United States: SEC Proposes Securities Act Reform

Last Updated: December 21 2004

Originally published December 17, 2004

On October 26, 2004, the Securities and Exchange Commission proposed modifications to the securities registration and offering processes under the Securities Act of 1933. Release Nos. 33-8501; 34-50624; IC-26649. It is the first attempt by the SEC to make wholesale revisions to the capital raising process since the SEC’s "aircraft carrier" proposals in 1998. Release No. 33-7606A. The proposals would build on a number of concepts from the "aircraft carrier" release, but would apply them in different ways than previously proposed as an attempt to avoid the negative reaction from many market participants in response to the previous release. This initiative promises to be critically important to any company that accesses the public securities markets and to the investment banking firms that underwrite public offerings.

If adopted, the proposals would result in a significant change in the way substantially all issuers conduct their registered securities offerings. The proposals would eliminate unnecessary and outmoded restrictions on the capital raising process. In addition, the proposals would require public companies to provide more timely investment information to investors. They would also continue the SEC’s efforts towards integrating the disclosure processes under the Securities Act and the Securities Exchange Act of 1934.

The proposals do not address private placements and other exempt offerings and do not affect the regulatory framework applicable to business combinations and exchange offers.

Comment Period

The period for commenting on the Securities Act reform proposals ends on January 31, 2005.

Summary of the Proposals

While addressing numerous topics, the Securities Act reform proposals involve:

  • Communications related to registered securities offerings;
  • Registration and other procedures in the securities offering and capital raising process; and
  • Delivery of information to investors, including deemed delivery of prospectuses through access and notice rather than physical delivery, and timeliness of that delivery.

The SEC believes that the proposals, if adopted, would:

  • Facilitate greater availability of information to investors and the market with respect to all issuers;
  • Eliminate barriers to open communication that have been made increasingly outmoded by technological advances;
  • Reflect the increased importance of electronic dissemination of information, including the use of the internet;
  • Make the capital raising process more efficient; and
  • Define more clearly both the information and the timeliness of the availability of information against which an issuer’s statements are evaluated for liability purposes.

The following are highlights of the SEC’s proposals:

  • Well-known seasoned issuers. A new category of public company with a public float of at least $700 million or registered debt issuances of at least $1 billion in the preceding three years in the case of registered debt offerings. Well know seasoned issuers would qualify for the very simplified securities registration procedures that are close to the concept of "company registration" and would include:
  1. Automatically effective shelf registration statements upon filing without prior SEC staff review;
  2. "Pay-as-you-go" filing fees that provide for paying a nominal fee when a registration statement is filed and additional fees as needed for individual takedowns; and
  3. Permitted use of "free-writing prospectuses" at any time, whether or not a registration statement has been filed.
  • Liberalization in Permitted Communications for All Issuers During the Offering Process. Under current "gun-jumping" rules, no communications that could be deemed offers of securities are permitted before a registration statement for the securities has been filed with the SEC and written communications that could be deemed an offer must, with limited exceptions, conform to the content requirements of a statutory prospectus. Under the proposals, all issuers would benefit in some form from the following liberalizations of these rules:
  1. 30-day bright line test that provides that any communication made 30 days or more before a registration statement is filed would not be considered a prohibited offer, so long as it does not refer to an offering and reasonable steps are taken to prevent distribution or publication of the communication within the 30 days before the filing date;
  2. Free-writing prospectuses could be used by all issuers after a registration statement is filed for the offering of the securities, subject to the satisfaction of specified conditions, including filing with the SEC; and
  3. Electronic road shows would be treated as free-writing prospectuses that would be permitted on an expanded and simplified basis, and in multiple versions designed for different audiences, subject to specified conditions including making one version of the presentation generally available to the public.
  • Access Equals Delivery. Issuers would be permitted to comply with their obligation to deliver a final prospectus through the electronic filing of the prospectus with the SEC via EDGAR rather than through physical delivery of a hard copy of the prospectus.
  • Incorporation by Reference for S-1 Issuers. All reporting issuers would be permitted to incorporate their existing SEC filings by reference to comply with the information requirements of Form S-1, but incorporation by reference to future filings would not be permitted on a Form S-1.

Categories of issuers

The SEC proposals create four categories of public companies. These categories are generally based on the type of issuer, the issuer’s Exchange Act reporting history and the issuer’s equity market capitalization or debt issuance history. The category into which a company falls would determine how its fits into the proposed regime and the benefits it will be able to obtain from the proposed changes. The most far reaching proposed revisions and the greatest benefits would apply to well-known seasoned issuers because the SEC believes they are the most widely followed in the marketplace. The four proposed categories of issuer are:

  • Non-reporting issuer. An issuer that is not required to file reports with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act;
  • Unseasoned issuer. An issuer that is required to file reports with the SEC, but is not eligible to register a primary offering of its securities on Form S-3 or Form F-3;
  • Seasoned issuer. An issuer that is eligible to register a primary offering of its securities on Form S-3 or Form F-3; and
  • Well-known seasoned issuer. An issuer that (i) is eligible to register a primary offering of its securities on Form S-3 or Form F-3, (ii) either has a non-affiliate common equity market capitalization, or "public float," of at least $700 million or, if the issuer does not meet the public float test and is registering non-convertible debt securities only, has issued $1 billion aggregate amount of registered debt during the past three years, and (iii) neither the offering nor the issuer is an ineligible issuer (described below).

A majority-owned subsidiary of a well-known seasoned issuer would be considered a well-known seasoned issuer if:

  • The subsidiary itself meets the conditions for eligibility;
  • The well-known seasoned issuer parent of the subsidiary fully and unconditionally guarantees the subsidiary’s non-convertible debt being offered;
  • A subsidiary guarantees the non-convertible debt of its parent or another majority-owned subsidiary being offered where there is also a full and unconditional guarantee of the same obligation by the parent that is a well-known seasoned issuer; or
  • The subsidiary’s non-convertible debt being offered are fully and unconditionally guaranteed by another majority- owned subsidiary that itself is a well-known seasoned issuer.

The same tests would be used by a majority-owned subsidiary of a seasoned issuer in determining whether the subsidiary can be considered a seasoned issuer.

For purposes of determining its status as a well-known seasoned issuer, an issuer would measure its public float and the aggregate amount of its debt issuances as of the last business day of its most recently completed second fiscal quarter prior to the date of filing its most recent Form 10-K or 20-F, as appropriate. This is the same date that is used for determining whether or nor an issuer is an "accelerated filer." In contrast, an issuer is permitted to determine its public float for Form S-3 or Form F-3 eligibility purposes using any day within 60 days of the filing of the registration statement or most recent Section 10(a)(3) update to the registration statement.

Voluntary filers, such as most high-yield debt issuers, are considered unseasoned issuers for purposes of the proposals.

Communication Reforms

As a starting point for its communications reforms, the SEC proposes to define "written communication" as any communication that is written, printed or broadcast or is a graphic communication. It would not include oral communications, such as telephone calls or other direct oral communications. However, written communications would include broadly disseminated or "blast" voicemail messages that are more like broadcasts than what are commonly regarded as oral communications. A graphic communication would include any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROMs, email, internet websites and computers, computer networks and other forms of computer data compilation. As a result, electronic postings on websites, including electronic roadshows, would be written communications.

In the proposing release, the SEC recognizes the value of ongoing communications as well as the importance of avoiding unnecessary restrictions on offers of securities during a registered offering. The proposals would eliminate requirements that can interrupt unnecessarily an issuer’s normal and routine communications into the market while an issuer is engaged in a securities offering, and would enhance the ability to make written offers outside the statutory prospectus. Well-known seasoned issuers would have freedom generally from the gun-jumping provisions to communicate around the time of a registered offering, including by means of a written offer other than a statutory prospectus. Various levels of restrictions would apply to other categories of issuers.

Regularly Released Factual Business and Forward Looking Information (Proposed Rules 168 and 169)

Proposed Rule 168 would provide a safe harbor from the definition of "prospectus" in the Securities Act for continued publication or dissemination of regularly released factual business and forward-looking information by reporting issuers. This proposal largely codifies long-standing staff guidance and practice set forth in releases beginning with Publication of Information Prior to or After the Effective Date of a Registration Statement, Release No. 33-3844 (October 8, 1957). If adopted, the proposed rule would remove uncertainty that certain issuers have when disclosing factual business information or forward-looking information dur ing a registered offering of securities, other than information about the offering.

Proposed Rule 168 would define factual business information as:

  • Factual information about the issuer or some aspect of its business;
  • Advertisements of, or other information about, the issuer’s products or services;
  • Factual information about business or financial developments with respect to the issuer;
  • Dividend notices; and
  • Factual information set forth in the issuer’s Exchange Act reports.

To qualify for the safe harbor, forward-looking information must be limited to:

  • Projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items;
  • Statements about management’s plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;
  • Statements about future economic performance, including statements of the type contemplated by Item 303 of Regulation S-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations; or
  • Assumptions underlying or relating to any of the foregoing.

The following conditions must be satisfied in order to qualify for the safe harbor that would be provided by proposed Rule 168:

  • By or on Behalf of the Issuer. The information will be considered released or disseminated by or on behalf of the issuer if the issuer, an agent of the issuer or a representative of the issuer authorized and approved its use before release or dissemination.
  • Regularly Released Information. Information will be considered to be regularly released if the issuer has previously released or disseminated the same type of information in the ordinary course of its business and releases or disseminates the information in the ordinary course of its business, the release or dissemination is materially consistent in timing, manner and form with the issuer’s past disclosures of such information, and the method of disclosure is consistent with prior practice.
  • Non-Offering Related Information. Information released as part of the offering of securities in a registered offering beyond what is permitted by Rule 134, Rule 135 or another exemption or safe harbor or contained in a permissible free-writing prospectus (described below), would be covered by the safe harbor. For example, the safe harbor would not be available for the text of an Exchange Act report that is incorporated by reference into a registration statement, a copy of a press release that is specifically provided to investors or potential investors as part of an issuer’s offering activities or disclosure of information at a roadshow.

A narrower safe harbor is proposed for a non-reporting issuer’s release or dissemination of regularly released ordinary course business information, but not for forward-looking information, to persons receiving the information other than in their capacity as investors or potential investors, such as customers and suppliers. For non-reporting issuers, proposed Rule 169 would define factual business information as:

  • Factual information about the issuer or some aspect of its business;
  • Advertisements of, or other information about, the issuer’s products or services; and
  • Factual information about business or financial developments with respect to the issuer.

The other provisions of the proposed Rule 169 safe harbor are the same as those that would apply to reporting issuers under proposed Rule 168. The fact that a customer also may be a potential investor in the issuer’s securities would not affect the availability of the safe harbor if the conditions are otherwise met.

Permitted Communications By All Issuers Prior to Filing a Registration Statement

Proposed Rule 163A would provide all issuers a bright-line time period, ending 30 days prior to the filing of a registration statement, during which issuers may communicate without risk of violating the gun-jumping provisions. This proposal does not apply to registration statements on Form S-8. These communications would be exempt from the definition of "offer" for purposes of Section 5(c) of the Securities Act. In order to rely on the 30-day bright line test:

  • Communications made in reliance on proposed Rule 163A could not reference a securities offering;
  • Communications made in reliance on proposed Rule 163A would have to be made by or on behalf of the issuer; and
  • The issuer would have to take reasonable steps within its control to prevent further distribution or publication of the information during the 30-day period immediately before the issuer files the registration statement.

Communications made in reliance on proposed Rule 163A would not be considered to be made in connection with a registered securities offering for purposes of Regulation FD. Therefore Regulation FD’s provisions would also need to be complied with. Communications regarding business combination transactions would be excluded from the proposed exclusion as they are regulated separately under existing Regulation M-A.

Pre-Filing Offers Permitted forWell-Known Seasoned Issuers

Proposed Rule 163 would provide well-known seasoned issuers with a much broader exemption than proposed Rule 163A would provide for other issuers from the prohibition on offers before the filing of a registration statement for offers made by or on behalf of eligible well-known seasoned issuers. The proposed exemption would permit well-known seasoned issuers to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions. These communications would still be considered offers of securities and would subject to the existing liability standards that are applicable to such offers. All such communications would also be subject to Regulation FD. All written offers would be considered a "free-writing prospectus," which we describe in greater detail below, and would be required to include a legend and be filed with the SEC promptly upon the filing of the related registration statement. The legend would inform the reader that the issuer may file a registration statement with the SEC for the proposed offering and before the reader invests, the reader should read the prospectus and other documents the issuer has filed with the SEC for more complete information about the issuer and the offering. The legend would also inform the reader where these documents could be obtained.

Expansion of Information Permitted to be Disclosed Under Rule 134

Existing Rule 134 provides a safe harbor from the gunjumping provisions for limited public notices about an offering made after an issuer files its registration statement. The proposed amendments to Rule 134 would:

  • Permit inclusion in a Rule 134 notice of increased information about an issuer and its business, including where to contact the issuer;
  • Permit inclusion in a Rule 134 notice more information about the terms of the securities being offering;
  • Expand the scope of permissible factual information that may be provided about the offering itself, including information about the underwriter, more details about the mechanics of and procedures for transactions in connection with the offering process, the anticipated schedule of the offering and a description of marketing events;
  • Allow more factual information about procedures for account opening and submitting indications of interest and conditional offers to buy the offered securities; and
  • Expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned to the securities that will be offered.

Free-Writing Prospectuses

Proposed Rule 164 and Rule 433 would permit written communications that constitute offers, including electronic communications, outside the statutory prospectus to a greater extent than is currently permitted by the Securities Act, if certain conditions are met. These written communications would be "free-writing prospectuses." Written communications after the effectiveness of the registration statement that are accompanied or preceded by a prospectus would not be considered prospectuses and therefore would not be subject to the requirements for free-writing prospectuses.

Proposed Rule 405 would define a "free-writing prospectus" to include any written communication that constitutes an offer to sell or a solicitation of an offer to buy securities that are or will be the subject of a registration statement and that is not a prospectus satisfying the requirements of Section 10 of the Securities Act or the SEC’s rules permitting the use of a preliminary or summary prospectus subject to completion. Communications that comply with Rule 134, Rule 135, or are regularly released factual business information, forward-looking information and research reports falling with the proposed safe harbors for such communications, would not be treated as free-writing prospectuses.

Proposed Rule 164 and Rule 433 would require that each free-writing prospectus contain a legend indicating where the prospectus satisfying the requirements of Section 10 is available, recommending that potential investors read the latter, including the documents incorporated by reference into the prospectus, including any risk factors, stating that the communication constitutes a written offer pursuant to a free-writing prospectus that is part of a public offering, and informing investors that a copy of the registration statement can be obtained for free through the SEC’s website and that a copy of the prospectus can be obtained from the issuer, or any underwriter or dealer, by calling a provided toll-free number. If a free-writing prospectus is unintentionally used without the required legend, the issuer would be permitted to cure the defect by retransmitting a copy of the free-writing prospectus that includes the required legend to each person who received the defective free-writing prospectus. If the legend cannot be included in the free-writing prospectus, in the case of a published article for example, this information need only be contained in the free-writing prospectus that is filed with the SEC. Certain legends or disclaimers would not be permitted to be included in a freewriting prospectus, including:

  • Disclaimers regarding accuracy or completeness;
  • Statements requiring investors to read or acknowledge that they have read any disclaimers or legends or the registration statement; or
  • Language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation of an offer to buy.

If any impermissible legend or disclaimer is included, the communication would not qualify as a free-writing prospectus and therefore would be required to meet the requirements of a statutory prospectus in order to be used.

Proposed Rule 433 would condition the use of a free-writing prospectus on issuers and offering participants, such as underwriters, retaining any free-writing prospectuses they have used, whether or not filed with the SEC, for three years from the date of the bona fide initial offering of the securities in question.

Although each free-writing prospectus prepared by an issuer or containing information provided by an issuer would generally be required to be filed, a free-writing prospectus would not be part of a registration statement subject to liability under Section 11 of the Securities Act unless the issuer elected to file it as part of the registration statement. Free-writing prospectuses would, however, be subject to liability for prospectuses under Section 12(a)(2) of the Securities Act and under the antifraud provisions of the securities laws. As proposed, a free-writing prospectus would be required to be filed by the issuer if it is prepared:

  • By or on behalf of the issuer and used by any person;
  • By a participant in the offering other than the issuer and it contains material information about the issuer or its securities that has been provided by or on behalf of the issuer and that is not already contained or incorporated by reference into the registration statement or filed as a free-writing prospectus; or
  • By any person and contains only a description of the terms of the issuer’s securities, a free-writing prospectus that contains the final terms of the securities.

Generally, a free-writing prospectus prepared by underwriters and participating dealers would not be required to be filed unless it contains information that was obtained from the issuer. However, a free-writing prospectus would be required to be filed by third parties participating in the offer or sale of securities if it is prepared by a party other than the issuer and is distributed in a manner reasonably designed by that party to lead to its broad unrestricted dissemination.

Proposed Rule 164 would provide for the ability to cure any immaterial or unintentional failure to file, or delay in filing, a free-writing prospectus, without losing the ability to rely on the Rule. The cure would be available if a good faith and reasonable effort was made to comply with the filing condition and the free-writing prospectus was filed as soon as practicable after the discovery of the failure to file.

Under the proposals, if an issuer or any offering participant provides information about the issuer or the offering that constitutes an offer, whether orally or in writing, to a member of the press or other media that is published in any form, where dissemination in writing by the issuer or offering participant would constitute a free-writing prospectus, the publication would be considered a free-writing prospectus that must comply with the rules applicable to the relevant category of issuer. If an issuer or offering participant prepared, paid for or gave consideration for a published article, broadcast or advertisement, the issuer would have to satisfy the conditions described below for use of a free-writing prospectus as of the time of the publication or broadcast. If the free-writing prospectus is prepared by persons in the news media that are not affiliated with and not paid by the issuer or offering participant, a statutory prospectus would not be required to precede or accompany the communication, although a filed registration statement and availability of a statutory prospectus would be conditions. Any such free-writing prospectus would be required to be filed with the SEC by the issuer or offering participant involved within one business day after first publication or broadcast. As a result, if the press who were invited to a roadshow wrote an article containing information from the roadshow, the article would be a free-writing prospectus that would be subject to the proposed rules, unless the roadshow was readily accessible to an unrestricted audience.

A free-writing prospectus that contains only a description of the securities offered would be required to be filed with the SEC within two days after the later of the date the terms became final or the date of first use but only if it reflects the final terms of the securities being offered. This filing requirement would not be satisfied by the timely filing of a prospectus supplement pursuant to existing Rule 424.

Under proposed Rule 164 and Rule 433, for eligible well-known seasoned issuers, a free-writing prospectus would be permitted to be used by those issuers at any time before or after the filing of a registration statement. If it is used before the filing of a registration statement, the free-writing prospectus would need to be filed at the time of the filing of the registration statement. A free-writing prospectus could be used by any other offering participant after the filing of a registration statement containing a statutory prospectus, which may be a base prospectus that meets the requirements of proposed Rule 430B in the case of shelf offerings.

For eligible seasoned issuers, a free-writing prospectus could be used under proposed Rule 433 if the following conditions are satisfied:

  • A registration statement containing a statutory prospectus, which may be a base prospectus that meets the requirements of proposed Rule 430B in the case of shelf offerings, for the offering has been filed.
  • The user of the free-writing prospectus notifies the recipient, through a required legend, of the URL where the recipient can access or hyperlink to the preliminary or base prospectus.

For non-reporting and unseasoned issuers, a free-writing prospectus could be used under proposed Rule 433 if the following conditions are satisfied:

  • A registration statement containing a statutory prospectus for the offering must be filed.
  • The free-writing prospectus is filed no later than the day it is first used.
  • If the free-writing prospectus is prepared by or on behalf of an issuer or offering participant, and if consideration is or will be given by the issuer or an offering participant for the publication or broadcast of the free-writing prospectus or if Section 17(b) of the Securities Act would require disclosure that such consideration is or will be given by the issuer or offering participant, then the free-writing prospectus must be accompanied or preceded by a statutory prospectus that satisfies the requirements of Section 10 of the Securities Act. The statutory prospectus need not be delivered by the same means as the free-writing prospectus so long as it is provided at the required time. For example, the free-writing prospectus could contain a hyperlink to the statutory prospectus. However, merely referring to the availability of a statutory prospectus would not satisfy this condition. Once a statutory prospectus has been delivered, additional free-writing prospectuses may be delivered without delivering a new prospectus unless a material change has been made in the statutory prospectus. After effectiveness of the registration statement, the final prospectus must accompany or precede any further free-writing prospectuses. In addition, in the case of an IPO, the statutory prospectus must contain a price range.
  • If the free-writing prospectus is prepared by person in the news media that is not affiliated with or paid for by the issuer or offering participant, the statutory prospectus would not be required to precede or accompany the communication, although a registration statement containing a statutory prospectus must be filed with the SEC before the communication and the issuer or offering participant would still be required to file the prospectus within one business day following publication or broadcast.

The free-writing prospectus provisions do not apply in the context of business combination transactions as they are regulated separately by existing Regulation M-A.

In order to use free-writing prospectuses, an issuer may not be an ineligible issuer. In general, ineligible issuers would be issuers that are not compliant with their Exchange Act reporting obligations, have issues that may raise greater potential for abuse or have violated the federal securities laws previously. In particular, proposed ineligible issuers would be defined to include:

  • Reporting issuers that are not current in their Exchange Act reports;
  • Issuers that are blank check issuers;
  • Issuers that are shell companies;
  • Issuers that are penny stock issuers;
  • Issuers that are limited partnerships pursuant to the definitions contained in the SEC’s roll-up rules and are not selling their securities in a firm commitment underwriting;
  • Issuers that have received a going concern qualification in their independent auditor’s opinion for the most recent fiscal year;
  • Issuer that have filed for bankruptcy or insolvency during the last three years;
  • Issuers that have been or are the subject of refusal or stop orders under the Securities Act; and
  • Issuers that, or the subsidiaries of which, have been found to have violated the federal securities laws, have entered into a settlement with any government agency involving allegations of violations of federal securities laws, or have been made the subject of a judicial or administrative decree or order prohibiting certain conduct or activities regarding the federal securities laws during the past three years.

These same issuers would not generally be eligible for the automatic shelf registration statement procedures described below, as well as the communications safe harbors, exemptions and exclusions contained in the proposals. However, upon an issuer’s request, the SEC can waive an issuer’s ineligibility for good cause.

Electronic Road Shows

All electronic communications, including electronic road shows, would be considered graphic communications and therefore would only be permitted if the conditions of proposed Rule 433 described above are satisfied. As a result, an electronic road show would be treated as a free-writing prospectus and subject to the proposed filing requirements for such prospectuses. However, an electronic road show would only need to be filed if it contains material information concerning the issuer that was not previously included in the registration statement or a free-writing prospectus relating to the offering and the issuer makes at least one version of a bona fide electronic road show 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 information concerning the issuer used at the road show (other than the road show itself). A bona fide road show would be one that contains a presentation by at least some members of the issuer’s management and, if more than one version exists, that covers the same general areas regarding the issuer, its management and the securities offered as the other versions. It need not contain all of the same information and need not provide an opportunity for questions and answers. The proposed electronic road show requirements would replace the long line of noaction letters addressing the permissibility of electronic road shows, beginning with Private Financial Network (March 12, 1997).

Treatment of Information on a Website and Other Electronic Communication Issues

Proposed Rule 433 would make clear that an offer of an issuer’s securities that is contained on the issuer’s website or hyperlinked by the issuer from the issuer’s website to a third-party website is considered a written offer of such securities made by the issuer and, unless otherwise exempt, would be a free-writing prospectus. While a research report would generally not be an offer pursuant to Rule 433, an issuer’s hyperlink to that research report would make the research report a free-writing prospectus of the issuer.

Proposed Rule 433 would also make clear that historical issuer information that otherwise could be considered an offer but that is properly identified as such and located in a separate section of the issuer’s website containing historical issuer information would not be considered a current offer of the issuer’s securities. The issuer would be required to be able to demonstrate that the information is historical, which could be done by making sure that all such information is dated.

Regulation FD

Currently, communications made during a registered offering of securities are excluded from the application of Regulation FD. The SEC is proposing to amend the exclusion so that Regulation FD would not apply to disclosures made in the following communications:

  • A registration statement filed under the Securities Act;
  • A free-writing prospectus used after filing the registration statement for the offering and satisfying the requirements of proposed Rule 433;
  • 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 the filing of the registration statement for the offering.

Research Reports

The SEC is proposing to amend Rule 137, Rule 138 and Rule 139, which describe circumstances in which a broker or dealer may publish research that might be deemed to constitute an offer around the time of a registered offering without violating Section 5.

To begin, the SEC is proposing to define a research report to be 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.

Rule 137 would provide that a broker or dealer that is not an offering participant in a registered offering but published or distributes research will not be considered to be engaged in the distribution of the issuer’s securities and would therefore not be an underwriter in the offering. The proposals would expand the exemption to apply to securities of any issuer, including a non-reporting issuer.

Rule 138 would permit a broker or dealer participating in a distribution of an issuer’s common stock and similar securities to publish or distribute research that is confined to that issuer’s fixed income securities, and visa versa, if it publishes or distributes the research in the regular course of its business. The proposals would expand the categories of eligible issuers to include all reporting issuers that are current in filing their periodic Exchange Act reports, rather than only issuers who that are Form S-3 or Form F-3 eligible. The proposals would also require that as a condition to the exemption the broker or dealer must have previously published or distributed research reports on the types of securities that are the subject of the current reports in the regular course of its business.

Rule 139 would permit a broker or dealer participating in a distribution of securities by a seasoned issuer or a larger foreign private issuer publicly traded abroad 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. The proposals would limit the condition so that it would only be available with respect to reports on specific issuers having at least a one year reporting history that are current and timely in their Exchange Act reports and are eligible to use Form S-3 or F-3 based on the $75 million minimum public float or investment grade securities provisions of those forms. The proposals would also eliminate the requirement that the reports be distributed with reasonable regularity and replace it with a requirement that the broker or dealer must at the time of use have previously distributed or published research reports about the issuer or its securities. The proposals would expand the issuers that could be covered in an industry-related report to include any reporting issuer, not just reporting issuers eligible to use Form S-3 or F-3, would remove the prohibition on a broker or dealer making a more favorable recommendation than the one it made in its last publication, and would require that the research reports must contain similar types of information about the issuer or its securities as those contained in prior reports.

In addition, the proposals would make clear that research reports meeting the conditions of Rule 138 or Rule 139 will not be considered offers, or a general solicitation or general advertising in connection with offerings relying on Rule 144A and would not constitute directed selling efforts or be inconsistent with the offering transaction requirements of Regulation S.

None of the proposed changes would apply to blank check companies, shell companies or penny stock companies.

Automatic Shelf Registration for Well-Known Seasoned Issuers

Under the proposals, eligible well-known seasoned issuers could register unspecified amounts of different specified types of securities on automatically effective Form S-3 or F- 3 registration statements. All such shelf registration statements and post-effective amendments thereto would become effective automatically upon filing, without staff review. This would mean that the SEC staff will focus substantially all of their review effort with respect to these issuers to their Exchange Act reports.

Automatic shelf registration would be available for all primary and secondary offerings of securities of eligible wellknown seasoned issuers, other than those in connection with business combination transactions or exchange offers. As with Form S-3 eligibility, eligibility for automatic shelf registration would be assessed at the time of each updated prospectus required by Section 10(a)(3) of the Securities Act. If an issuer is no longer eligible for automatic shelf registration, a post-effective amendment would have to be filed to amend the registration statement onto the form the issuer was then eligible to use or a new registration statement would have to be filed. Continuous offerings could continue on the automatic shelf registration until a post-effective amendment or new registration statement that is filed in a timely manner (within 120 days after the issuer’s most recent fiscal year end) is declared effective.

The proposals would permit more information to be excluded from the base prospectus than what would be otherwise permitted to be excluded from a regular shelf registration statement, including:

  • Whether the offering is a primary or secondary offering;
  • The names of any selling security holders; and
  • Any plan of distribution for the offered securities.

The proposals would permit most information required in the prospectus about the issuer and its securities to be incorporated by reference from Exchange Act reports or to be contained in the prospectus or prospectus supplement that would be deemed part of the registration statement. The principal exceptions are that a post-effective amendment to a registration statement would be required to be filed to add new types of securities or new eligible issuers, including guarantors, to the registration statement. New issuers and their officers and directors would be required to sign the post-effective amendment.

An eligible well-known seasoned issuer could register an unspecified amount of securities to be offered. Issuers that satisfy the definition of well-known seasoned issuer based only on their debt issuance would only be permitted to register non-convertible obligations. The calculation of the registration fee table also would not need to include a dollar amount or specific number of securities but would specify each class of security registered. The dollar amount would be specified in the prospectus supplement for the offering. The base prospectus would identify and describe the securities registered to the extent information is available at the time of filing.

Eligible issuers would be permitted to pay filing fees in advance, as is the case today, or on a "pay-as-you-go" basis at the time of each shelf takedown. Under the "pay-as-yougo" system, issuers would pay a small initial filing fee at the time of filing the registration statement. The fee would be applied to the first shelf takedown. For each takedown, the prospectus supplement would include a calculation of the registration fee table or a post-effective amendment including the same information could be filed.

Liability Timing Issues

The SEC’s proposals would address the anomaly in the current system that a final prospectus may be delivered to a securities purchaser in connection with the delivery of the confirmation of sale of the security, which is a point after the time that the investor has made an investment decision and entered into a binding agreement to purchase the security. Proposed Rule 159 would provide that for purposes of determining under Section 12(a)(2) and Section 17(a)(2) of the Securities Act, whether at the time of sale a prospectus, oral statement or a statement includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements made, in light of the circum stances under which they were made, not misleading, any information conveyed to the purchaser after the time of sale would not be taken into account. The "time of sale" for this purpose would be the date that the investor agrees to purchase, not the settlement date. The SEC proposes to amend Rule 412 to make clear that information filed by an issuer after the time of sale and incorporated by reference into the prospectus will also not be considered for this purpose. If adopted, these changes will mean that the final prospectus which historically is conveyed to the investor with the confirm of the sale, and which often includes modifications, amendments or corrections to the information that was previously available, will not be considered for determining whether the issuer or other offering participant is subject to liability. Accordingly, all material information will have to be available to an investor before the time of sale.

The SEC is also proposing an interpretation that information in a prospectus or prospectus supplement that is filed after the time of sale will be considered to be a part of and included in the registration statement at the time of effectiveness of the registration statement. Accordingly, this information would now be subject to liability under Section 11 of the Securities Act.

Some courts have held that in a firm commitment underwriting that the underwriters and selling dealers are the sellers of the securities and that the issuer therefore does not have liability exposure to liability under Section 12(a)(2) of the Securities Act. Proposed Rule 159A would provide that an issuer in a primary offering of securities, regardless of the form of underwriting arrangement, is considered to offer and sell the securities to the purchaser, and therefore to be a seller for purposes of Section 12(a)(2) of the Securities Act as to any communications made by or on behalf of the issuer. The following communications would be deemed to be made by or on behalf of the issuer:

  • Both an issuer’s registration statement relating to the offering and any preliminary prospectus or prospectus supplement relating to the offering filed with the SEC;
  • 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.

Other Proposed Changes

Requirements for Base Prospectuses

Proposed Rule 430B describes the types of information that primary shelf eligible and issuers eligible to use the proposed new automatic shelf registration provisions (described above) may omit from a base prospectus in delayed offerings and include instead in a prospectus supplement, an Exchange Act report incorporated by reference or a post-effective amendment. For example, all information concerning the issuer and its securities would be permitted to be omitted from the base prospectus and incorporated by reference from its Exchange Act reports or included in a prospectus supplement. In addition, material changes to a plan of distribution could be made in a prospectus or prospectus supplement, rather than being required to be made only in a post-effective amendment to the registration statement as is currently the case. The trade-off for this increased flexibility is that prospectus supplements and final prospectuses would be deemed to be part of and included in the registration statement, which means that they would be subject to liability under Section 11 of the Securities Act.

Proposed Rule 430B would deem information contained in prospectus supplements to be included in the related registration statement as follows:

  • For a prospectus supplement filed other than in connection with a shelf takedown, all information would be deemed part of the registration statement as of the date the prospectus supplement is first used; and
  • For a prospectus supplement filed in connection with a shelf takedown, all information would be deemed part of the registration statement as of the earlier of the date it 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.

Proposed Rule 430B would also establish a new effective date for a shelf registration statement for liability purposes in connection with a shelf takedown. In such cases, the new effective date would be the date a prospectus supplement filed in connection with the shelf takedown was deemed part of the relevant registration statement, although it would not be considered the filing of a new registration statement for form eligibility purposes.

This change would largely eliminate the current timing discrepancy in the application of disclosure liability to issuers (whose potential liability begins with the effectiveness of a registration statement), as compared with underwriters and other parties (who only take on potential liability when they agree to participate in a takedown).

Identification of Selling Security Holders

The SEC is proposing to amend Form S-3 and Form F-3 to allow seasoned issuers eligible to use those forms for primary offerings of securities to identify selling security holders, and all information about them, after effectiveness of the registration statement through either an amendment to the registration statement or a prospectus supplement. Currently this information generally must be included in the registration statement prior to effectiveness. The ability to identify selling security holders in this manner would only be available if:

  • The resale registration statement identified the specific private transaction or transactions pursuant to which the securities were sold; and
  • The private transaction was completed and the securities that were the subject of the registration statement were issued in the private transaction and outstanding prior to the initial filing of the resale registration statement.

Proposed Changes to Rule 415

The SEC is proposing to amend Rule 415 to:

  • Eliminate the current provision that limits the amount of securities that can be registered to an amount that is intended to be offered or sold within two years from the registration statement effective date;
  • Require that shelf registration statements only be used for three years after the initial effective date of the registration statement – new shelf registration statements would be required to be filed every three years, with unsold securities and fees being carried forward to the new registration statement and continuous offerings would be able to continue under the old registration statement until the new registration statement becomes effective;
  • Allow primary offerings on Form S-3 and F-3 to occur promptly after effectiveness of a shelf registration statement, abandoning the staff’s current "convenience shelf" prohibition; and
  • Eliminate the current "at-the-market offering" restrictions.

Proposed Changes to Rule 424

The SEC is proposing to amend Rule 424 to:

  • Require that any prospectus supplement filed pursuant to Rule 434 (term sheets) be filed at the same time as other prospectus supplements for shelf takedowns; and
  • Require that in offerings where information regarding the terms of the securities or plan of distribution or other information related to the offering is included in Exchange Act reports incorporated by reference, the prospectus supplement must disclose on its cover page the report or reports containing such information.

Registration Statement Undertakings

The SEC is proposing to amend the undertakings that an issuer includes in Part II of its registration statement. Item 512(a) of Regulation S-K would be revised to make clear that an issuer’s updating requirements can also be met by including the required information in a prospectus supplement that is filed and deemed part of and included in a registration statement. In addition, automatic shelf issuers would be permitted to use prospectus supplements to include all other information that has been omitted from the base prospectus.

Proposed Rule 430B would require a new undertaking in which the issuer would agree that information in filed prospectus supplements will be deemed to be part of and included in the related registration statements and that, for liability purposes, new effective dates for those registration statements will be deemed to occur upon the earlier of the date they are first used or the date of the first sale of the securities to which they relate.

Form S-3 and Form F-3 eligibility

The SEC is proposing to expand the categories of majority-owned subsidiaries that would be eligible to use the form to register their non-convertible securities or guarantees. The categories would be expanded to be the same as those pro posed for majority-owned subsidiaries to qualify as well-known seasoned issuers discussed above.

Changes that Would Affect Unseasoned Issuers and Non-Reporting Issuers Only

Incorporation by Reference

The proposals would permit a reporting issuer that has filed at least one annual report and that is current in its reporting obligations to incorporate by reference into its Form S-1 or F-1 information from its previously filed Exchange Act reports. However, reporting issuers that are ineligible issuers as discussed above would not be able to incorporate by reference their previously filed reports. In addition, in order to incorporate by reference, unseasoned issuers must make the documents incorporated by reference readily available on their websites, state that they would provide copies of any incorporated reports on request and indicate that reports are available from the SEC. However, unseasoned issuers would not be able to "forward incorporate" by reference. They would only be able to incorporate by reference documents that are specifically referenced in the registration statement.

Elimination of Form S-2 and Form F-2

In light of the changes being made to allow incorporation by reference by unseasoned issuers, the SEC is proposing to eliminate Form S-2 and Form F-2.

Prospectus Delivery Changes

In light of the changes made to the liability provisions discussed above, and since the investment decision has already been made before a final prospectus is required to be delivered, the SEC is proposing changes to the prospectus delivery requirements that would be based on an "access equals delivery" concept. Specifically, sellers of securities would only be required to provide investors with prescribed means of having access to a final prospectus rather than physically delivering a final prospectus. Under the proposal, investors are presumed to have access to the internet and issuers can satisfy their obligations to deliver a final prospectus by posting it on a website. In particular, under proposed Rule 172 the SEC would:

  • Delink the obligation to deliver a confirmation from the obligation to deliver a final prospectus;
  • Provide that the obligation to have a final prospectus precede or accompany a security delivered for sale could be satisfied by filing the final prospectus with the SEC within the required time frame (so that it can be electronically accessed by investors through the SEC’s EDGAR system);
  • Permit written notices of allocations and confirmations to be sent after effectiveness of a registration statement without being accompanied or preceded by a final prospectus; and
  • Permit the prospectus delivery obligations in dealer transactions during any prospectus delivery period and registered resale transactions in securities that are trading to be satisfied if the final prospectus has been filed with the SEC or will be filed within the required time frame.

Proposed Rule 173 would require that for each transaction involving a sale by an issuer or underwriter to a purchaser or a sale in which the final prospectus delivery requirements apply, each underwriter, broker or dealer participating in the offering may send to each purchaser from it, not later than two business days after the completion of the sale, in lieu of a final prospectus, a notice providing that the sale was made pursuant to a registration statement and informing the investor that the investor may request a final prospectus.

The SEC is proposing to amend Rule 153 so that brokers or dealers effecting transactions on an exchange or through any trading facility registered with the SEC would be deemed to satisfy their prospectus delivery obligations 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 with the SEC or will be on file with the SEC by the applicable filing date;
  • Securities of the same class are trading on an exchange or through any trading facility registered with the SEC; and
  • The registration statement relating to the offering is effective and not the subject of a stop order.

Physical copies of the prospectus would no longer need to be sent to the exchange or market maker and the exchange or market maker would no longer need to keep track of any prospectuses.

The SEC is proposing to amend Rule 174 to provide that during the aftermarket delivery period, dealers may rely on Rule 172 to satisfy any aftermarket delivery obligations, which are the same as those described above in connection with the proposed changes to Rule 153.

In general, these exemptions would not be available for offerings pursuant to a registration statement on Form S-8 or for business combination transactions or exchange offers.

New Disclosures in Exchange Act Reports

Under the proposals, issuers would be required to include the following in their Exchange Act reports:

  • Disclosure regarding risk factors in a Form 10-K or equivalent form in plain English of the type that is currently required in Securities Act registration statements;
  • Disclosure of any changes in relevant risk factors in a Form 10-Q or equivalent form;
  • Disclosure regarding the issuer’s status as a "voluntary" filer of Exchange Act reports, such as debt-only issuers that no longer are required to file reports pursuant to the Exchange Act, through a check-the-box requirement proposed to be added to the front page of Form 10-K or equivalent forms; and
  • Disclosure by accelerated filers in a Form 10-K or equivalent form of the substance of written staff comments that were issued more than 180 days before the end of the fiscal year to which the annual report relates, if the comments remain unresolved at the time the annual report is filed and the issuer believes the comments are material.

Application of Proposals to Asset-Backed Securities

In April 2004, the SEC proposed new Regulation AB and other rules to address the registration, disclosure and reporting requirements specifically for asset-backed securities. Release No. 33-8419. The Securities Act reform proposals also affect ABS and to some extent alter the ABS proposals.

Categories of ABS Issuers

ABS issuers would not be well-known seasoned issuers and thus would not benefit from automatic shelf registration and the other liberalized communication and registration procedures available to well-known seasoned issuers. ABS issuers offering securities on Form S-1 would be non-reporting issuers. ABS issuers offering securities on Form S-3 would be seasoned issuers. As a result, the more flexible communications proposals for seasoned issuers and non-reporting issuers would apply to ABS offerings. Although many of the safe harbors from gun-jumping applicable to corporate issuers – such as advertisements about the issuer’s products or services or dividend notices – would not apply, other safe harbors for regularly released information for reporting issuers could apply. An example would be static pool data with respect to pools underlying outstanding ABS posted on the website of a sponsor of ABS.

Free Writing Materials and Term Sheets

ABS issuers have historically benefited from a series of noaction letters whereby written offering materials outside of the prospectus – term sheets – were permitted in connection with S-3 offerings. This concept was proposed to be codified in the ABS proposals as "informational and computational materials," which would be required to be filed on Form 8-K and incorporated by reference into the registration statement. Under the Securities Act reform proposals, these ABS term sheets would become "free writing prospectuses" and presumably the ABS proposals would be amended.

ABS term sheets, as free writing prospectuses, would need to satisfy the conditions of proposed Rule 164 and proposed Rule 433. Unlike the ABS proposals, term sheets could also be used by non-reporting issuers that file on Form S-1. For non-reporting issuers, a registration statement containing a statutory prospectus would need to be filed and the free writing prospectus would need to be preceded or accompanied by the most recent statutory prospectus. For seasoned issuers filing on Form S-3, actual delivery of the statutory prospectus would not be required. Unlike current practice, underwriters using informational and computation materials that are based on but do not contain issuer information would not need to file them as free writing prospectuses. An example would be computational materials prepared by the underwriter based on issuer pool data. ABS issuers would need to file issuer information contained in an underwriter’s free writing prospectus, such as the pool data itself, unless the pool data is already filed or part of a registration statement or a previously filed free writing prospectus. As a result, combined term sheets containing pool information as well as computational material would still need to be filed by ABS issuers. Any final term sheet would also need to be filed. Unlike current practice, ABS term sheets would not be automatically incorporated into the registration statement but would be subject to Section 12(a)(2) liability. Many of the disclaimers of liability typically found in ABS term sheets would no longer be permitted.

Liability Timing Issues

Like other issuers, under the proposals ABS issuers would be liable under Section 12(a)(2) for information conveyed to investors by or on behalf of the issuer at or prior to the time of contract of sale without update by the final prospectus. The liability timing proposals may lead to more elaborate ABS term sheets or more frequent use of preliminary prospectuses because ABS issuers will not be able to rely on their Exchange Act reports for new ABS offerings as can corporate issuers.

Conclusion

It is important to remember that these proposals have not yet been adopted by the SEC. While commenters generally appear to be supportive of the reform proposals, it is expected that there will be a substantial amount of comments that will result in many changes to the proposals before they are adopted. Although it is unclear when and if the reforms will be adopted, it is never to early for public companies to begin thinking about this significant proposal from the SEC and the impact it could have on them.

Copyright © 2004 Mayer, Brown, Rowe & Maw LLP. This Mayer, Brown, Rowe & Maw LLP article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer, Brown, Rowe & Maw is a combination of two limited liability partnerships, each named Mayer, Brown, Rowe & Maw LLP, one established in Illinois, U.S.A., and one incorporated in England.

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