Spring 2013
Securities Regulation
Linda Boss
Module III Notes
February 13, 2013
4. PUBLIC OFFERINGS
Relevant Rules & Statutes
1. Sections of the Securities Act
a. 2(a): Definitions
b. 4: Exempted Transactions
i. 4(4) if you’re not selling from your allotment, you’re exempt from § 5 because it’s
not a solicitation.
c. 5: Prohibitions Relating to Interstate Commerce and the Mails
d. 7(a): Information Required in Registration Statement
e. 8: Taking Effect of Registration Statements and Amendments Thereto
f. 10: Information Required in Prospectus
2. Rules of the Securities Act
a. 134: Communications not deemed a prospectus
i. identifying statements (a) issuer offering info (b) legended + where to get preliminary
prospectus (c) unless tombstone or accompanied w/ preliminary prospectus
b. 135: Notice of proposed registered offerings
c. 137: publications or distributions of research reports by brokers or dealers that are not
participating in an issuer’s registered distribution of securities
d. 138: publications or distributions of research reports by brokers or dealers about securities other
than those they are distributing
e. 139: publications or distributions of research reports by brokers or dealers distributing
securities
f. 153: definition of ‘preceded by prospectus’ as used in section 5(b)(2) of the Act, in relation to
certain transactions
g. 163: exemption from section 5(c) of the Act for certain communications by or on behalf of
well-known seasoned issuers
h. 163A: exemption from section 5(c) of the Act for certain communications made by or on
behalf of issuers more than 30 days before a registration statement is filed
i. 164: post-filing fee writing prospectuses in connection with certain registered offerings
i. you can say what you want as long as no confliction w/ filing, legended, unseasoned and
non-reporting issuers must accompany preliminary prospectus, and file w/ SEC
j. 168: exemption from sections 2(a)(10) and 5(c) of the Act for certain communications of
regularly released factual business information and forward-looking information
k. 169: exemption from sections 2(a)(10) and 5(c) of the Act for certain communications of
regularly released factual business information
l. 172: delivery of prospectuses
m. 173: notice of registration
n. 174: delivery of prospectus by dealers; exemptions under section 4(3) of the Act
o. 193: review of underlying assets in asset-backed securities transactions
p. 405: definitions of terms
Spring 2013
Securities Regulation
q.
r.
s.
t.
u.
v.
w.
x.
y.
z.
aa.
3.
4.
5.
6.
7.
I.
409: information unknown or not reasonably available
412: modified or superseded documents
413: registration of additional securities and additional classes of securities
415: delayed or continuous offering and sales of securities
420: legibility of prospectus
421: presentation of information in prospectuses
424: filing of prospectuses; number of copies
430: prospectus for use prior to effective date
430A: prospectus in a registration statement at the time of effectiveness
430B: prospectus in a registration statement after effective date
430C: prospectus in a registration statement pertaining to an offering other than pursuant to Rule
430A or Rule 430B after the effective date
bb. 431: summary prospectuses
cc. 433: conditions to permissible post-filing fee writing prospectuses
dd. 460: distribution of preliminary prospectus
ee. 461: acceleration of effective date
ff. 462: immediate effectiveness of certain registration statements and post-effective amendments
Form S-1
Form S-3
Regulation S-K Items
a. 512(a): Undertakings
b. 1100: asset-backed securities in general
c. 1104: sponsors of asset-backed securities
d. 1111: pool assets
Securities Exchange Act
a. Rule 15c2-8: Delivery of prospectus
Regulation M Rules
a. Regulations issued by the Federal Reserve
Economics of Public Offerings
a. a public offering is the first time someone becomes public to sell its stock
b. if a company sells more common stock, pre-existing common stockholders are left w/ a smaller
proportionate share of the profits—known as dilution.
c. A brief description of the public offering process
i. Investment bankers may approach boards, or boards may approach investment bankers,
depending upon the market for IPOs
ii. The role of investment banks as underwriters
1. Underwriters provide advice on the structure of the corporation, the securities to
be offered, the offering amount, and price
2. Guide companies through SEC’s registration process
3. Market securities to the public
iii. “Effective” = when the SEC approves the IPO/the moment when the registration
statement is effective and the offering can commence
iv. “Green Shoe” option—if more people want to buy than initially believed, then the
underwriter has the option to offer more shares and sell them—this is limited to 15%--it’s
a rule of FINRA –we don’t want a huge option so you make all your money from overallotment
v. “firm commitment” = this is at the moment of effectiveness when issuer and underwriter
signs final agreement—you can have resale price maintenance
Spring 2013
Securities Regulation
vi. issuer proceeds = what the issuer gives up—spread between what issuer gets and
securities are sold for. That’s to cover fees for the underwriter and distributions process
1. what does the spread go toward
a. selling concession—retail investor who sells the shares—they get a large
commission
b. if managing underwriter sells, they get both the selling concession and the
managing underwriter portion of the spread
c. expenses—big chunk is underwriter’s counsel
vii. Different types of offerings
1. Firm Commitment
a. Underwriter guarantees the sale of the offering
b. Underwriter will purchase the entire offering from the issuer before
turning around and reselling the securities to investors
c. Underwriter purchases securities from issuer at a discount for helping to
sell the offering and taking on the risk
d. Makes investment more likely to be profitable for the investors
2. Best Efforts
a. Investment bank agrees only to use its ‘best efforts’ to sell the offering
b. Investment bank acts purely as a selling agent, receiving a commission on
each security sold
c. Investment bank assumes less risk and issuer retains more risk
d. Investors face greater risks
i. Investors have less confidence in the securities’ valuation
ii. Issuer may not sell out entire issue—obtaining only a fraction of
the expected offering proceeds may jeopardize the business plan
e. Straight
i. You just sell as much as you can at that IPO price
f. Mini-max
i. I’ll sell a minimum of this, if not it goes away, but I won’t sell
more than that [you won’t be one of millions of shareholders]
g. Conditional best efforts [All-or-nothing]
i. Underwriters and issuer promise to rescind all sales if the offering
is not sold out
3. Direct Public Offering
a. Public offering without an underwriter
b. Very rare, because—
i. Many issuer lack necessary expertise
ii. Many issuers lack a pre-existing network among securities dealers
and large institutional investors
iii. Investment banks play a gatekeeping role
1. Screen out poor or fraudulent offerings
2. Investors are likely to discount substantially the price
they’re willing to pay
4. Dutch Auction Offering
a. Issuer and underwriter do not fix a price for the offering
b. Investors place bids for a desired number of shares at a specified price
c. Issuer chooses highest price that will result in offering completely selling
out
Spring 2013
Securities Regulation
d. If you have enough to clear a price, but you can’t have them all, you do a
pro rate percentage
e. Investment bankers should be doing this before it declares an IPO price;
there’s a de facto dutch auction inquiry before a firm commitment
viii. the underwriters
1. well-known underwriters are known as the ‘bulge bracket’
2. after successful issuance of securities, a ‘tombstone’ advertisement is released
with details of the offerings
3. the tombstone lists underwriters in brackets, w/ bulge bracket up top
4. many new underwriters in recent year, which increases competition but might
result in bulge bracket making bad investment decisions and damaging reputation
ix. the underwriting process
1. typically syndicate of underwriters will share the offering
a. they will sign agreement among themselves
b. lead underwriter can act on behalf of the syndicate
2. 1-3 underwriters will be managing underwriter
a. responsible for allocating offered shares to investors
b. gets issuer ready for public offering
c. ensures registration statement is filed and effective
d. prices the offering
e. performs due diligence
f. negotiates with issuer on behalf of syndicate
g. manages ultimate distribution of the securities
3. one investment bank will take primary role
4. the agreement among underwriters is being all underwriters; whereas the
underwriting agreement is between the lead/managing underwriter on behalf of
every other underwriter and the issuer
5. initially issuer and managing underwriter sign letter of intent
a. will not specify price
b. it states mutual intentions that the issuer and lead underwriter give to each
other
i. issuer says we intend to use the underwriter
ii. underwriter says we intend to be your underwriter
iii. it can’t be a K yet because if they did it would be a sale, and there
can’t be any sales until the SEC gives its blessing
iv. this is part of the ‘clubbish’ and ‘gentleman’s’ behavior
6. comfort letters
a. company/issuer counsel to the underwriter—let me give you legal comfort
b. who pays for this? The issuer.
c. The underwriter wants this to protect itself from liability. If anything false
is said in this comfort letter, the law firm is being sued
7. housekeeping—
a. fixing your business [see capital structure below] to make your shares look
positive for investors
8. each underwriter receives a selling concession in proportion to the # of shares that
the underwriter purchases from the issuer
9. just before offering is made to the public, issuer and lead underwriter sign formal
underwriting agreement
a. includes # shares to be sold by issuer to underwriters
Spring 2013
Securities Regulation
b. public offering price
c. gross spread
d. overallotment option
e. issuer indemnification of underwriters
x. underpricing
1. very odd phenomenon where IPO shares are underpriced and overpriced at the
same time
2. companies going public for the first time on average experience a large first day
jump in stock price from IPO price—why do they underprice the shares?
3. Underpricing is greater during ‘hot’ issues markets when many IPOs are brought
to market
4. Winners in traditional offering are initial IPO purchasers who purchase
underpriced stock and profit by reselling in secondary market
5. Dutch Auction process
a. Eliminates underpricing
b. Winners are issuers
c. Market will still fix price though and issuer might give offering price
exceeding company’s value
6. If we have efficient markets, explain why stocks rise a lot then fall then flatten?
a. Underwriters are pushing these investments to investors, making it a
positive picture
i. Bad gatekeepers
b. The variability depends upon prospectus disclosure
i. If it’s positive—higher bump. If prospectus is neural—lower
bump.
ii. This is debated
c. Proof of no efficient markets
xi. capital structure
1. investors will question an offering by a company with no assets, no prior owners,
and no operating history
2. companies typically come to an IPO with at least some, and often extensive,
operating and financial history
3. not all businesses are structured as corporations, but investors in public capital
markets typically prefer a simple corporate structure
4. investors typically prefer companies incorporated in DE
d. public offering disclosure
i. primary problem for investors is valuing the enterprise
1. insiders have informational advantage
2. risk for outside investors is that issuers may sell overvalued shares using this
information
ii. disclosure documents
1. registration statement & statutory prospectus
iii. registration statement forms
1. three categories—
a. transaction-related information
b. company information
c. exhibits and undertakings
2. S-1
a. Available to all issuers
Spring 2013
Securities Regulation
b. Contains all 3 categories of disclosure
c. Those that are Exchange Act reporting issuers can incorporate companyrelated information by reference from prior SEC filings
3. S-3
II.
a. Available to issuers that have—
i. Been a reporting company for one year
ii. Current in SEC filings
iii. Have over 75 million of voting and non-voting common equity in
the hands of non-affiliates
1. Unless you limit sales in any 12 month period to maximum
of 1/3 issuer’s public float of voting and non-voting
common equity
b. Can incorporate by reference company-related information contained in
prior SEC filings, as well as information contained in Exchange Act
reports that are filed after the effective date of the Form S-3 registration
statement [“forward incorporation by reference”]
iv. plain English disclosures
1. SEC requires prospectus be drafted in a ‘clear, concise and understandable
manner’
e. America Depository Receipts
i. Don’t want to be listed directly on a US stock exchange
ii. You reserve 10% of the company to be part of a bank, which lists ADRs, and trades them
just like stocks on the stock exchange.
iii. So they sell you receipts, which are they traded on the exchange (ADRs)—if you want
stock you have to buy it on the exchange. The ADR is sold at the IPO stage.
iv. Each ADR represents a certain # of shares
v. The only point of this is because of complications w/ currency exchanges—makes things
simple
f. What is a registration statement?
i. Part of an integrated disclosure system
1. The ’33 Act tells you what goes in the registration statement [S-1; S-3]
2. The ’34 Act deals w/ proxy statements [14A] and periodic reports [10-K; 10Q; 8K]
3. These are combined in Regulations S-K and S-X
The Gun-Jumping Rules [Controlled Disclosure During Registration]
a. To understand disclosure in a public offering, you have to understand the statutory scheme, what
the definitions mean in that statutory scheme, and the layer of SEC rules that provide further
definitions and clarification [sometimes w/ rules; sometimes releases]; and then you also have to
take into account new 2005 public offering rules that change a lot of previous rules reflecting
technological realities of today
b. Three goals of gun-jumping rules
i. Registration process focuses on two mandatory disclosure documents—formal
registration statement and statutory prospectus
ii. Requires distribution of the statutory prospectus to investors in the offering, as well as
other investors for a specified period of time thereafter
iii. Restricts information about offering if it is not part of the registration statement or
prospectus
c. Three periods of public offering process [MEMORIZE THESE]
i. Pre-filing period
Spring 2013
Securities Regulation
1. Ends when issuer files registration statement with SEC
2. No sales—5(a)(1)
3. No deliveries—5(a)(2)
4. No offering—5(c)
ii. Waiting period
1. After filing registration statement
2. Ends when SEC declares registration statement ‘effective’
3. No sales—5(a)(1)
4. No deliveries—5(a)(2)
5. No prospectus, unless § 10 OK—5(b)(1)
6. No offers, if § 8 proceeding—5(c)
iii. Post-Effective Period
1. You’re engaging in actual selling of securities and you have certain obligations to
provide investors a final prospectus
a. The SEC has finessed this final prospectus requirement—you just have to
give them internet access to this information
2. No prospectus, unless §10 OK—5(b)(1)
3. No delivery w/o § 10a prospectus—5(b)(2)
4. No offers, if § 8 stop order—5(c)
d. Objective of regulation of public offerings
i. Get information into the public’s hands so that the information will adequately price
securities
ii. Market is the best mechanism to determine securities prices
iii. Securities self-correct pretty easily
e. Securities Offering Reform from 2005
i. Adopted rules are in three main areas
1. Communications related to registered securities offerings
2. Registration and other procedures in the offering and capital formation processes;
and
3. Delivery of information to investors, including delivery through access and
notice, and timeliness of that delivery
ii. Results of the rules
1. Facilitate greater available of information to investors and the market with regard
to all issuers
2. Eliminate barriers to open communications that have been made increasingly
outmoded by technological advances
3. Reflect the increased importance of electronic dissemination of information,
including the use of the internet
4. Make the capital formation process more efficient
5. Define more clearly both the information and the timeliness of the availability of
information against which a seller’s statements are evaluated for liability purposes
iii. When they changed these rules, they incorporated company-based registration inside the
transaction-focused regulatory regime
iv. Rules listed—
1. 163
a. applies to WKSIs [issuer only; not underwriter or dealer]
b. safe harbor—pre-filing communications for non-merger offerings (‘free
writing must be filed w/ SEC)
2. 163A
Spring 2013
Securities Regulation
a. applies to issuer, not underwriters or dealers
b. ‘in registration’ begins 30 days before file RS
c. things done before 30 days won’t count against you.
3. Rule 168
a. Applies to reporting companies
b. Continue regular ‘factual business information’ [includes Forward
Looking Information]
4. Rule 169
a. Applies to non-reporting companies
b. Continue regular ‘factual business information’ [doesn’t cover FLI, info
on offering, info to investors]
f. Section 28 of the Securities Act gives the SEC sweeping authority by rule or regulation to
exempt any person, security or transaction from any provision of the securities act, including the
transaction-focused securities offering regime
g. The SEC divides companies into four groups
i. Non-reporting issuer
1. Not required to file periodic reports under exchange act; and Is not filing such
reports voluntarily
2. These are companies that are new to the game
3. Highest hoops to jump through—investors have to learn a lot about these
companies
4. IPOs
ii. Unseasoned issuer [Reporting company]
1. Already reporting, , but doesn’t satisfy requirements of Form S-3 or F-3 for
primary offering of its securities
2. Regulated a bit more strenuously
3. Small, or have been in existence for less than a year
iii. Seasoned issuer [Reporting Company]
1. Eligible to use Form S-3 or F-3 to register primary offering of securities
2. Includes securities to be sold by issuer or on its behalf, on behalf of its subsidiary,
or on behalf of a person of which it is the subsidiary
3. Have more than a $75 million float
4. Have been around more than a year
iv. Well-known seasoned issuers (WKSI) [reporting company]
1. “wick-sees”
2. requirements are—
a. issuer is eligible to register primary offering of securities on Form S-3 or
F-3
b. issuer, as a date within 60 days of determination date, has either—
i. minimum $700 million of common equity worldwide market value
held by non-affiliates [float]; or
ii. issued $1 billion aggregate principal amount of non-convertible
securities in registered offerings during the past 3 years and either
will register only non-convertible securities, other than common
equity, or full and unconditional guarantees of a subsidiary’s
securities
iii. if you have a float of at least $75 million in equity in hands of nonaffiliates, you can also issue common equity as a WKSI
Spring 2013
Securities Regulation
3. the determination date is the date the issuer’s most recent shelf registration
statement was filed or its most recent amendment to a shelf registration statement,
whichever is later
4. WKSI issuers are disqualified if—
a. Not current in exchange act filings or late in satisfying those obligations
for the preceding 12 months
b. Ineligible issuer or asset-backed issuer
c. Investment company or business development company
5. ineligible issuers under Rule 405
a. in past 3 years were blank check or shell company
b. in past 3 years issued registered penny stock offering
c. filed BKC within 3 years
d. violated anti-fraud provisions of federal securities laws in last 3 years
e. anyone who files registration statement subject of pending proceeding
under securities act in last 3 years
f. in last 3 years, has been subject of any refusal or stop order under
securities act
h. Pre-Filing Period
i. § 5(a) of the Securities Act prohibits all sales until the registration statement becomes
effective
ii. § 5(c) bans all offers prior to the filing of the registration statement
1. the remedy for a violation of this is the SEC stops the whole process for a specific
period of time
2. if you violate, every person who bought securities in the last year can say I want
my money back w/ interest
a. issuers and underwriters are responsible to pay this
iii. What is an “offer”
1. Broad definition of the term ‘offer’—defined in § 2(a)(3) of Securities Act, but
it’s broader than that
a. § 2(a)(3)—offer is ‘every attempt or offer to dispose of, or solicitation of
an offer to buy, a security or interest in a security’
b. ‘shall not include preliminary negotiations or agreements between an
issuer and any underwriter or among underwriters who are or are to be in
privity of contract with an issuer’
c. also prohibits offers to buy—we know brokers are going to be tempted to
sell if they buy, so we also prohibit this.
2. ‘offer’ is broad than just communication—it encompasses all communications
that may ‘condition’ the market for the securities
a. you do not have to mention securities to condition the market for securities
3. prohibits issuers, underwriters and dealers from initiating a public sales campaign
prior to the filing o a registration statement by means of publicity efforts which
condition the public mind or arouse public interest in the particular securities
4. publicity must be presumed to set in motion or to be a part of the distribution
process and therefore to involve an offer to sell or a solicitation of an offer to buy
such securities prohibited by 5(c)
5. seeks to prevent ‘speculative frenzy’
6. Securities Act Release No. 5180
Spring 2013
Securities Regulation
a. There is no basis in the securities acts which justifies the practice of nondisclosure of factual information by a publicly held company on the
grounds that it has securities in registration under the securities act
b. Must be limited to factual information and should not include predictions,
projections, forecasts or opinions with respect to value
c. This is in response to inquiries; not instigating the release of the
information
d. Things issuers should continue to do during registration process—
i. Advertise products/services
ii. Send out customary quarterly, annual, and periodic reports
iii. Publish proxy statements and send out dividend notices
iv. Make announcements w/ respect to factual business and financial
development
v. Answer unsolicited telephone inquiries from stockholders,
financial analysts, and press concerning factual information
vi. Observe open door policy responding to unsolicited inquiries of
factual matters
vii. Hold stockholder meetings as scheduled and answer questions
related to factual matters
e. Issuers should avoid during registration process—
i. Forecast, projects, predictions
ii. Opinions concerning values
7. The usual remedy for section 5 violations is delaying the offer, because SEC
believes delay will allow conditioning of the market to subside
8. The pre-filing period begins when a company is ‘in registration’ meaning it
begins at the time the issuer reaches an understanding with the broker-dealer
which is to act as managing underwriter, up until completion of the offering and
time which dealers must deliver prospectus
9. Rule 433 says hyperlinks from one page to another are written offers
a. Excludes historical issuer information contained in separate section of web
site
b. By virtue of having a hyperlink, a company adopts whatever is on there as
its own.
10. Reporting Issuer Safe harbor—Rule 168 of Securities Act
a. Allows Exchange Act reporting issuers to continue regular release of
factual business information and forward-looking information
b. Issuer must have previously released or disseminated the same type of
information in the ordinary course of its business
c. Information must be materially consistent in timing, manner, and form
11. Rule 169 is for non-exchange Act reporting issuers, and does not allow them to
disseminate forward-looking information
12. Rule 163 exempts oral and written communications, including offers, by or on
behalf of WKSIs from 5(c) during the pre-filing period.
iv. Putting Together the Offering
1. Rule 135
a. Safe harbor
b. Applies only for issuer
c. Excludes notices meeting its requirement from definition of offer for
purposes of § 5
Spring 2013
Securities Regulation
d. Places tight limits on information that may be disclosed
i. Communication can identify issuer, amount and basic terms of
offered security, purpose of offering, and anticipated timing
i. Waiting Period
i. During waiting period—
1. Issuer and underwriters attempt to gauge market interest in the offering; and
2. SEC may review registration statement before declaring it effective
ii. Everything turns on 5(b)(1)
1. In no way can you use interstate means to ‘carry or transmit any prospectus
relating to any security with respect to which a registration statement has been
filed, unless such prospectus meets the requirements of § 10’
iii. Gauging Market Sentiment
1. § 5(c) no longer applies and § 5(b)(1) now restricts the transmission, through
interstate commerce, of any ‘prospectus’ not meeting the requirements of the
statutory prospectus as set forth in § 10 of the Securities Act
a. however, prospectuses that fit the requirements are fine
2. § 5(a) still prohibits sales during the waiting period
3. § 2(a)(10) says a prospectus includes ‘notice, circular, advertisement, letter or
communication, written [an e-mail is a writing] or by radio or television, which
offers any security for sale or confirms the sale of any security’
a. any writing that conditions the market is a prospectus
4. oral communications not involving a broadcast medium are permitted during the
waiting period. People can talk all they want.
5. exemptions for 5(b)(1)—
a. 135 announcement of offer
b. 134 ‘tombstone’ advertisement—identifying statement
c. 169 factual information for non-reporting company
d. 164/433 for free-writing prospectus
6. The preliminary prospectus
a. Rule 430—preliminary prospectus must contain the same information as
the final statutory prospectus, except price-related information
7. The free writing prospectus
a. Treated as 10(b) prospectuses
8. The roadshow and other oral offers
a. ‘roadshow’ offering pitches are not prospectuses and therefore not
prohibited
b. face-to-face discussions with institutional investors nationwide
c. telephone calls are oral and therefore not prohibited
9. Regularly released information in the ordinary course of business
a. Ordinary course of business safe harbor rules 168 and 169 apply after prefiling period
10. ‘tombstone’ advertisements
a. tombstone safe harbor continues to apply in waiting period
b. issuer and underwriters can use rule 134
c. as long as no sales take place, notices complying with 134 are exempted
from gun-jumping rules
d. 134 says…
i. you can do a if you do b
ii. you need not do b if you do either c1 or c2
Spring 2013
Securities Regulation
iii. or you can do d as specified
iv. LOOK AT SLIDE [134 SYNOPSIS] FOR WHAT THESE
SECTIONS SAY
e. 134 allows disclosure of-i. issuer’s legal identity
ii. business location
iii. amount and type of security to be offered
iv. business of issuer
v. price of security
vi. names of all underwriters
vii. securities exchanges
viii. ticker symbol
ix. mayyyybe a rating for bond investments [S&P 500, e.g.]
11. solicitations of interest
a. 134 enables issuers to obtain interest indications from investors
b. there is a right to revoke an offer
iv. Free Writing Prospectuses
1. Definition of a free writing prospectus
a. Any written communication that offers to sell or solicits an offer to buy a
security that is or will be subject to a registration statement and that does
not meet the requirements of a §10 statutory final or preliminary
prospectus or a § 2(a)(10)(a) form of traditional free writing. [Rule 405]
b. Real-time electronic communications are considered oral communications
i. If it’s recorded—it’s a prospectus
ii. If it’s not recorded, like skype, it’s not a prospectus
c. Rule 164 exempts free writing prospectuses from § 5, and satisfies §
10(b), as long as Rule 433 conditions are met
i. Available to issuer, UW, or participant [investors who are selling]
d. Rule 433
i. Information may not conflict with RS or SEC filings;
ii. Must be legended (tells investor to read prospectus and how to
obtain it)
iii. Must be accompanied by preliminary/final prospectus (only for
non-reporting and unseasoned issuers)
iv. Must file with SEC (on date of first use)
1. Issuers must file free writing prospectus and issuer
information
2. Participants must file free writing prospectus that has
‘broad unrestricted dissemination’
e. What is a ‘graphic communication’?
i. Defined in Rule 405
ii. Doesn’t include power points if they’re in front of a live audience
and not recorded
iii. The power point can be disseminated and not considered a
prospectus as long as you put the entire thing on the company
website
f. Rul3 433(f): exception for media communications
i. Not subject to delivery of statutory prospectus, legending and
filing with SEC
Spring 2013
Securities Regulation
ii. Still must be consistent with RS and SEC filings
iii. Two conditions
1. Media source not compensated by issuer
2. Issuer files written communication with Commission with
the legend within 4 business days after the issuer becomes
aware of publication
a. Filing of the first story is enough
b. Filing can correct information
c. Filing requirement satisfied with materials
(including transcript) provided by issuer to media
g. There’s a provision that says if a free writing prospectus has some little
mistakes, and doesn’t satisfy every requirement under 433, the SEC might
still say it’s effective if it was an immaterial or unintentional failure—
164(b)&(c)
i. Explicitly discusses failure to include legend, and failure to file
ii. Doesn’t protect you from individual lawsuits
h. § 5 does not apply to anyone except issuers, underwriters, or dealers
i. a dealer is anyone in the securities business
ii. exemption is in Rule 137
1. exemption from ‘participants’ as underwriters
2. a securities firm not participating in the distribution may
publish research reports on securities in registration if—
a. the securities firm has received no special
compensation related to the distribution;
b. the recommendation is in the regular course of the
firm’s business
iii. Rule 139
1. Exemption from definition of ‘offer’
2. Securities firm that participates in the distribution may
issue a report recommending the securities either—
a. issuer-specific: issuer is seasoned reporting
company eligible for Form S-3 or WKSI; or
b. industry reports: issuer is reporting company and
the recommendation is included in a report that
includes other securities, receives no special
prominence, is part of the securities firm’s regular
business and issuer has been in similar reports
3. why?—assume underwriter is corrupt
2. Issuer requirements
a. there are different requirements for different types of issuers
b. Non-reporting and unseasoned issuers
i. The free writing prospectus must be accompanied or preceded by
the most recent statutory prospectus that satisfies § 10, other than
anything ‘deemed’ a prospectus
ii. Issuers that have already sent out a statutory prospectus to an
investor may send subsequent free writing prospectuses without
including another statutory prospectus so long as there have been
no material changes in the information
c. Seasoned issuers and WKSIs
Spring 2013
Securities Regulation
i. Can use free writing prospectus any time after the filing of the
registration statement
ii. Registration statement must contain statutory prospectus
iii. No need to deliver statutory prospectus to free writing prospectus
recipients
iv. WKSI can distribute free writing prospectuses freely throughout
the public offering process, using 163 during pre-filing period and
164 and 433 thereafter
3. Disclosure, filing and retention requirements
a. Rule 433 has two disclosure requirements
i. Free writing prospectus cannot contain information inconsistent w/
statutory prospectus or period or current report incorporated by
reference in registration statement
ii. Free writing prospectus must include specified legend indicating
where registration statement and base prospectus are located/filed
b. Must file free writing prospectus with SEC if—
i. ‘issuer free writing prospectus’ is issued by any person; or
ii. ‘issuer information’ contained in free writing prospectus was
prepared by any other person.
iii. issuer must also file description of final terms of securities after
such terms have been established
c. ‘issuer free writing prospectus’ is all information distributed by the issuer,
on behalf of the issuer, or used or referred to by the issuer
d. ‘issuer information’ is defined as material information about the issuer or
its securities that has been provided by or on behalf of the issuer
e. see page 430 where it lists out every single exception to rule 433 is
excruciatingly painful detail.
4. Antifraud liability and regulation FD implications
a. Free writing prospectus not part of formal registration statement, so no §
11 liability
b. They are ‘public communications’ under § 12(a)(2) liability
c. Regulation FD has exception for communications relating to registered
public offering
v. The process of going effective
1. A registration statement is supposed to go effective 20 days after filing—Section
8(a)
a. This never happens
b. The statutory scheme anticipates the SEC can get everything to you in 20
days, but that’s ridiculous. It actually takes a few months.
2. SEC can accelerate the effective date of the registration statement, after
considering an acceleration request [two days prior to desired effective date]
3. Rule 461—factors SEC considers when granting or denying acceleration requests
a. Inaccurate or inadequate information in a preliminary prospectus
b. Failure to make a bona fide effort to conform the prospectus tot eh plain
English requirements
c. Current SEC investigation of the issuer, controlling person of the issuer, or
underwriters
d. Objection by FINRA to compensation to be paid to the underwriters
e. Other broker-dealers participating in the offering
Spring 2013
Securities Regulation
f. Adequacy of information respecting the registrant available to the public
4. § 8(a)—any amendment to the registration statement resets the filing date for
purposes of determining when the registration statement becomes effective
5. why include a delay provision in the registration statement
a. in order to not set the price until the registration statement is approved
b. avoid antifraud provisions that apply to misstatements and omissions in
the registration statement
c. issuers who don’t give SEC time risk a formal SEC refusal or stop order
6. if the SEC wants more from the registration statement, it sends a comment letter
to the issuer
7. SEC reviews all IPO registrations [takes about 40 days] and about 15% of nonshelf seasoned offerings [takes less than 10 days]
8. the SEC requires when you file registration statement, you include a ‘delaying
amendment’ statement. Rule 473
vi. Analysts
1. SEC provides safe harbors for publication or distribution of ‘research reports’ by
analysts under Rules 137, 138, and 139
2. Research reports are a ‘written communication that includes information,
opinions, or recommendations with respect to securities of an issuer or an analysis
of a security of an issuer
3. Rule 137 provides safe harbor for broker-dealers not participating in the offering
4. Dealers can rely on § 4(3) if two conditions apply—
a. Dealer is not an underwriter and
b. The publication or distribution of research does not take place during the
prospectus delivery requirement period
5. Rule 138 provides a limited safe harbor, exempting research reports of
participating broker-dealers from the definition of an ‘offer for sale’ under
2(a)(10) and 5(c)
a. Limited to Exchange Act reporting issuers
b. Divides securities into common stock/debt/preferred securities convertible
into common stock; and debt and preferred securities not convertible into
common stock
c. Broker-dealers can provide opinions on one group while offering
securities belonging to the other group
6. Rule 139 provides are more general safe harbor for participating broker-dealers
publishing research reports on Exchange Act reporting issuers
a. Research reports are not ‘offer for sale’
b. Two prongs—
i. Issuer-specific reports; and
1. SEC limits type of issuers who can qualify for this
exemption
a. Eligible for S or F-3 reports
b. Must be in regular course of business
ii. Industry reports
1. Must include similar information w/ respect to a substantial
# of issuers In the issuer’s industry, or a comprehensive list
of securities currently recommended by the broker or dealer
2. Can’t devote materially greater space or prominence than
other securities
Spring 2013
Securities Regulation
3. Must be in regular course of business
7. Broker-dealer could also treat their research report as a free writing prospectus
under rules 164 and 433
8. FINRA imposed quiet-period
a. Prohibits managing underwriters from issuing research reports until 40
days after IPO
b. Broker-dealers who participated as underwriters or dealers have 25-day
quiet period
c. Secondary offerings—10 days
d. Managing underwriters—15 days prior and 15 days after the expiration of
a ‘lock-up’ agreement w/ company insiders
j. Post-Effective Period
i. § 5(a) no longer applies and the issuer and the offering participants can begin selling
ii. there are still restrictions under § 5(b)(1) & (2)
iii. Forms of the Final Prospectus
1. A prospectus confirms the sale of every security
a. The statutory scheme is such that with confirmation of the sale, you also
send the final prospectus and the SEC says you’ll also get preliminary
prospectuses
2. Final statutory prospectus adds price-related information to the information
contained in the preliminary prospectus
3. Rule 430A
a. The final prospectus filed as part of the registration statement may omit
price-related information, due to timing issues and getting the best price
b. Only for all-cash offerings
c. Must eventually file price-related information
i. Within 15 business days, no post-effective amendment is necessary
ii. After 15 business days, necessary
d. Price-related information filed after the effective date is deemed part of
the registration statement as of the date it went effective [retroactive]
e. cannot be used to satisfy provisions in the post-effective period that
require the use of a § 10(a) prospectus
4. Rule 433
a. Free writing prospectuses that comply with this rule are valid § 10(b)
prospectuses in the post-effective period
b. § 10(b) free writing or summary prospectus cannot be used to satisfy
provisions in the post-effective period that require the use of a § 10(a)
prospectus
i. examples—5(b)(2) prospectus delivery, 2(a)(10)(a) traditional free
writing, Rule 433(b)(2) prospectus delivery, Rule 172 accessequals-delivery
iv. Traditional Free Writing
1. 5(b)(1) allows the transmission of not only § 10(a) final statutory prospectuses but
also 430A prospectuses, Rule 431 summary prospectuses, and Rule 433 free
writing prospectuses
2. § 2(a)(10)(a) removes traditional free writing from the definition of a prospectus
in the post-effective period as long as the traditional free writing is preceded or
accompanied by a § 10(a) final statutory prospectus
Spring 2013
Securities Regulation
3. issuers and broker-dealers can send selling documents to potential investors after
the effective date as long as they also include the final statutory prospectus
4. seasoned issuers and WKSIs do not have a prospectus delivery requirement for
free writing prospectuses
v. Prospectus Delivery Requirement
1. The Traditional Delivery Requirement
a. 5(b)(2) requires 10(a) final prospectus precede or accompany transmission
of securities for sale through an instrumentality of interstate commerce
b. prospectus delivery requirement under 5(b)(1)—
i. written confirmation of sales are, without more, prospectuses under
2(a)(10)
ii. 5(b)(1) prohibits the transmission of the written confirmation of
sales since the confirmation itself is not a § 10 prospectus
iii. s2(a)(10)(a) removes written confirmation of sales from the
definition of a prospectus if accompanied or preceded by a 10(a)
final statutory prospectus
iv. once 2(a)(10)(a) removes the written confirmation of sales from
the definition of a prospectus, the transmission of the confirmation
no longer violates 5(b)(1)
c. for non-reporting companies, Rule 15c2-8(b) requires that participating
brokers send a copy of the preliminary prospectus at least 48 hours prior to
the sending of the confirmation
d. 134(d)
i. to obtain written indication of interest, must send preliminary
prospectus
e. if you’re a dealer, and you sell something, you have to send confirmation
of sale, final prospectus included
i. SEC says the requirement of sending the prospectus and
confirming sales is normally 90 days, but if it’s exchange act
reporting company it’s 0 days, 25 days, etc. etc. as stated below.
2. Prospectus Delivery Period
a. 5(b) provides no time limit
b. 4(1) exempts transactions not involving any ‘issuer, underwriter, or
dealer’ from § 5
c. brokers’ roles in those transactions in the secondary market, if unsolicited,
are exempted by 4(4)
d. 4(3) establishes time periods when 4(3) is not available
i. 0 days—reporting issuer immediately prior to the filing of the
registration statement
ii. 25 days—issuer whose securities will be listed on a national
securities exchange as of the offering date
iii. 40 days—issuer that does not fit any of the above categories not
doing an initial public offering
iv. 90 days—issuer that does not fit any of the above categories doing
an initial public offering
e. beyond these time periods, 4(3) exempts dealers from application of
5(b)(1)
3. Access Equals Delivery
Spring 2013
Securities Regulation
a. Mandatory disclosure protects retail investors whether they read it or
not—
i. Retail investors may obtain information indirectly
ii. Disclosure may influence the market for the offering
iii. Mere drafting of a disclosure document that the SEC may review
encourages issuers to be truthful in their disclosures
b. ‘access equals delivery’ Rule 172(c) imposes conditions to quality—most
importantly, issuer must file final § 10(a) statutory prospectus
i. says to the brokers don’t bother sending the prospectus w/
confirmation; just give purchasers access to that information
1. RS has to be effective
2. No pending proceedings
3. Issuer has filed final prospectus or will within 15 days of
effective date
c. if Rule 172(c) is satisfied, Rule 172(a) exempts written confirmations of
sales from the reach of § 5(b)(1), obviating the need for broker-dealers to
mail out a final prospectus with the confirmation of sales
d. Rule 173 requires that for transactions in which the final prospectus
delivery requirement applies under Rule 174 and 4(3), participating
underwriters, brokers, and dealers must either notify purchasing investors
that the sale took place under an effective registration statement or provide
a final prospectus
i. not subject to requirements if final prospectus given no later than 2
days after sale, or notice sale made pursuant to RS
ii. SEC says what we really want people to get is the preliminary
prospectus b/c by the time you get the final prospectus, you have
already bought the security. The investment decision happens
during pre-effective period.
iii. An investor can request a prospectus
iv. Separate obligation from § 5 and non-compliance may lead to SEC
enforcement, but won’t affect whether § 5 requirements are met
vi. Updating the Prospectus and Registration Statement
1. after offering is initially sold, § 5(b) imposes continuing obligation on dealers to
send final prospectus
2. Updating the Prospectus
a. Underwriters selling their allotment are required to delivery a final
prospectus until allotment is entirely sold
b. Section 10(a)(3) of Securities Act
i. If a prospectus is used more than nine months, information used in
the prospectus may not be more than 16 months old, to the extent
info is known or can be provided without unreasonable effort or
expense
c. Antifraud liability
i. No explicit updating duty specified
ii. If information in a prospectus is no longer accurate, issuer and
others involved are potentially liable for § 12(a)(2) and Rule 10b-5
liability
d. Shelf registration
Spring 2013
Securities Regulation
III.
i. Shelf registration under Rule 415 must update prospectus to reflect
any ‘fundamental’ change to the information in registration
statement pursuant to Item 512(a) of Regulation S-K
ii. For non-shelf, antifraud liability provides major incentive for
updating the prospectus.
e. SEC v. Manor Nursing (2d Cir.)
i. Grossly misleading prospectus violates prospectus delivery
requirement of § 5, potentially giving rise to cause of action under
§ 12(a)(1)
ii. Not widely supported—rejected by 5th
f. When required to update prospectus, issuers generally prefer ‘stickering’
where new information is directly added onto relevant page of prospectus
i. Doesn’t update registration statement
3. Updating the Registration Statement
a. Registration statement must be accurate as of its effective date
b. SEC may issue stop order pursuant to 8(d) if registration statement
contains misrepresentations
c. However, no general duty to update registration statement
d. 415 Shelf Registration
i. Must include 512(a) undertaking pursuant to Regulation S-K
ii. Requires issuer to make post-effective amendment to the
registration statement for certain events, including—
1. 10(a)(3) change to prospectus
2. any ‘fundamental’ change to information in registration
statement
3. any material change in plan of distribution
iii. Rule 412—allows incorporation by reference to exchange act
filings to meet updating requirements
e. Rule 424(b)(3) requires issuers file an updated prospectus that represents a
‘substantive change from or addition to’ a previously filed prospectus
Dissecting the IPO
a. Information dictates what the price of the IPO stock will be, due to market forces and signaling
from markets. Regulation also forces disclosure to the intermediaries so that the information does
translate into the price.
b. All of this regulation with the IPO comes from § 5.
c. Prospectus disclosure
i. Issuer’s business and its risks
ii. Management
iii. Manager Discussion and Analysis
iv. Financial statements
v. Plans for proceeds
vi. Nature of offering
vii. Principal shareholders
d. The statute tells us—
i. Who signs
ii. Filing fee
iii. Effective date
iv. How to disseminate
v. What information has to be there
Spring 2013
Securities Regulation
vi. The SEC disclaimer
e. The regulations tell us—
i. What to disclose
ii. How it is itemized
iii. Red herring that says it’s a preliminary prospectus in the top margin.
iv. Final prospectus
f. Registration Statement Structure
i. Cover page: Terms of the IPO
1. Information to the SEC
2. Who to contact? What fees apply?
ii. Part I: Prospectus
1. Information to investors
2. Company’s story
3. Audited financials
iii. Part II: Additional information
1. How much the IPO cost
2. Indemnification clause
3. Sales of unregistered stock
4. Signatures
iv. Exhibits
1. Treasure trove of business documents
2. Can be filed confidentially