of the post-effective amendment).
Other offerings, though, such as delayed and continuous offerings where the securities offered and sold in various
takedowns vary in their terms, methods of sale and the identity of sellers (such as selling shareholders), require that the
base prospectus included in the registration statement at the time of effectiveness be supplemented to reflect these
features.
Rule 424 governs the manner and timing of the filing of these prospectuses and prospectus supplements with the
Commission. There is, however, currently no rule that establishes the relationship between the forms of base prospectus
and prospectus supplements and the information that may be omitted from or included in one or the other.
Proposal
Proposed Rule 430B is intended, among other things, to remedy this. Proposed Rule 430B:
„
contains all the prospectus requirements for shelf registration statements for registered primary securities
offerings by issuers eligible to use Form S-3 or F-3 (other than in business combination transactions and
exchange offers);
„
is intended to facilitate the ability of issuers to add to a prospectus more information than is currently the case
and to do so by means other than a post-effective amendment to the registration statement;
„
describes the type of information that Primary Offering Shelf Eligible Issuers and Automatic Shelf Eligible
Issuers (described below) may omit from a base prospectus in delayed offerings and include instead in a
prospectus supplement, Exchange Act report incorporated by reference into the registration statement or a
post-effective amendment to the registration statement;
„
clarifies that prospectus supplements and the information contained in them, like information included in a
base prospectus or in an Exchange Act periodic report that is incorporated into a base prospectus, also would
be deemed to be part of and included in the registration statement and therefore subject to Section 11 liability;
„
confirms that, as today, a base prospectus that omits information would not be considered a Section 10(a) final
prospectus—to satisfy the requirements of Section 10(a), an issuer would have to include the information
omitted from the base prospectus in a prospectus supplement, or, where permitted, through its Exchange Act
filings incorporated by reference into the registration statement and prospectus but the base prospectus
nevertheless would be deemed a permitted prospectus for purposes of Section 5(b)(1);
DECEMBER 2004
Kirkpatrick & Lockhart LLP
21
„
provides that a base prospectus that omits information in accordance with the Proposed Rule would be a
permitted prospectus—thus, after a registration statement is filed, offering participants and issuers could use
this base prospectus, issuers could communicate by means of Rule 134 notices and issuers and other offering
participants could communicate via Free Writing Prospectuses under Proposed Rules 164 and 433; and
„
provides that the base prospectus in a shelf registration statement could continue to omit information that is
unknown or not reasonably available to the registrant as permitted by Rule 409.
Amendment to Forms S-3 and F-3
The Commission also proposes to amend Forms S-3 and F-3 to permit all information about the issuer and its securities
that would be required in the base prospectus included in the registration statement at the time of effectiveness to
instead be incorporated by reference from Exchange Act reports or provided in a prospectus supplement filed with the
Commission pursuant to Rule 424(b). For example:
„
material changes in the plan of distribution, which currently are required to be added only by means of posteffective amendment, could be amended by use of prospectus supplements or incorporated Exchange Act
reports;
„
in connection with a resale registration statement filed by an issuer that is eligible to use Form S-3 or Form
F-3 for primary offerings, the identity of selling securityholders and all other required information about them
may be added after the effectiveness of the registration statement by means of a prospectus supplement in
addition to the current means of filing a post-effective amendment to the registration statement but only if38
†
the registration statement at the time of its effectiveness and prior to the use of the prospectus supplement,
specified the particular private transaction in which the securities covered by the registration statement,
on behalf of the to-be-named selling securityholders, were acquired;
†
the resale registration statement identified the specific private transaction or transactions pursuant to
which the securities were sold; and
†
the private transaction was completed according to the provisions of Rule 152 and the securities that
had been the subject of the registration statement were issued in the private transaction and outstanding
prior to initial filing of the resale registration statement.
For example, in the resale registration statement for a PIPE offering in which the privately placed securities were not
yet issued even though the investors were contractually bound to purchase them, the issuer could not rely on this
provision to identify selling securityholders. The issuer must, as today, identify them in the registration statement prior
to effectiveness or by post-effective amendment.
Amendment to Rule 415
Elimination of Two-Year Limitation on Amount of Securities Registered. For offerings other than business combination
transactions and continuous offerings, the current provision in Rule 415 that limits the amount of securities registered
to an amount that is intended to be offered or sold within two years from the registration statement effective date would
be eliminated under the Proposal.
22
Creation of New Three-Year Shelf Life. As proposed, shelf registration statements could be used for three years after
the initial effective date of the registration statement before a new shelf registration statement would have to be filed
with the Commission. Unsold securities and unused fees may be carried forward to the new registration statement.
Continuous offerings begun prior to the end of the three years could continue on the old registration statement until the
effective date of the new registration statement, at which point the continuous offerings could continue on the new
registration statement for an additional three years.
Immediate Takedowns From a Shelf Registration Statement Filed Under Rule 415(a)(1)(x). Primary offerings on
Form S-3 or Form F-3 may occur promptly after effectiveness of a shelf registration statement. Current Rules permit
the omission of information from the prospectus at the time of effectiveness only in reliance on Rule 430A with respect
to immediate offerings from an effective registration statement. The Proposal permits a great deal more information
to be left for inclusion by means of a prospectus supplement after effectiveness. Rule 430A would continue to be
available for immediate takedowns.
Elimination of “At-the-Market” Offering Restrictions. Any issuer eligible to conduct a primary offering pursuant to
Rule 415 (using Form S-3 or F-3) could, under the Proposal, conduct an “at-the-market” offering of equity securities
without requiring identification of an underwriter in its registration statement and without a volume limitation.
Amendment to Rule 424
In conjunction with other procedural proposals, there would be certain companion modifications to Rule 424 such as:
„
requiring that any prospectus supplement filed pursuant to Rule 434 (which permits the use of term sheets) to
be filed at the same time as other prospectus supplements for shelf registration statement takedowns; and 39
„
requiring that, in offerings where information regarding the terms of the securities or the plan of distribution or
other information related to the offering (including changes or additions to information previously provided) is
included in Exchange Act reports incorporated by reference, the prospectus supplement filed pursuant to Rule
424 must disclose on its cover the Exchange Act report or reports where an investor could find such information.
Automatically Effective Shelf Registration Statements for
Well-Known Seasoned (Reporting) Issuers
The Proposal allows eligible Well-Known Seasoned (Reporting) Issuers:
„
to register unspecified amounts of different specified types or classes of securities (without allocating between
primary and secondary offerings) on Form S-3 or Form F-3 registration statements that will become automatically
effective upon filing;
„
to add additional classes of securities after an automatic shelf registration statement is effective, unlike other
issuers registering primary offerings on Form S-3 or Form F-3;
„
to use Automatic Shelf Registration for both primary and secondary offerings (other than in connection with
business combinations or exchange offers);
„
to pay filing fees in advance or on a “pay-as-you-go” basis at the time of each takedown off the shelf registration
statement in an amount calculated for that takedown;
„
to exclude more information from the base prospectus than from a regular shelf registration statement—the
omitted information could then be included in a prospectus supplement or incorporated by reference from
Exchange Act reports;
DECEMBER 2004
Kirkpatrick & Lockhart LLP
23
„
to use a Free Writing Prospectus to structure transactions (for example, by essentially distributing drafts of a
proper term sheet and re-distributing revised drafts in response to comments from prospective investors); and
„
to add securities of a majority-owned subsidiary that satisfies the conditions for being considered a WellKnown Seasoned Reporting Issuer on its own by post-effective amendment that becomes effective upon filing.
However, if the issuer satisfies the definition of Well-Known Seasoned (Reporting) Issuer based only on its aggregated
registered debt issuances, it may register only non-convertible obligations on the Automatic Shelf Registration Statement.
Eligibility Reassessment. An issuer could file an Automatic Shelf Registration Statement if it met the eligibility
criteria for Well-Known Seasoned (Reporting) Issuers on the initial filing date of the registration statement. The issuer
must reassess its eligibility at the time the prospectus contained in the registration statement must be updated pursuant
to Section 10(a)(3) of the Exchange Act (e.g., upon the filing of a Form 10-K or Form 20-F).
If the issuer becomes ineligible to use an Automatic Shelf Registration Statement at the time of a Section 10(a)(3)
update, it would have to either post-effectively amend its registration statement using the form it was then eligible to
use or file a new registration statement on such other form. Any offerings that were ongoing at that time, such as
registered conversions of outstanding convertible securities, could continue on the Automatic Shelf Registration
Statement until a post-effective amendment or new registration statement that was timely filed was declared effective.
Mechanics of Automatic Effectiveness. As proposed under Rule 462(e) and (f), all Automatic Shelf Registration
Statements and post-effective amendments thereto would become effective automatically upon filing, without Staff
review. Rule 401(g) would provide that an Automatic Shelf Registration Statement would be deemed to be filed on
the proper form unless the Staff notified the issuer after filing of its objection to the use of such form. If the Staff
notified an issuer of its objection, the issuer could not proceed with subsequent offerings (not already in progress),
unless it amended the registration statement to the proper form, or otherwise resolved the issue. In that case, even if the
Staff were to notify an issuer that it was ineligible to use an Automatic Shelf Registration Statement, securities sold
prior to notification would not be deemed to have been sold in violation of Section 5.
With automatic effectiveness, the Staff would expect issuers to evaluate whether there are unresolved disclosure or
accounting issues that have been raised on the issuer’s Exchange Act filings before filing the Automatic Shelf Registration
Statement or at the time of its Section 10(a)(3) update to such registration statement. However, because the Commission
believes it is important that issuers address unresolved comments on a timely basis, accelerated filers, which include
Well-Known Seasoned (Reporting) Issuers, would be required to disclose written Staff comments received 180 days
before the issuer’s fiscal year end that the issuer believes are material and that have remained unresolved at the time of
filing of the Form 10-K or Form 20-F.
Duration of Shelf. As is the case with other shelf registrations, issuers are required under the Proposal to file new
Automatic Shelf Registration Statements every three years which would, in effect, amend and restate their theneffective registration statement. The new registration statement likewise would be effective immediately and would
carry forward the securities registered and any fee paid on the prior registration statement provided the issuer is, at the
time of the new filing, eligible for Automatic Shelf Registration. In effect then, the issuer’s securities offerings under
the prior registration statement could proceed uninterrupted.
More Information May be Omitted From the Base Prospectus. A base prospectus included in an Automatic Shelf
Registration Statement could, as today, omit information pursuant to Rule 409 that was unknown and not reasonably
available and, as proposed, could omit the following additional information:
„
24
whether the offering is a primary or secondary offering;
„
the names of any selling security holders; and
„
any plan of distribution for the offering.
Omitting this additional information from the base prospectus would not affect the information that an investor
would be provided in connection with a particular sale. The right to omit information from a base prospectus also
does not affect the fact that under Staff interpretations and Proposed Rule 159, whether there are material misstatements
or material omissions is assessed on the basis of information conveyed at the time of sale.
Including Later Information. As discussed above, the Proposal would allow issuers to add omitted information to
a prospectus generally by means other than a post-effective amendment. Forms S-3 and F-3 would be amended to
permit all information required in the prospectus about the issuer and its securities to be incorporated by reference
from Exchange Act reports or contained in the prospectus supplement related to each takedown that would be
deemed to be part of and included in the registration statement. Examples of the types of information that could be
added in this manner for Automatic Shelf Registration Statements would include:
„
the public offering price;
„
a detailed description of securities;
„
the identity of underwriters and selling securityholders; and
„
the plan of distribution of the securities.
The principal exception to this is that an issuer desiring to add to the registration statement new types or classes of
securities or new eligible issuers, including guarantors, and the securities they intend to issue, must do so by
registering them via an automatically effective post-effective amendment40 at any time before the sale of those
securities and could provide the disclosure about the new class of securities or new registrants either in the posteffective amendment, in a prospectus supplement or in an Exchange Act report incorporated by reference in the
registration statement.
Elimination of Specific Amount or Number of Securities to be Registered Currently. Currently, an issuer offering
securities on Form S-3 or Form F-3 is not required to specify the amount of each class of securities that it will offer,
but it is required to separately register and designate the amount and classes of securities that may be offered and
sold by eligible subsidiaries and selling securityholders; offerings for selling securityholders are not considered
delayed offerings under Rule 415(a)(1)(x) and thus must be separately registered or designated prior to effectiveness
of the registration statement; and securities of selling securityholders cannot be sold using an unallocated shelf
registration statement.
Under the Proposal:
„
the issuer may register an unspecified amount of securities to be offered, without indicating whether the
securities would be sold in primary offerings or secondary offerings on behalf of selling securityholders;
„
the registration fee table in the initial registration statement would not need to include a dollar amount or
specific number of securities—the issuer could specify the number or dollar amount of securities in a prospectus
supplement for each offering;
„
the base prospectus in the initial registration statement must identify and describe, to the extent the information
was available at that time, the classes of securities registered (as under current practice with shelf registration,
the descriptions would not need to contain detailed information as to particular security terms); and
DECEMBER 2004
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25
„
classes of securities may be registered without allocating the mix of securities registered among the issuer, its
eligible subsidiaries or selling securityholders.
Registration Fees. Well-Known Seasoned (Reporting) Issuers will be able to pay filing fees for their Automatic Shelf
Registrations either in advance or on a pay-as-you-go basis at the time of each takedown from the shelf. For example,
a small initial filing fee would be paid at the time of filing the initial registration statement which may be used offset
against fees paid for the first takedown. In addition:
„
at any time before each takedown in the future, the issuer could file a prospectus supplement that would include
the “calculation of registration fee table” for that takedown;
„
the issuer would pay the appropriate fee calculated in accordance with Securities Act Rule 457 at the time of
the filing of the prospectus supplement; and
„
the issuer must file the prospectus supplement with the fee table in accordance with the due date under the
applicable section of Rule 424(b).
Increased Flexibility for Unseasoned (Reporting) Issuers—
Incorporation by Reference in Forms S-1/F-1
The Proposal would affect Unseasoned (Reporting) Issuers by, among other things:
„
expanding the circumstances under which issuers may incorporate information from their Exchange Act reports
into their Securities Act registration statements; and
„
eliminating Form S-2 and Form F-2.
The Proposal permits any Reporting Issuer (other than an Ineligible Issuer) that has filed at least one annual report and
that is current in its reporting obligation to incorporate by reference into its Form S-1 or Form F-1 registration statements
information from its previously filed Exchange Act reports and documents, provided the issuer makes its Exchange
Act reports and other documents readily accessible on its web site (the issuer need not effect any other type of
“delivery” of the reports and documents).
The prospectus in the registration statement at the time of effectiveness must identify all Exchange Act reports and
documents that are incorporated by reference. Exchange Act reports and documents not identified in the registration
statement or that are filed after the registration statement becomes effective may not be incorporated by reference.
Any material changes in or updates to the information that is incorporated by reference from an Exchange Act report
or document must be included in the Form S-1/F-1.
Expanding the types of issuers that may incorporate by reference through the proposed amendments to Form S-1 and
Form F-1, without requiring delivery of the incorporated documents, would make Form S-2 and Form F-2 superfluous.
The Commission, therefore, proposes to eliminate these two forms.
Prospectus Delivery Reforms
Currently
An investor’s investment decision and the sale of securities to the investor in an offering generally occur before the
final prospectus is required to be delivered under the Securities Act—moreover, for sales occurring in the aftermarket,
investors in securities of reporting issuers are not delivered a final prospectus.
26
Proposal
The Proposal would:
„
eliminate the existing requirement that a final prospectus must be delivered prior to or with the delivery of a
confirmation of sale;
„
provide that the obligation to have a final prospectus precede or accompany a security for sale could be
satisfied by filing the final prospectus within the required time;
„
permit written notices of allocations; and
„
permit the prospectus delivery obligations in dealer transactions during any prospectus delivery period and
registered resale transactions in securities that are already trading to be satisfied if the final prospectus has been
filed or will be filed within the required time period.
Access Equals Delivery—Proposed Rule 172. Under Proposed Rule 172, a final prospectus would be deemed to
precede or accompany a security for sale for purposes of Section 5(b)(2) of the Securities Act as long as the final
prospectus meeting the requirements of Section 10(a) is filed as part of the registration statement by the required Rule
424 prospectus filing date.41
Notice of Sale—Proposed Rule 173. Proposed Rule 173 provides that:
„
for each transaction involving a sale by an issuer or underwriter or a sale in which the final prospectus delivery
requirements apply, each underwriter, broker or dealer participating in a registered offering (or, if the sale was
effected by the issuer and not an underwriter, broker or dealer, then the issuer) may send to each purchaser, not
later than two business days after the completion of the sale, in lieu of the final prospectus, a notice stating that
the sale was made pursuant to a registration statement or a final prospectus in a registration statement;
„
an investor may request a final prospectus but such prospectus would not have to be provided before settlement;
and
„
compliance with Proposed Rule 173 would not, in and of itself, be a condition to the exemption from final
prospectus delivery under Proposed Rule 172 and non-compliance with Proposed Rule 173 would not result in
a violation of Section 5.42
Confirmations and Notices of Allocations of Shares. Under the Proposal, written confirmations43 and notices of
allocation of shares offered also may be sent after the effectiveness of a registration statement without being accompanied
or preceded by a final prospectus. Written communication from a broker/dealer to a customer or from an underwriter
to participating dealers in the selling group may notify them of the basic terms of the transaction or their allocations of
the securities.
The notice of allocations could include the name of the securities, the amount allocated to the customer, the price of
the securities, and the date or expected date of settlement and incidental information. This exemption from prospectus
delivery requirements would be conditioned on the registration statement being effective and the final prospectus
meeting the requirements of Section 10(a) being filed within the required time frame.
Exchange or Registered Trading Facility Transactions—Amended Rule 153. Rule 153 addresses the delivery of final
prospectuses in transactions taking place between brokers over a national securities exchange; it does not currently
apply to transactions on an automated quotation system such as the Nasdaq Stock Market. The Proposal would
expand Rule 153 to apply to any trading facility registered with the Commission. Broker/dealers would be deemed to
DECEMBER 2004
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27
satisfy their prospectus delivery obligations under Section 5(b)(2) with regard to transactions in securities that are
already trading on the market or through the trading facility if the final prospectus is on file, securities of the same class
are trading on the exchange or through the trading facility and the registration statement relating to the offering
remains effective and is not the subject of a stop order issued under Section 8.
Aftermarket Prospectus Delivery—Amendment to Rule 174. All dealers are required to deliver a final prospectus for
a specified period (generally 25 days if the securities will be listed) after a registration statement becomes effective to
persons who buy the securities in the aftermarket. Rule 174 exempts from aftermarket prospectus delivery requirements
any transaction relating to securities of a reporting issuer. The rule applies only to dealers and does not apply to
underwriters continuing to act as such with regard to any unsold allotment in the offering. Rule 174 would be revised
to provide that during the aftermarket period, dealers can rely on Proposed Rule 172 (Access Equals Delivery) to
satisfy any aftermarket delivery obligations.
V. EXCHANGE ACT DISCLOSURE EXPANDED
Risk Factor Disclosure Added to Form 10-K and Form 10
Under the Proposal, risk factor disclosure must be included in annual reports on Form 10-K and registration statements
on Form 10. This disclosure is essentially the same type of Item 503 disclosure as in a Securities Act registration
statement, other than, obviously, information about a particular securities offering, and would have to be written in
accordance with the same “plain English” standards that apply to Securities Act registration statements. Material
changes from risks previously disclosed in Exchange Act reports would have to be reflected in the Form 10-Q Quarterly
Reports. However, a restatement or repetition of risk factors in the Form 10-Q Quarterly Reports would not be
required.
Disclosure of Unresolved Staff Comments
The Commission is concerned that some of the proposed procedural changes will eliminate certain incentives issuers
currently have to respond to Staff comments on their Exchange Act reports in a timely manner. As a result, the
Proposal requires Accelerated Filers to disclose in their annual reports on Forms 10-K or 20-F written Staff comments
(made in connection with its review of prior Exchange Act reports) issued more than 180 days before the end of the
fiscal year covered by the annual report and that remain unresolved as of the date of the filing of the Form 10-K/Form
20-F that the issuer believes are material. Staff comments that have been resolved, including those that the Staff and
the issuer have agreed would be addressed in future Exchange Act reports, would not need to be disclosed. Issuers
will be permitted to state their position regarding any such unresolved comments in the annual report.
Disclosure of Status as Voluntary Filer under the Exchange Act
The Commission believes that it is important that investors and other market participants are aware that an issuer is a
voluntary filer and, thus, may cease to file its Exchange Act reports at any time and for any reason, without notice. As
a result, a box will be included on the cover page of Forms 10-K, 10-KSB and 20-F for an issuer to check if it is filing
reports voluntarily. The box would be for informational purposes only and the issuer’s filing obligation would be
unaffected by an incorrectly checked box. The Proposal does not permit voluntary filers to become Seasoned
(Reporting) Issuers. Identification of voluntary filers also would enable the Commission to monitor their use of the
proposed communications rules as well as the other regulatory requirements.
28
VI. MISCELLANEOUS
Liability Issues
Date of Inclusion of Prospectus Supplements in Registration Statements.
Proposed Rules 430B and 430C make clear that a prospectus supplement would, in all cases, be considered part of
and included in shelf registration statements for purposes of determining liability under Section 11 of the Securities
Act. (Section 11 assesses liabilities only as of the time the registration statement is declared effective.) In addition, the
Commission specifically addressed the dating of the information in the prospectus supplement for liability purposes:
„
under Proposed Rule 430B and Proposed Rule 430C, all information in a prospectus supplement filed other
than in connection with a takedown (pursuant to Rule 424(b)(3) or Rule 497(c) or (e)) would be deemed part
of the registration statement as of the date the prospectus supplement is first used; and
„
under Proposed Rule 430B, all information in a prospectus supplement filed in connection with a takedown
(pursuant to Rule 424(b)(2), (b)(5), (b)(7) or Proposed Rule 424(b)(8)) to add information omitted from the
base prospectus that relates to the issuer or the identity of the selling securityholders and that constitutes a
substantive change from or in addition to the information in the base prospectus, would be deemed part of the
registration statement as of the earlier of the date the prospectus supplement is first used or the date and time of
the first contract of sale of securities in the offering to which the prospectus supplement relates.
(The date of first use for purposes of Rule 424 is not the date the prospectus supplement is given to a purchaser; it is
the date that the prospectus is available to the managing underwriter, syndicate member or any prospective purchaser.)
For purposes of Section 11 liability for a shelf registration statement, the Proposal creates a new effective date for each
takedown from the shelf. This would be the same date a filed prospectus supplement used in connection with the
takedown was deemed part of the relevant registration statement pursuant to Proposed Rules 430B and 430C, as
applicable (see above). However, the new effective date would not:
„
be considered the filing of a new registration statement for purposes of Form eligibility—the determination of
an issuer’s eligibility to use Form S-3 or F-3 would, as today, be made at the time of the Section 10(a)(3) update
to the registration statement;
„
by itself, require the filing of additional consents of experts;
„
in and of itself, result in a duty to update the registration statement; and
„
modify or supersede any information contained in the registration statement for purposes of an earlier effective
date with respect to a prior takedown (thus, the rights of an investor in a prior sale (with a previous effective
date) would be unaffected by subsequently filed information).
These provisions also would reconcile the effective date for shelf offerings with a comparable date for non-shelf
offerings and would eliminate the unwarranted, disparate treatment of underwriters and issuers and others subject to
liability under Section 11. Today, new effective dates of shelf registration statements occur annually at the time of the
Section 10(a)(3) updates, while takedowns occur periodically throughout the year. The Proposal would not change
the date at which disclosure is evaluated under Section 11 for underwriters but would move the effective date for the
issuer and others subject to liability under Section 11 to the same date, or approximately the same date, as for underwriters
for takedowns off shelf registration statements.
DECEMBER 2004
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29
Timing of Other Disclosure Liabilities.
Commission Interpretation of Section 12(a)(2) and Section 17(a)(2) Liability—Proposed Rule 159. The Commission
believes that the current discrepancy between the time of the contract of sale for securities (when an investor makes the
investment decision to purchase the securities) on the one hand, and the later time of availability of a prospectus (and
perhaps other information) on the other hand, should be dealt with. The Securities Act registration regime permits
final prospectuses to become available after an investor has made the decision to purchase a security.44 The Interpretation
embodied in Proposed Rule 159 holds that materially accurate and complete information regarding an issuer and the
securities being sold should be available to investors at the time of the contract of sale, which is the date when the
investment decision is made, not the date that a confirmation is sent or received or a payment is made. Under the
Interpretation, the time of contract of sale can be the time the purchaser either enters into the contract (including by
virtue of acceptance by the seller of an offer to purchase) or completes the sale, whichever comes first.
Therefore, the Commission interprets Section 12(a)(2) and Section 17(a)(2) as meaning that, for purposes of assessing
whether information that is conveyed to an investor at the time of sale by or on behalf of a seller (including an issuer,
underwriter, participating dealer, or other offering participant) includes a material misstatement or omits to state a
material fact necessary in order to make the statements in light of the circumstances under which they were made, not
misleading, information conveyed to the investor only after the time of the contract of sale should not be taken into
account. For purposes of Section 12(a)(2) and 17(a)(2), then, whether or not information has been conveyed to an
investor at or prior to the time of the contract of sale is a facts and circumstances determination. Evaluation of
information at or prior to the time of sale, however, would not take into account any modifications, corrections, or
additions that are made available subsequent to the time of sale, including information contained in any final prospectus,
prospectus supplement, or Exchange Act filing that is only filed or delivered subsequent to the time of sale.
The Interpretation is not intended to affect any of the existing liabilities that may arise under the securities laws in
respect of any other time. Section 12(a)(2) would apply to oral communications and prospectuses (including final
prospectuses) at other times; Section 17(a)(2) would similarly apply to statements at other times; and both Securities
Act Section 12(a)(2) and Section 17(a) would continue to assess liability for “offers” as well as for sales. The
Interpretation clarifies that the time an investor enters into a contract of sale and becomes committed to purchase the
securities is merely another appropriate time to apply the liability standards of Section 12(a)(2) and Section 17(a)(2).
The Commission has included in the Release an extensive list of questions concerning the Interpretation as to which
it is requesting comment.
Amendment to Rule 412. Under current Rule 412, information contained in a prospectus supplement or Exchange
Act filing incorporated by reference into a registration statement may modify or supersede other previously disclosed
information that was contained in a document incorporated or deemed to be incorporated by reference in that registration
statement. The Proposal would revise Rule 412 to make it consistent with Proposed Interpretive Rule 159. The
revision would provide that subsequently provided information deemed part of or incorporated by reference into a
registration statement or prospectus would not modify or supersede any information conveyed to an investor at the
time of the contract of sale for purposes of determining the information conveyed to an investor at or prior to that time.
Relationship of Interpretation to Section 11 Liability. Under the Interpretation, information contained in a prospectus
or prospectus supplement that is filed after the time of the contract of sale will be considered to be part of and included
in a registration statement for purposes of liability under Section 11 at the time of effectiveness, which may be at or
before the time of the contract of sale. The date and time that the information is deemed part of the registration
30
statement preserves an investor’s rights under Section 11, but does not affect any rights assessed at the time of sale that
the investor may have under Section 12(a)(2) or that the Commission might enforce under Section 17(a). Thus,
information that is deemed part of the registration statement as of the time of the contract of sale for shelf takedowns
or as of effectiveness under Securities Act Rule 430A would not be taken into account under Section 12(a)(2) or
Section 17(a)(2) unless the information was conveyed to an investor at or prior to the time of the contract of sale.
Similarly, an investor’s rights under Section 11 would not be affected by information conveyed to an investor at or
prior to the time of the contract of sale that is not in or deemed part of the registration statement at the time of the
effectiveness of the registration statement for the securities sold to the investor. An investor could also pursue an action
under Section 12(a)(2) based on the final prospectus.
Issuer as Seller—Proposed Rule 159A. The Commission believes that there is unwarranted uncertainty as to issuer
liability under Section 12(a)(2) for issuer information in registered offerings using certain types of underwriting
arrangements. As a result, issuers may not be held liable under Section 12(a)(2) for information contained in the
issuer’s prospectus included in its registration statement. Therefore, Proposed Rule 159A provides that an issuer in a
primary offering of securities, regardless of the form of the underwriting arrangement, is considered to offer or sell the
securities to the purchaser, and therefore be a seller for purposes of Section 12(a)(2), in respect of any communications
made by or on behalf of the issuer.
Proposed Rule 159A provides that any of the following communications would be deemed to be made by or on behalf
of an issuer:
„
the registration statement relating to the offering and any preliminary prospectus or prospectus supplement
relating to the offering filed pursuant to Securities Act Rule 424 or Rule 497;
„
any Free Writing Prospectus prepared by or on behalf of the issuer;
„
information about the issuer or its securities provided by or on behalf of the issuer and included in any other
Free Writing Prospectus; and
„
any other communication made by or on behalf of the issuer.
A communication by an underwriter or dealer participating in an offering would not be on behalf of the issuer solely
by virtue of that participation. However, depending on the facts and circumstances, a communication by an underwriter
or dealer could be a communication on behalf of an issuer to the extent it contained Issuer Information. This definition
of the issuer as a seller is not intended to affect whether any other person offers or sells a security by means of the same
prospectus or oral communication for purposes of Section 12(a)(2).
Asset-Backed Securities
Regulation AB, proposed by the Commission earlier this year, addresses comprehensively the registration, disclosure,
and reporting requirements for asset-backed securities (ABS) under the Securities Act and the Exchange Act.
The communications reforms in the current Proposal would generally apply to ABS offerings though many would
have only limited application in such context. For example, safe harbor exclusions from the definition of offer for
purposes of the gun-jumping provisions would apply, and the Regularly Released Information safe harbor for reporting
issuers could apply, depending on the facts and circumstances, to information conveyed to investors in outstanding
ABS, such as static pool information provided with respect to pools underlying outstanding ABS, either in Exchange
Act reports or other communications.
DECEMBER 2004
Kirkpatrick & Lockhart LLP
31
For purposes of the current Proposal, ABS issuers offering securities registered on Form S-1 would be considered
Non-Reporting Issuers. ABS issuers offering securities registered on Form S-3 would be considered Seasoned
(Reporting) Issuers. No ABS issuer would be a Well-Known Seasoned (Reporting) Issuer. Consequently, Automatic
Shelf Registration would not be available to issuers of ABS. The general content of ABS registration statements under
current practice and under the ABS proposals would not change.
The permitted use of Free Writing Prospectuses in the Proposal would change for ABS issuers from that contained in
Proposed Regulation AB. Following a series of Staff no-action letters from the mid-1990’s, certain ABS issuers have
been permitted to use written offering related communications outside of the prospectus in connection with offerings
registered on Form S-3. Proposed Regulation AB would codify the use of these informational and computational
materials for these issuers in accordance with existing no-action letters; these materials would all be filed on
Form 8-K and incorporated by reference into the registration statement, regardless of who prepared the materials.
Under the current Proposal, these materials would be considered Free Writing Prospectuses and their use would be
conditioned on satisfying the conditions of Proposed Rule 164 and Proposed Rule 433. The conditions of Proposed
Rule 433 would permit use of Free Writing Prospectuses:
„
„
by ABS issuers using Form S-1, if
†
a registration statement containing a statutory prospectus was filed; and
†
in the case of a Free Writing Prospectus prepared by or involving payments made or compensation
given by issuers or other offering participants, the Free Writing Prospectus was preceded or accompanied
by the most recent statutory prospectus; and
by ABS issuers eligible to use Form S-3, if a registration statement containing a statutory prospectus is on file
but the statutory prospectus need not be delivered.
Underwriters that use informational and computational materials would not be required to file the Free Writing
Prospectuses that they prepare and including information prepared by the underwriters on the basis of, but not containing,
Issuer Information, such as computational materials based on pool data provided by the issuer, would not trigger a
filing requirement for an underwriter’s Free Writing Prospectus.
However, an issuer would be required to file such materials prepared by it, as well as Issuer Information included in an
underwriter’s Free Writing Prospectus unless it was already filed or part of a registration statement or previously filed
Free Writing Prospectus or Issuer Information. In addition, as is the case today, any final term sheet would need to be
filed. A Free Writing Prospectus in an ABS offering, like any Free Writing Prospectus, would not be automatically
incorporated by reference into the registration statement though it nevertheless would be subject to Section 12(a)(2)
liability.
*
*
*
*
*
If you have any questions about this Client Alert, please contact Lorraine Massaro at 212.536.4043 (lmassaro@kl.com);
Nanette Heide at 212.536.4813 (nheide@kl.com); or Ronald Goldberg at 212.536.3964 (rgoldberg@kl.com).
32
ENDNOTES
1 In connection with the Proposal, the following would be revised: (a) Securities Act Rules 134, 137, 138, 139, 153,
158, 174, 401, 405, 408, 412, 413, 415, 418, 424, 430A, 434, 439, 456, 457, 462, 473 and 902; (b) Forms S-1, F1, S-3, F-3 and to a minor degree, S-4 and F-4 (business combination transactions and exchange offers are not
covered by the Proposal, however); (c) Exchange Act Rule 14a-2 and Regulation FD; and (d) Forms 10, 10-K, 10KSB and 10-Q. Forms S-1 and S-2 under the Securities Act would be eliminated. The following rules under the
Securities Act would be added: Rules 163, 163A, 164, 168, 169, 172, 173, 430B and 433.
2 The foundation for the proposed reforms seems to be the recent significant enhancement of the periodic reporting
system for public companies under the Securities Exchange Act of 1934, technological advances in the means of
dissemination of information, the aftermath of the Sarbanes-Oxley Act and the Commission’s relentless push
toward “real-time” disclosure of and equal access to high-quality information about issuers.
3 Other than in connection with business combinations and exchange offers.
4 Today the filing of a post-effective amendment would be required in many cases.
5 A Well-Known Seasoned (Reporting) Issuer also includes a majority-owned subsidiary under certain conditions.
6 The date of determination is, initially, the filing date of the registration statement and, thereafter, the dates on
which the registration statement is required to be updated pursuant to Securities Act Section 10(a)(3) (i.e., generally
the filing of a Form 10-K or 20-F). As to those dates, the determination is made as of the last business day of the
most recently completed second fiscal quarter prior to the date of filing of the Form 10-K or 20-F.
7 This is the same public float test that currently is used to determine if a public company is an “accelerated filer” that
is required to file its Exchange Act reports in the shorter time frames being phased in under the Sarbanes-Oxley
rules but is much higher than the $75 million public float test used to determine eligibility to use Form S-3 or F-3.
8 These issuers are generally ineligible to use the Proposal’s new communications safe harbors, exemptions and
exclusions and the simplified shelf registration procedure.
9 Rule 135 permits written notice of a proposed registered offering, which, for purposes of Section 5 of the Securities
Act, will not be deemed to constitute a prohibited offer provided that the notice includes a statement to the effect
that it does not constitute an offer of any securities for sale and otherwise includes no more than the following
information: the name of the issuer; the title, amount and basic terms of the securities offered; the amount of the
offering, if any, to be made by selling securityholders; the anticipated timing of the offering; a brief statement of the
manner and the purpose of the offering, without naming the underwriters; whether the issuer is directing its offering
to only a particular class of purchasers; any statements or legends required by the laws of any state or foreign
country or administrative authority; and certain other information if the offering will involve a rights offering to
existing securityholders, an offering only to employees, an exchange offer or a Rule 145(a) offering.
10 Well-Known Seasoned (Reporting) Issuers may rely on either the Proposed Rule 168 safe harbor or the Free
Writing Prospectus exemption (discussed below) during this period. However, the permitted communications
under Proposed Rule 168, unlike a Free Writing Prospectus, would not be deemed to constitute prospectuses and
therefore would not be subject to liability under Section 12(a)(2) or 17(a) under the Securities Act or Section 10(b)
or Rule 10b-5 under the Exchange Act.
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11 Currently, the Staff follows an informal rule of thumb that would allow “standard business communications” made
prior to a 45-day period before an issuer is “in registration” to be exempt from gun-jumping issues.
12 Existing exemptions, such as Rule 135 notices, continue to be available and the existing industry practice of trying
to assess what business-related communications are not prohibited offers or prospectuses based on facts and
circumstances endures.
13 The 30-day period is intended to be consistent with the 30-day time period used in Rule 155 relating to integration
of abandoned offerings.
14 Ineligible Offerings are those involving business combinations, offerings registered on Form S-8 and offerings by
Ineligible Issuers.
15 The required Legend for all Free Writing Prospectuses is as follows:
“[Issuer’s name] may file a registration statement (including a prospectus) with the SEC for this offering. Before
you invest, you should read the prospectus in it and other documents the issuer has filed with the SEC for more
complete information about [issuer’s name], including any risks affecting the issuer or its securities, and this
offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov.
Alternatively, the company will arrange to send you the prospectus after filing if you request it by calling toll-free
1-8[xx-xxx-xxxx]. This document is a written communication that is an offer pursuant to a free writing prospectus.”
The Legend may also indicate, if true, that the statutory prospectus may be accessed on the issuer’s website, and
may provide the Internet address and the exact location of the documents on the website.
16 The Proposal provides that the unintentional omission of the Legend may be cured if the Free Writing Prospectus
is retransmitted with the Legend to all prospective purchasers to whom or by the same means as the Free Writing
Prospectus was originally transmitted and the unintentional failure to file the communication may be cured by
filing the Free Writing Prospectus as soon as practicable after discovery of the failure to file, in each case avoiding
a violation of Section 5.
17 Section 5(b)(1) of the Securities Act limits the means by which written offers may be made following the filing of
the registration statement; it does not limit oral offers. Rule 134 provides a safe harbor from the gun-jumping
provisions of Section 5 for limited written notices about an offering made post-filing.
18 All issuers, including Well-Known Seasoned (Reporting) Issuers, are precluded from relying on Rule 134 until a
registration statement is on file. Well-Known Seasoned (Reporting) Issuers would instead relay on Proposed Rule
163 exempting pre-filing offers from the gun-jumping provisions and the communication would constitute a Free
Writing Prospectus.
19 The conditions include a prescribed Legend; the filing of the Free Writing Prospectus on or prior to the date of its
first use, and in some cases, having the Free Writing Prospectus be preceded or accompanied by delivery of a
statutory prospectus; and retention of the Free Writing Prospectus. These conditions also depend in part on the
type of issuer involved. Ineligible Issuers and issuers involved in Ineligible Offerings would not have the benefit
of the Proposed Rule.
20 Existing rules do not require the delivery of preliminary prospectuses in offerings involving reporting issuers.
34
21 Use of a broadly disseminated Free Writing Prospectus by an issuer in this category may not be feasible unless, for
example, it is in electronic form and contains a hyperlink to the statutory prospectus.
22 For example, once an investor had been sent a preliminary prospectus, absent a material change, Proposed Rule
433 would permit subsequent e-mail communications by an offering participant that constitute Free Writing
Prospectuses without having to hyperlink to or otherwise redeliver a statutory prospectus with each communication.
After effectiveness of the registration statement and the availability of a final prospectus meeting the requirements
of Section 10(a), no earlier statutory prospectus may be provided, and such final prospectus must precede or
accompany any Free Writing Prospectus provided after such availability, whether or not an earlier statutory prospectus
had been provided to the recipient. If a final prospectus is given or sent prior to or with a written offer, the written
offer is not a prospectus and therefore would not be a Free Writing Prospectus and Proposed Rules 164 and 433
would not apply.
23 Rule 134 notices and Rule 135 would not be considered Free Writing Prospectuses under the Proposal and would,
therefore, not be subject to these conditions. Electronic road shows would not be subject to the filing condition in
certain circumstances (see “Special Filing Situations”).
24 Issuer Information contained in Free Writing Prospectuses would be publicly available on the EDGAR system.
25 An issuer, underwriter, dealer, or other offering participant may not indirectly disseminate information through the
press or otherwise without complying with the Conditions of Proposed Rule 433.
26 Examples of this information would include information prepared by an underwriter that is proprietary to the
underwriter.
27 Issuer involvement or participation in an electronic road show would make it an Issuer Free Writing Prospectus.
28 For example, the road show audience would not have to be limited in any way, and the road show need not be the
re-transmission of a live presentation in front of an audience. In addition, those distributing the road show would
not have to limit viewers to seeing it either within a 24-hour period or twice. They could also allow viewers to copy,
print or download the road show. Multiple versions of the electronic road show would be permitted. Each would be
a separate Free Writing Prospectus. Upon adoption of the Proposal, the electronic road show no-action letters for
registered public offerings would be withdrawn by the Staff.
29 “Bona fide electronic road show,” for purposes of the Proposed rule, is a version of the electronic road show (one
that is provided or made available by means of graphic communication) that contains a presentation by some
members of an issuer’s management and, where the issuer is using more than one version of an electronic road
show, covers the same general areas regarding the issuer, its management, and the securities being offered as the
other versions. To be bona fide, the version need not address all of the same subjects or provide the same information
as the other versions of an electronic road show. It also need not provide an opportunity for questions and answers
or other interaction, even if other versions of the electronic road show do provide such opportunities.
30 In all cases the member of the media must be unaffiliated with the issuer and other offering participants.
31 Base prospectuses, preliminary prospectuses and prospectuses subject to completion that are permitted under
Securities Act Rules are statutory prospectuses under Section 10 but are not prospectuses that satisfy the requirements
of Section 10(a).
DECEMBER 2004
Kirkpatrick & Lockhart LLP
35
32 Oral communications of an issuer made in connection with a registered offering would, as today, not be subject to
any filing or public disclosure requirement. The existing exclusion in Regulation FD for registered business
combination transactions also would not be affected. The Commission proposed including a proviso that would
bring within Regulation FD any capital raising offering by an issuer if the securities are being registered for the
purpose of evading the requirements of Regulation FD. This would cover the situation, for example, where a
de minimis issuer participation was included in what was otherwise entirely a selling security holder offering in an
attempt to exclude communications in the offering from the application of Regulation FD.
33 The 2002 Global Research Settlement on Research Analysts Conflicts of Interest, which involved twelve brokerage
firms, requires the settling firms to, among other things, adopt changes designed to ensure that there is a structural
separation between the firm’s analysts and investment bankers. The firms are required to include enhanced disclosures,
including disclosure of potential conflicts of interests and disclosure of their analysts’ quarterly performance. The
firms are also required to pay for independent research for a five-year period and to make this research available to
the firm’s customers. The National Association of Securities Dealers and the New York Stock Exchange have
adopted rules requiring, among other things, separating analyst compensation from investment banking influence,
prohibiting analysts from issuing research reports around the expiration of a lock-up agreement (sometimes called
“booster shot” research reports), imposing quiet periods around the issuance of research reports for offering
participants, prohibiting analysts from participating in “pitches” or other communications for the purpose of soliciting
investment banking business, restricting prepublication review of research reports by non-research personnel,
prohibiting retaliation by investment banking personnel against analysts whose reports or public appearances may
adversely affect an investment banking client relationship, requiring disclosure of any compensation from an issuer
or other relationships with clients, and requiring additional registration, qualification, and continuing education
requirements for research analysts.
34 The rules do not supersede any applicable rules of a self-regulatory organization regarding the timing of the
distribution of research reports.
35 The consideration prohibited by the Rule does not include payment of (i) the regular price being paid by the broker
or dealer for independent research, so long as the other conditions above are satisfied or (ii) payment of the regular
subscription or purchase price for the research report.
36 According to the Commission, the underlying premise of Rule 138 is that there is less opportunity to condition the
market when a broker or dealer is involved in the underwriting of one type of security but providing regular course
research on another type (as for example underwriting an offering of equity securities while providing research on
debt securities of the issuer).
37 (Or to foreign private issuers that meet the eligibility requirements of Form F-3 (other than the reporting history)
and that either satisfy the $75 million public float test or are issuing non-convertible investment grade securities
and have equity securities that are publicly trading abroad for at least 12 months.)
38 Currently, the Staff of the Division of Corporation Finance requires all issuers registering securities for the benefit
of selling securityholders to include the names of selling securityholders in the registration statement either prior to
effectiveness or through a post-effective amendment to the registration statement, with limited exceptions. Often,
however, transfers of restricted securities occur after the private placement is completed so that the identities of the
holders of those restricted securities at the time of filing the resale registration statement may not be known to the
issuer. Filing post-effective amendments to add new or previously unidentified securityholders, as opposed to
36
identifying the selling securityholders in a prospectus supplement at the time of their resale offering, can impose
significant delays in the offering.
39 The Commission indicated that it does not believe prospectus supplements used by issuers relying on Rule 434
should be treated differently than any other type of prospectus supplement.
40 New registrants and their officers and directors would be required to be signatories to the post-effective amendment.
41 Certain types of offerings are excluded from Proposed Rule 172. For example, in offerings made pursuant to Form
S-8, the final prospectus is never filed with the SEC and, thus, these offerings do not raise the same types of issues
as in capital formation transactions. Business combination transactions and exchange offers also differ from other
types of offerings registered under the Securities Act because the proxy rules and tender offer rules in conjunction
with state law impose informational and delivery requirements in those transactions. The information contained in
the final prospectus therefore would be delivered regardless of the Securities Act’s requirements.
42 The same offerings excluded pursuant to Proposed Rule 172 would also be excluded from this notification provision.
43 Confirmations must be limited to information called for in Exchange Act Rule 10b-10 and other information
customarily included in confirmations.
44 For example, in a shelf offering an issuer is permitted to file a final prospectus supplement not later than the second
business day after a takedown.
DECEMBER 2004
Kirkpatrick & Lockhart LLP
37
K&L is comprised of more than 800 lawyers practicing in offices located in Boston, Dallas, Harrisburg, Los
Angeles, Miami, Newark, New York, Pittsburgh, San Francisco and Washington. K&L currently represents or
recently has performed projects for over half of the Fortune 100 companies; 21 of the 25 largest mutual fund
complexes or their investment managers; and 18 of the 20 largest U.S. bank holding companies or their
affiliates. Our practice is national and international in scope, cutting edge, complex, and dynamic. You can
learn more about the firm and its practice areas by visiting our website at www.kl.com.
Our corporate and securities lawyers represent companies, investment banks, underwriters, placement agents,
investors and investment groups in a wide range of transactions, compliance, and regulatory matters. For
public company clients, our lawyers advise on a continuing basis about disclosure and other compliance
issues and assist in the preparation of periodic SEC reports as well as filings triggered by special circumstances
and extraordinary transactions. These include insider transactions, option and other equity-based compensation
plans, spin-offs, going private transactions, tender offers, proxy contests, corporate restructurings, change
in control efforts and other transformative (M&A) events.
In addition, our securities enforcement practice is among the largest and most experienced in the country. We
have many years of experience representing organizations and individuals who have become subjects of
investigations or enforcement proceedings by the Securities and Exchange Commission, the Commodity
Futures Trading Commission, state securities regulators, or industry self-regulatory organizations, like the
National Association of Securities Dealers Regulation, Inc. and the New York Stock Exchange. Our clients
have included securities broker-dealers, investment advisers, investment companies, publicly held companies,
banks, insurance companies, accounting firms, commodities firms and law firms.
For more information about our securities capabilities, please contact one of the attorneys listed below. Also,
we invite you to visit our website at www.kl.com for more information on our Securities and Securities
Enforcement practices.
Boston
Stephen L. Palmer
617.951.9211
spalmer@kl.com
Dallas
Norman R. Miller
214.939.4906
nmiller@kl.com
Los Angeles
Katherine J. Blair
Mark A. Klein
Thomas J. Poletti
310.552.5017
310.552.5033
310.552.5045
kblair@kl.com
mklein@kl.com
tpoletti@kl.com
Miami
Clayton E. Parker
305.539.3306
cparker@kl.com
Newark
Stephen A. Timoni
973.848.4020
stimoni@kl.com
New York
Stephen R. Connoni
Lorraine Massaro
John D. Vaughan
212.536.4040
212.536.4043
212.536.4006
sconnoni@kl.com
lmassaro@kl.com
jvaughan@kl.com
Pittsburgh
Janice C. Hartman
Michael C. McLean
Kristen L. Stewart
412.355.6444
412.355.6458
412.355.8975
jhartman@kl.com
mmclean@kl.com
kstewart@kl.com
San Francisco
Mark H. Davis
Peter W. Sheats
415.249.1020
415.249.1030
mdavis@kl.com
psheats@kl.com
Washington
Diane E. Ambler
Alan J. Berkeley
Cary J. Meer
202.778.9886
202.778.9050
202.778.9107
dambler@kl.com
aberkeley@kl.com
cmeer@kl.com
The lawyers resident in all offices, unless otherwise indicated,
are not certified by the Texas Board of Legal Specialization.
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
© 2004 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.