United States: Securities Offering Reform: Shelf Registration Proposal

On November 3, 2004, the Securities and Exchange Commission proposed new rules (http://www.sec.gov/rules/proposed/33-8501.pdf) that would significantly modify and advance the registration, communications and offering framework of the Securities Act of 1933. The proposals would enhance the disclosure requirements under that Act and the Securities Exchange Act of 1934 — which have both undergone significant changes since the enactment of the Sarbanes-Oxley Act of 2002 — and continue the SEC’s long-term effort to integrate the disclosure requirements, as well as other offering processes, under both of these Acts. The release is subject to a 75-day comment period, which expires on January 31, 2005, and the SEC is seeking comment on virtually all of the topics covered in its proposals.

This Client Alert is one of three separate Client Alerts summarizing the SEC’s principal proposals that are described in our overview Client Alert entitled "Securities Offering Reform: A Takeoff from the Aircraft Carrier". Specifically, this Client Alert covers the proposal to simplify the shelf registration process, including automatic effectiveness of registration statements for a new category of issuers that have reporting histories and are presumptively the most widely followed in the marketplace — which the SEC calls "well-known seasoned issuers" — that will permit them to issue securities without any potential delay arising from SEC staff review. A well-known seasoned issuer — or so-called "WKSI" — is generally a company eligible to file a registration statement for an offering of debt or equity securities on Form S-3 or Form F-3 that either has a market capitalization held by non-affiliates of at least $700 million or has issued at least $1 billion of registered debt over the past three years and registers only debt securities. (For a more complete definition of WKSI and other categories of issuers, see our overview Client Alert.) Although the SEC’s shelf registration proposal does not focus on private offerings of securities, such as Rule 144A offerings, given the increased flexibility afforded to the registration process in the proposal, it is clear that the SEC intends to encourage the use of SEC-registered offerings over the widespread reliance on Rule 144A offerings by issuers, particularly WKSIs.

Because of the technical nature of the proposed reforms — which took the SEC nearly 400 pages to summarize and promulgate — we have also prepared separate Client Alerts for the other two principal proposals covered by the SEC’s release:

• our Client Alert entitled "Securities Offering Reform: Communications Proposal" covers the proposal to formalize and liberalize communications that can be used by or on behalf of companies in connection with their offerings, other than by means of the customary statutory prospectus, including the use of "free writing prospectuses," with the most flexibility afforded to WKSIs

• our Client Alert entitled "Securities Offering Reform: Prospectus Delivery Proposal" covers the proposal to adopt an "access equals delivery" model that will minimize the requirements to deliver a hard copy of a final prospectus, as well as to clarify that investors should have all the information necessary to make their investment decision at the time of sale; that Client Alert also covers other topics in the SEC proposal, including a requirement to include risk factor disclosure in annual reports on Form 10-K and update them in quarterly reports on Form 10-Q

Moreover, the SEC’s proposals modify and clarify the principal liability provisions of the Securities Act, which have varying standards of liability associated with untrue statements of or omissions to state material facts in connection with an issuer’s offering of its securities. These liability standards are discussed as applicable in the context of each of our Client Alerts.

The SEC has proposed a significant modernization of the shelf offering process – automatic shelf registration for well-known seasoned issuers. Under its proposal, the SEC would allow WKSIs to register an unspecified amount of different types of securities on a registration statement that would be automatically effective upon filing. Essentially, the SEC proposal would bring the registration system as close as possible to a general "company registration" system without displacing the current regulatory regime. Together with the loosening of restrictions on communications (discussed in our Client Alert entitled "Securities Offering Reform: Communications Proposal", the automatic shelf registration process would provide WKSIs with the flexibility to use a free writing prospectus to structure transactions and then rapidly market these transactions to the public in a registered offering.

Three related events have provided the SEC with the basis to believe these modifications can be accomplished without risking investor protection or impacting market processes:

• the enhanced reporting requirements under the Exchange Act, which require more extensive and contemporaneous disclosure

• the shifting of the Department of Corporation Finance resources toward review of Exchange Act reports, which are intended to enhance the quality and currency of corporate disclosure

• the advent of improved technologies for providing investors and other market participants with access to information about the issuer and its securities

Automatic shelf registration would be available for all primary and secondary offerings by WKSIs, other than offerings in connection with business combinations or exchange offers. Under the proposal, such registrations would become immediately and automatically effective upon filing, without SEC staff review. Similarly, post-effective amendments to such shelf registrations would also become automatically effective upon filing.

To make use of the automatic shelf registration process, an issuer would need to meet the eligibility requirements for a WKSI both on the initial filing date of the registration statement and again at the time each updated prospectus is issued. Majority-owned subsidiaries that satisfy the conditions for being considered a WKSI would also be allowed to make use of the automatic shelf registration process. In the event an issuer later loses its WKSI eligibility, it would be permitted to continue any offering that was ongoing until a timely-filed post-effective amendment or new registration statement is declared effective.

As noted above, all automatic shelf registration statements and post-effective amendments would become effective automatically upon filing, without SEC staff review. However, the SEC expects that issuers will need to evaluate whether there are any material disclosure or accounting issues that the staff has raised on any of the issuer’s Exchange Act filings that remain unresolved. Moreover, the SEC will require issuer disclosure of written staff comments that were received 180 days before an issuer’s fiscal year end that are material and that remain unresolved at the time the issuer files a new Form 10-K or Form 20-F. The issuer would be responsible for determining whether or not the comments are material and would be permitted, but not required, to include its position as to any unresolved comments.

The SEC has proposed a pay-as-you-go filing fee system. Under this proposal, the issuer would pay a small initial filing fee at the time of filing the initial registration statement. Then, for each takedown, the issuer would file a prospectus supplement, which would include calculation and disclosure of the registration fee, and would tender the appropriate amount.

The SEC would allow automatic shelf issuers to omit more information from the base prospectus than is the case currently or than would be the case under the SEC’s proposals for regular shelf registration statements discussed below. For example, the base prospectus in an automatic shelf registration could omit whether the offering is primary or secondary and need not allocate the mix of securities. Instead, any information required in a prospectus about the issuer and its securities could be incorporated by reference from the issuer’s Exchange Act reports or contained in a prospectus supplement. The SEC would continue to require a post-effective amendment for an issuer to include new types of securities or any new eligible issuers (such as guarantors); however, the post-effective amendment would be immediately effective on filing and thus the amendment process would be unlikely to cause significant delay in an offering.

The SEC has also proposed a number of helpful, general reforms in the shelf registration context.

Currently, issuers may only use a shelf registration statement to register an amount of securities which they intend to sell within two years of filing the registration statement. The registration statement, however, does not expire at the end of the two-year period but instead remains in effect. Consequently, takedowns from shelf registrations may sometimes rely on a registration statement many years old. The SEC would eliminate any ceiling on the amount of securities that may be registered under a registration statement and instead the registration statement would have a finite life of three years. At the end of the three-year period an issuer would be required to file a new registration statement, but any unsold securities or unused fees under the old registration statement could be carried forward to the new one.

The SEC has also proposed a reform to the method for identifying and providing information about selling security holders in the registration statement. Under the existing rules, any addition to the list of selling security holders after a registration statement has been declared effective (for example, where a transfer of restricted securities has occurred after a private placement has been completed) must be made by means of a post-effective amendment, with the consequent delay to the offering while the SEC staff reviews the amendment. In contrast, the SEC proposal would allow an issuer the alternative of providing the required information about the selling security holder by means of a prospectus supplement, thus eliminating unnecessary delay to the offering. However, this alternative would only be available if the resale registration statement identified a specific private placement pursuant to which the relevant securities were sold and the private placement was completed and the relevant securities were outstanding prior to the initial filing of the resale registration statement.

Under existing SEC rules, an issuer conducting an "at-the-market" offering of voting stock may not sell additional voting stock in excess of 10% of the aggregate market value of the currently outstanding voting stock held by non-affiliates. In addition, all at-the-market offerings must be sold through an underwriter named in the prospectus. The SEC would eliminate these restrictions. Due to enhanced Exchange Act reporting requirements and an increase in the size of trading markets for issuer securities, the SEC has concluded that these limitations are no longer necessary to provide protection to either investors or the securities markets.

The SEC has also proposed a liberalization for delayed or continuous offerings, by allowing a primary offering by an issuer promptly after a shelf registration statement has been declared effective.

Many types of offerings contemplated by the SEC’s rules can be accomplished by using a prospectus that is complete at the time of the effectiveness of the related registration statement. However, other types of securities offerings — so-called "shelf" registrations — require updated or additional information in the form of a prospectus supplement at the time securities are "taken off the shelf." Currently, there are no formal rules specifying the relationship between the prospectus included in the original registration statement — often referred to as the "base prospectus" — and any later-filed prospectus supplements. Consequently, the SEC has proposed rules that would both codify certain existing practices and clarify other procedures necessary for an issuer to update its registration statement.

Specifically, the SEC would formally provide that an issuer may omit certain material terms of a securities offering in the base prospectus. A prospectus omitting such terms would be permitted under the rules but would not be considered "final." Instead, the rules would formally allow an issuer to provide the required information at a later date, either by means of a prospectus supplement or by means of an Exchange Act report that is incorporated by reference into the registration statement. These rules would also cover information that traditionally has necessitated a formal post-effective amendment to the registration statement. For example, under the proposed rules an issuer could provide material changes to the plan for distribution of the securities by means of a Form 8-K incorporated by reference into the issuer’s registration statement. The only caveat to this "incorporation by reference" rule is that the issuer must include a reference to the Exchange Act report on the cover page of the prospectus supplement so that investors are aware of and might easily access the appropriate information.

As a corollary to its codification of the use of a prospectus supplement and of the incorporation by reference of information in Exchange Act Reports, the SEC would also clarify that information contained in the prospectus supplement or incorporated by reference would be deemed a part of and included in the registration statement for purposes of liability under Section 11 of the Securities Act. For a prospectus supplement filed other than in connection with a takedown of securities off the shelf, the information in the prospectus supplement would be deemed a part of the registration statement as of the date the prospectus supplement is first used. For a prospectus supplement filed in connection with a takedown of securities off the shelf, the information in the prospectus supplement would be deemed a part of the registration statement as of the date it is first used or the date of the first contract of sale of securities in the offering to which the prospectus supplement relates, whichever is earlier. The SEC believes that the proposal would eliminate the unwarranted and disparate treatment afforded underwriters and issuers under Section 11, inasmuch as issuers may not be subject to the same liability as that of underwriters in shelf takedowns occurring a significant time after the registration statement’s initial effectiveness.

In addition, the proposal also would provide – again, for liability purposes only – that a new effective date is created for a shelf registration statement in a takedown offering, with the new effective date being the date on which the prospectus supplement is deemed a part of the registration statement as described above. The proposal would also provide that information in a prospectus supplement or information in an SEC report that is incorporated by reference into a registration statement would not be deemed to modify or supersede any information that was in the registration statement or the prospectus for purposes of any earlier takedown of securities. The new effective date would not be considered the filing of a new registration statement for form eligibility purposes nor would it, by itself, trigger the filing of additional consents of experts, which would continue to be required by virtue of the inclusion of any expertized portion in the prospectus supplement.

Finally, to buttress the foregoing Section 11 liability rules, the SEC would also modify an issuer’s undertakings included in registration statements so that the issuer would agree that information filed in a prospectus supplement would be deemed a part of and included in the registration statement and that such inclusion would trigger a new effective date for the registration statement as outlined above.

Our securities practice team works together with our securities litigation team and white collar defense and corporate investigation team to monitor developments in the federal securities laws and at the SEC, the NYSE and Nasdaq. As indicated above, the SEC is seeking comment on virtually all of the topics covered in its proposals and the comment period expires on January 31, 2005. While we expect that the proposals will receive meaningful public comment, we also expect that the SEC will adopt final rules that reflect many of the more significant proposals included in the SEC's release. We will issue additional Client Alerts addressing significant developments affecting the proposals as they occur.

If you wish either to obtain a more detailed explanation of the proposals and their ramifications or develop a new comprehensive and adaptive strategy to meet the changing landscape, please contact the Pillsbury Winthrop securities attorney with whom you work or one of the co-leaders of the Pillsbury Winthrop securities practice team, Stanton D. Wong in San Francisco or Todd W. Eckland in New York.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.