On November 3, 2004, the SEC issued proposed rules that would make significant changes to the securities offering process under the Securities Act of 1933 ("Securities Act"). The proposed rules are the SEC's most significant effort at reforming the securities offering process since the SEC's 1998 "Aircraft Carrier Release," which the SEC ultimately did not adopt. In contrast to the Aircraft Carrier Release, the SEC characterizes its current proposals as "constructive, incremental changes to the regulatory system and offering process rather than the introduction of a far-reaching entirely new system." The SEC believes that the proposed rules would eliminate unnecessary and outmoded restrictions on offerings, provide more timely information to investors and continue the SEC's long-term efforts toward integrating disclosure and processes under the Securities Act and the Securities Exchange Act of 1934 ("Exchange Act"). Specifically, the proposed rules address communications related to registered securities offerings, delivery of information to investors and procedural restrictions in the offering and capital formation processes. The proposed rules can be found on the SEC's web site at:
http://www.sec.gov/rules/proposed/33-8501.htm.

The reforms proposed by the SEC would substantially change securities offering practices and the information made available to investors. The comment period on the release expires on January 31, 2005 and the release will likely receive many comment letters from those involved in securities offerings. We believe that, unlike the Aircraft Carrier Release, the SEC is likely to adopt rules addressing many of the topics contained in the release.

Categories Of Issuers

Many of the proposed rules apply differently to issuers based on their size and reporting history. The SEC noted that large issuers are followed closely by sophisticated institutional and retail investors, members of the financial press and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. In addition, unlike small issuers, large issuers often have regular dialogue with investors and market participants through the media. In recognition of the foregoing, the SEC proposed the following classifications of issuers:

  • "Non-Reporting Issuer": Not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act and does not file voluntarily such reports.
  • "Unseasoned Issuer": Required to file, or voluntarily files, reports pursuant to Section 13 or Section 15(d) of the Exchange Act but does not satisfy the requirements of Form S-3 or Form F-3 for primary offerings of its securities.
  • "Seasoned Issuer": Eligible to use Form S-3 or Form F-3 for primary offerings of its securities but does not meet the definition of "Well-Known Seasoned Issuer."
  • "Well-Known Seasoned Issuer": Eligible to use Form S-3 or Form F-3 for primary offerings of its securities and has (i) a public common equity float of $700 million or more or (ii) has issued at least $1 billion in registered debt securities in the last three years and is seeking to register only debt securities.

As discussed below, the classification of an issuer would affect an issuer's ability to communicate with potential investors in connection with a registered offering of securities, the material that must be furnished in connection with such an offering and the issuer's eligibility to use an automatic shelf registration statement.

The SEC conducted a survey that reflected approximately 30% of issuers in 2003 would have qualified as Well-Known Seasoned Issuers and they accounted for approximately 95% of U.S. equity market capitalization. Additionally, issuers that would have qualified as Well-Known Seasoned Issuers accounted for 87% of the total debt raised in registered offerings over the past seven years.

"Gun-Jumping" Reform

The proposed rules would update and liberalize permitted offering activity and communications by revising the "gun-jumping" restrictions of rules under the Securities Act, which prohibit all offers prior to filing a registration statement and prohibit written offers other than by a statutory prospectus after filing a registration statement. The overall effect of these proposed rules would be the following:

  • Well-Known Seasoned Issuers would be able to make oral and written communications at any time, whether before or after the filing of a registration statement, subject to certain conditions;
  • All reporting issuers would be permitted at any time to continue to publish regularly released "factual business information" and "forward-looking information;"
  • Non-Reporting Issuers would be permitted at any time to publish "factual business information" that is regularly released to persons other than in their capacity as investors or potential investors;
  • Communications by all issuers more than 30 days prior to filing a registration statement would not be considered prohibited offers if they did not reference a securities offering;
  • As described in more detail below, all issuers and other offering participants would be permitted to use a "free writing prospectus," subject to specified conditions;
  • Rule 134 under the Securities Act would be amended to expand the type of information that issuers may include in announcements after the filing of a registration statement; and
  • The exemptions for research reports would be expanded.

The proposed rules define "factual business information" to include information about the issuer or some aspect of its business; advertisements or other information about the issuer's products or services; factual information about business or financial developments of the issuer; dividend notices; and factual information in any Exchange Act report the issuer files. The proposed rules define "forward-looking information" to include financial projections; statements about management's plans and objectives for future operations, including those relating to the issuer's products or services; statements about the issuer's future economic performance, including those statements contemplated by the MD&A requirements relating to the issuer's results of operations and financial condition; and assumptions underlying any of the foregoing.

Free Writing Prospectus

The proposed rules would permit a new type of communication called a "free writing prospectus." A free writing prospectus is any written communication that constitutes an offer to sell, or a solicitation of any offer to buy, securities that are or will be the subject of a registration statement and is made by means other than a statutory prospectus under Section 10(a) of the Securities Act or an exemption from the definition of a prospectus under Section 2(a)(10) of the Securities Act.

Non-Reporting and Unseasoned Issuers could use materials constituting a free writing prospectus after they have filed a registration statement provided that the materials would be preceded or accompanied by the most current statutory prospectus. Seasoned Issuers and Well-Known Seasoned Issuer could also use materials constituting a free writing prospectus after they file a registration statement provided that they inform recipients through a required legend where they can access electronically the preliminary prospectus. Well-Known Seasoned Issuers would also be able to use materials constituting a free writing prospectus both before and after they file a registration statement. Certain "ineligible issuers" would not be able to use materials constituting a free writing prospectus. "Ineligible issuers" include issuers not current in their Exchange Act reports, issuers that are shell companies, penny stock issuers, blank check issuers and issuers that have filed for bankruptcy protection within the past three years.

Generally, an issuer would be required to file a free writing prospectus prepared by the issuer or containing material information about the issuer or its securities that has been provided by or on behalf of an issuer with the SEC on or before its date of first use. Underwriters would not be required to file a free writing prospectus that they prepare unless they distribute it in a manner designed to achieve broad unrestricted dissemination. A free writing prospectus prepared by the media that includes information about an issuer or its securities provided by or on behalf of the issuer or an offering participant and not paid for by the issuer or an offering participant, such as an interview with the chief executive officer, would be required to be filed by the issuer or the offering participant within one business day after its first publication or dissemination. Additionally, an issuer would be required to file a free writing prospectus that only contains a description of the securities being offered within two days after the later of the date the terms become final or the date of first use.

Electronic Road Shows

The proposed rules would clarify that electronic communications, including electronic road shows and information on an issuer's website, would be considered "written communications." Accordingly such communications would be considered written offers and could constitute a "free writing prospectus." However, electronic road shows would not be subject to filing with the SEC if the issuer publishes one version of a bona fide electronic road show presentation on the Internet prior to or at the same time the electronic road show takes place and files a free writing prospectus of material issuer information used at an electronic road show other than the road show presentation itself.

General Shelf Registration Improvements

The SEC proposed changes to rules regulating the use of shelf registration statements that would:

  • Codify in a single rule the information that an issuer could omit from the base prospectus at the time of the shelf registration statement's effectiveness and could provide later;
  • Expand the types of information required in the prospectus that may be included other than through a post-effective amendment (e.g., material changes to the plan of distribution), by providing that information about the issuer and its securities may be incorporated by reference from Exchange Act reports or included in a prospectus supplement;
  • Permit Seasoned Issuers to identify selling security holders after the shelf registration statement's effectiveness in a prospectus supplement;
  • Replace the current requirement that issuers only register securities that they intend to offer within two years with a requirement that an issuer file a new shelf registration statement every three years;
  • Eliminate the "convenient shelf" issue by permitting immediate takedowns of securities from a shelf registration statement after effectiveness; and
  • Eliminate restrictions on "at-the-market" offerings, including volume limits and the requirement to identify an underwriter.

Automatic Shelf Registration

Under the proposed rules, Well-Known Seasoned Issuers would be able to use a newly-created "automatic shelf registration" on Form S-3 or Form F-3 that would become immediately effective upon filing with .pay-as-you-go. filing fees at the time of takedowns of securities. With the .automatic shelf registration,. Well-Known Seasoned Issuers would be able to register unspecified amounts and types of securities without allocating between primary and secondary offerings. In addition, Well-Known Seasoned Issuers would be able to omit more information from the base prospectus than in a typical shelf registration statement.

Incorporation By Reference

The SEC proposed to permit an issuer that has filed at least one annual report and is current in its Exchange Act reporting obligations to incorporate by reference into a Form S-1 or Form F-1 its previously filed Exchange Act reports. The ability to incorporate by reference would be conditioned on the issuer making its incorporated Exchange Act reports accessible on the issuer's web site. In connection with this change, the SEC proposed to eliminate Form S-2 and Form F-2.

Prospectus Delivery Reform

The SEC stated that it believes Internet usage has increased sufficiently to permit it to propose an "access equals delivery" rule for furnishing prospectuses. Under the proposed rules, an issuer would satisfy its final prospectus delivery obligation by filing the final prospectus with the SEC through the EDGAR system by the date required under Rule 424 of the Securities Act. The SEC would exclude from this proposed rule offerings on Form S-8, business combination and exchange offers and offerings by registered investment companies and business development companies. In lieu of the final prospectus, the underwriters would be permitted to send to each purchaser of securities a notice providing that the sale was made pursuant to a registration statement. The proposed rules would also permit written confirmations and notices of allocation to be sent after effectiveness of a registration statement without being accompanied or preceded by a final prospectus.

Liability Timing Reform

The release states that the SEC interprets Section 12(a)(2) and Section 17(a)(2) of the Securities Act to reflect "a core concept of the Securities Act - that materially accurate and complete information regarding an issuer and the securities being sold should be available to investors at the time of the contract of sale, when they make their investment decisions." The release also states that the SEC interprets these sections to mean that, for purposes of assessing whether an issuer has made a material misstatement or omits to state a material fact necessary in order to make the statements in light of the circumstances in which they were made not misleading, modifications, corrections or additions that are made available subsequent to the time of sale, including information contained in a final prospectus or prospectus supplement, should not be taken into account. The SEC proposed to codify this interpretation in a new rule.

The proposed rules also would make clear that information contained in a final prospectus or prospectus supplement that an issuer files subsequent to the time of sale would be included in the registration statement for purposes of liability under Section 11 of the Securities Act at the time of effectiveness of the registration statement. In addition, the proposed rules would establish a new effective date for liability purposes for a shelf registration statement upon each takedown of securities, which would be the date an issuer files a prospectus supplement in connection with the takedown.

Additional Disclosure In Exchange Act Reports

The proposed rules would increase disclosure obligations for Exchange Act periodic reports by requiring:

  • All reporting companies to include "risk factors" in Form 10-Ks and Form 10 registration statements and to update the risk factors in Form 10-Qs to reflect material changes;
  • "Accelerated filers" to disclose in Form 10-Ks unresolved material SEC staff comments that were issued more than 180 days before the end of the fiscal year; and
  • Voluntary Exchange Act filers to disclose that they are voluntary filers and may cease to file Exchange Act reports at any time, for any reason and without notice.

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.