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These proposals may cause seasoned issuers to truncate the traditional dialogue with members of the SEC staff to resolve any disagreements about SEC comments and simply amend the disclosure to satisfy the comments more quickly than they otherwise would. Because the SEC would be focusing more of its resources on reviewing the Exchange Act reports of reporting issuers, underwriters and their counsel would likely have less ability to take part in the process of responding to staff comments absent a highly coordinated and somewhat unusual designated underwriters’ counsel arrangement.

F. Disclosure of Status as Voluntary Filer on Forms 10-K or 20-F

Because a voluntary filer may cease to file Exchange Act reports at any time without notice, the proposals include a requirement that voluntary filers identify their status as voluntary filers on the cover page of their Form 10-K or Form 20-F. Note that voluntary filers would not be considered to be seasoned issuers for purposes of the free writing prospectus proposals.

IX. Conclusion

The proposed new rules, taken together, amount to a major new way of looking at, and regulating, the public offering process. WKSIs would be the big winners under the new proposals – they would be left alone to fend for themselves in the capital markets much more than ever before, but by participating in the public offering regime they would be subject to greater liability than they would be for unregistered offerings. Most other issuers would benefit from the streamlining of the shelf offering process and the ability to incorporate by reference to Exchange Act filings on Forms S-1 and F-1. For all issuers, Exchange Act reports would be much more important for Securities Act purposes and would become even more central to the disclosure used in registered securities offerings. The new proposals pose interesting challenges to underwriters and their counsel, who may find their ability to influence issuer disclosure even further truncated by the proposed regime’s increased reliance on Exchange Act filings.

The SEC has asked for comments on the proposals by January 31, 2005. We have no doubt that much of what is being proposed will survive in the final form of the law to be adopted in 2005. We will advise you of all developments as they become known to us.

X. Annex A – Summary of the Proposals

A. WKSIs and Other Types of Issuers

What is a WKSI?

 

Any issuer (including majority-owned subsidiaries under certain circumstances) that:

  • is eligible to register a primary offering of its securities on Form S-3 or Form F-3;

  • has either (i) a market value of outstanding common equity held by non-affiliates of $700 million or more or (ii) issued at least $1 billion in aggregate amount of debt securities in registered offerings during the past three years and will only register debt securities;

  • has been a reporting issuer under the Exchange Act for at least 12 months;

  • is current in its reporting obligations under the Exchange Act and has timely filed required material; and

  • is not an "ineligible issuer" or "asset-backed issuer." 14

What are the other types of issuers?

 

Seasoned issuer – an issuer that is eligible to use Form S-3 or F-3 to register a primary offering of securities.

Unseasoned reporting issuer – an issuer that is required to file Exchange Act reports, but does not satisfy the requirements of Form S-3 or F-3 for a primary offering of its securities. In addition, this category includes issuers that voluntarily file Exchange Act reports.

Non-reporting issuer – an issuer that is not required to file Exchange Act reports and is not filing those reports voluntarily.

B. Free Writing Prospectus

Who may use a free writing prospectus?

 

WKSIs – would be able to use a free writing prospectus at any time.

Any issuer (or underwriter) – would be able to use a free writing prospectus after a registration statement is filed.

Ineligible issuers – would not be able to use a free writing prospectus.

What are the prospectus delivery requirements in connection with a free writing prospectus?

 

WKSIs and seasoned issuers – a free writing prospectus could be used by WKSIs and seasoned issuers without delivering a statutory prospectus. In the case of seasoned issuers and WKSIs, a statutory prospectus would first have to be on file with the SEC.

Non-reporting and unseasoned issuers – a statutory prospectus, including a price range when required (in the case of an IPO), would have to accompany or precede a free writing prospectus, with two exceptions:

  • once a statutory prospectus has been provided, if there is no material change between that prospectus and the most recent statutory prospectus; and

  • when the free writing prospectus is prepared and disseminated by someone other than the issuer or its underwriters – for example, a journalist – and no consideration is given for publication.

What are the information and legend requirements?

 

Not inconsistent – the information in a free writing prospectus would need to be consistent with the information in any prospectus or an issuer’s Exchange Act Reports.

Legend – the free writing prospectus would be required to contain a legend in prescribed form.

What are the filing requirements?

 

All issuers – all issuers would be required to file, on or prior to the day the free writing prospectus is used:

  • any issuer free writing prospectus used by any person;

  • any free writing prospectus of any person used by the issuer;

  • any issuer information contained in a free writing prospectus prepared by another person (but not information prepared by a person other than the issuer on the basis of issuer information); and

  • any free writing prospectus prepared by a person that contains only a description of the final terms of the issuer’s securities.

Underwriters – an underwriter would be required to file any free writing prospectus it distributes in manner reasonably designed to lead to its broad dissemination, unless information in the free writing prospectus has already been filed (e.g., by the issuer).

Exceptions to filing – no free writing prospectus would need to be filed if it is substantially the same as a free writing prospectus already on file. In addition, the requirement to file issuer information contained in a free writing prospectus of a person other than the issuer would not apply if that information were already included an a previously filed statutory or free writing prospectus.

Electronic roadshows – electronic road shows would be treated as free writing prospectuses which would need to be filed unless the issuer were to:

  • make at least one version of a bona fide electronic road show available electronically to any person; and

  • file any information disclosed at the road show that is not already included in the information already on file.

Issuer website information – offers of securities contained on an issuer’s website or hyperlinked from the issuer’s website to a third party website would be free writing prospectuses that must be filed. However, historical information about an issuer that is identified as such and is located in a separate section of an issuer’s website would not be considered a free writing prospectus unless that information had been included in a prospectus for the offering.

Media free writing prospectuses – any written communication about an issuer that is published by third party media would be a free writing prospectus, if it includes information provided by an issuer or one of its underwriters. However, media free writing prospectuses would not need to be accompanied or preceded by a statutory prospectus, and would not be subject to the prior filing and information/legend requirements if:

  • no payment were made or other consideration is given for the publication by the issuer or its underwriters; and

  • the issuer files the media free writing prospectus within one business day after publication or dissemination.

What are the liability implications?

 

Section 12(a)(2) and 17(a)(2) but not Section 11– a free writing prospectus would be subject to Section 12(a)(2) and Section 17(a)(2) liability, regardless of whether it is filed. A free writing prospectus would not be considered part of the registration statement and hence not subject to Section 11.

C. Additional Reforms to the Offering Process

Rule 163A – 30-day bright line exclusion from gun-jumping

 

Available for all issuers – Rule 163 A would provide issuers with a safe harbor for communications made during the period ending 30 days prior to the filing of a registration statement; these communications would not be considered prohibited "offers" under Section 5(c).

Requirements – in order to use the safe harbor:

  • Rule 163A communications could not refer to a securities offering;

  • the communications would have to be made by or on behalf of an issuer, so that communications by an underwriter (or prospective underwriter) would not come within the safe harbor;

  • the issuer would have to take "reasonable steps within its control" to prevent further distribution of the information during the 30-day period prior to filing the registration statement (except to the extent otherwise covered by another safe harbor, such as proposed Rules 168 and 169); and

  • the communication could not be used in connection with certain transactions.

Rule 163 – Pre-filing offers by WKSIs

 

Available only for WKSIs – all written and oral offers made by or on behalf of a WKSI before the filing of a registration statement would be exempt from Section 5(c)’s restrictions on "offers."

Written offers made in reliance on proposed Rule 163 – would be considered a free writing prospectus once the registration statement is filed.

Rule 168 – Safe harbor for factual business information and forward-looking information regularly released by reporting issuers

 

Reporting issuers; factual business information and forward-looking information – an issuer that files reports under the Exchange Act, or a person acting on its behalf, would be allowed to make continued regular release or dissemination of "factual business information" and "forward-looking information," subject to certain conditions.

Rule 168 information could be released at any time – including before and after the filing of a registration statement.

Information is released "by or on behalf" – if the issuer, its agent or its representatives authorized and approved the information before release.

Rule 168 factual business information –

  • 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 factual developments with respect to the issuer;

  • dividend notices; and

  • factual information set forth in the issuer’s Exchange Act reports.

Rule 168 forward-looking information —

  • projections of an issuer’s revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure, or other financial items;

  • statements about management’s plans and objectives for future operations;

  • statements about the issuer’s future economic performance, including statements contemplated by MD&A; and

  • assumptions underlying or relating to the foregoing.

    Information about the offering – would not be factual business or forward-looking information.

Additional conditions – to use the safe harbor:

  • the issuer must have previously released or disseminated information of this type in the ordinary course; and

  • the timing, manner and form of release must be consistent with past disclosure.

In order for the information to be considered regularly released in the ordinary course, the method of releasing or disseminating the information must be consistent with prior practice, not just the type of information disseminated. In other words, the issuer must have a track record of releasing information in that manner.

Rule 169 – Safe harbor for factual business information regularly released by non-reporting issuers.

 

Non-reporting issuers; factual business information only – an issuer that does not file reports under the Exchange Act, or a person acting on its behalf, would be able to make continued regular release of factual business information (but not forward-looking information).

Rule 169 information may be released at any time –including before and after the filing of a registration statement.

Information is released "by or on behalf" – if the issuer, its agent or its representatives authorized and approved the information before release.

Rule 169 factual business information –

  • 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 factual developments with respect to the issuer.

Additional conditions – to use the safe harbor:

  • the issuer would have to have previously released or disseminated information of this type in the ordinary course;

  • the timing, manner and form of release would have to be consistent with past disclosure; and

  • the information would have to be released to persons, such as customers or suppliers, other than in their capacity as investors or potential investors, by the issuer’s employees or agents who regularly and historically have provided this information to those persons.

Rule 134 – Expanded safe harbor for communications after filing

 

As amended, Rule 134 would permit the following – in addition to the information currently allowed under the rule:

  • basic factual information about the legal identity, business location and contact details;

  • information about the business segments through which the issuer operates;

  • greater information about the securities offered;

  • the names of all underwriters participating in the offering and their additional roles in the underwriting syndicate;

  • the anticipated schedule for the offering, and a description of marketing events;

  • a description of the procedures by which the underwriters will conduct the offering and information about procedures for opening accounts and submitting indications of interest;

  • expanded disclosure regarding credit ratings;

  • certain additional information, such as names of selling securities holders; and

  • a shortened legend.

D. Expanded Safe Harbors for Research Reports

Rule 137 – Research issued by brokers or dealers not participating in the offering

 

Under the current Rule 137 – a broker or dealer not participating in a registered offering may continue to publish research about a reporting issuer without being considered an underwriter in the offering.

Applies to all issuers – amended Rule 137 would expand the rule to apply to securities of all issuers, including non-reporting issuers.

Not a free writing prospectus – research reports published under amended Rule 137 would not be considered a free writing prospectus subject to the requirements of proposed Rule 433.

Rule 138 – Research issued by brokers or dealers participating in the offering regarding a different type of security

 

Under current Rule 138 – a broker or dealer participating in a registered securities offering of a Form S-3 or F-3 eligible issuer (and certain foreign private issuers) may continue to publish research regarding a different type of security of that issuer.

Applies to all reporting issuers – amended Rule 138 would expand the rule to cover reports on securities of all reporting issuers (including those not eligible to use Forms S-3 and F-3).

Foreign private issuers – amended Rule 138 would continue to permit research on certain non-reporting foreign private issuers.

Regular course – amended Rule 138 adds a requirement that the broker or dealer must publish research reports on the type of securities in question "in the regular course of business."

Rule 144A/Regulation S – if the other conditions of the rule are met, amended Rule 138 would allow the publication of research in connection with Rule 144A and Regulation S transactions.

Not a free writing prospectus – research reports published under Rule 138 are excluded from the definition of "offer" under Section 5(c) and Section 2(a)(10), and would not be considered a free writing prospectus subject to the requirements of proposed Rule 433.

Rule 139 – On-going research published by brokers or dealers participating in the offering

 

Under current Rule 139 – a broker or dealer participating in registered offering of securities may publish on-going research about a Form S-3 or Form F-3 eligible issuer in certain situations

Issuer-specific reports – under amended Rule 139, the issuer would continue to be required to be Form S-3 or F-3 eligible, or in the case of foreign private issuers to meet certain of the F-3 criteria. Although the broker-dealer would have to publish the report in the regular course of business, it would no longer need to publish with "reasonable regularity."

Industry-related reports – under amended Rule 139, the issuer would need only to be an Exchange Act reporting company (or an eligible foreign private issuer) and would not need to be eligible to use Form F-3 or Form S-3. The proposals eliminate the current requirement that the broker or dealer not make a more favorable recommendation in the report as compared to previous reports.

Rule 144A/Regulation S offerings – if the other conditions of amended Rule 139 are met, research may be published in connection with Rule 144A or Regulation S offerings.

Not a free writing prospectus – research reports published under amended Rule 139 would be excluded from the definition of "offer" under Section 5(c) and Section 2(a)(10), and would thus not be considered a free writing prospectus subject to the requirements of proposed Rule 433.

E. Liability Reforms

Rule 159 – Liability for information conveyed at the time the investment decision is made

 

Section 12(a)(2) and Section 17(a)(2) liability at the time the investment decision is made – under proposed Rule 159, for purposes of determining whether a prospectus or oral statement included a material misstatement or omission, information conveyed to the investor after the time the investment decision is made (i.e., the pricing date in most underwritten offerings) would not be taken into account.

A final prospectus cannot cure – if adopted, proposed Rule 159 would eliminate the ability of issuers and underwriters to correct misstatements and omissions in the preliminary prospectus with updated information in the final prospectus delivered after pricing.

Rule 159A – Issuer as "seller" under Section 12(a)(2)

 

Issuer on the hook – under proposed Rule 159A, a "seller" for purposes of Section 12(a)(2) would include the issuer of the securities in a firm commitment underwriting, notwithstanding the fact that the actual sale occurred between the underwriter and the would-be plaintiff investor.

Section 11 liability

 

The prospectus or prospectus supplement is considered part of the registration statement under Section 11 – under the proposed regime, information contained in a prospectus or prospectus supplement filed after the effective date would be considered part of the registration statement for purposes of Section 11 liability.

F. Reforms to the Shelf Offering Process

Automatic shelf registration

 

Available only for WKSIs – the proposed regime allows WKSIs to access the public capital markets quickly, as WKSIs would be able to register an unspecified amount of securities on a shelf registration statement that is automatically effective upon filing.

What may be omitted in the base prospectus? – under proposed Rule 430B, the base prospectus could omit:

  • whether the offering is a primary or secondary offering;

  • the plan of distribution for the securities;

  • the identification of other issuers;

  • the names of any selling security holders; and

  • the amount of securities to be registered on their behalf.

The omitted information could be included in a prospectus supplement, post-effective amendment or through incorporation of Exchange Act reports.

New class of securities added through post-effective amendment – proposed Rule 413 would permit WKSIs to add new classes of securities to an automatic shelf registration statement through post-effective amendment.

Pay-as-you-go – under proposed Rules 456 and 457, WKSIs would only be required to pay filing fees at the time of a securities offering (only a nominal fee at the time of filing the shelf registration statement would be required).

Rule 430B – Information that may be omitted from the base prospectus for seasoned issuers and WKSIs

 

Applies only to seasoned issuers and WKSIs – under proposed Rule 430B (and Rule 409), information that is unknown or not reasonably available may be omitted from a base prospectus in delayed primary offerings. In addition, the base prospectus may omit:

  • as noted above for automatic shelf registration statements, certain information regarding offerings by WKSIs; and

  • for all seasoned issuers, the identities of selling shareholders and the amount of securities being registered on their behalf.

The omitted information could be included in a prospectus supplement, post-effective amendment or through incorporation of Exchange Act reports

Three-year shelf life; no limitation on amount of securities registered

 

Update shelf every three years – under the proposed regime, a new shelf registration statement would have to be filed every three years, with unsold securities and unused fees carried forward to the new registration statement.

No limitation on securities to be registered – the provision in Rule 415 limiting the amount of securities registered to an amount that is intended to be offered or sold within two years from the registration statement effective date would be eliminated for primary offerings.

Footnotes

1. The proposals are contained in SEC Release Nos. 33-8501, 34-50624, IC-26649, and can be found on the SEC’s website at http://www.sec.gov/rules/proposed/33-8501.pdf.

2. Foreign private issuers may also take advantage of the safe harbor for offshore press releases provided by Rule 135e.

3. An "ineligible issuer" would include issuers that (i) are not timely in their Exchange Act reporting obligations; (ii) are blank check companies, shell companies, penny stock issuers or limited partnerships offering other than through a firm commitment underwriting; (iii) have received a "going concern" qualification from their independent auditors in the most recent fiscal year; (iv) have filed for bankruptcy in the last three years; (v) have been convicted of certain felonies or misdemeanors within the past three years; (vi) have entered into any settlement with any government agency alleging violations of the federal securities laws within the past three years; (vii) are subject to judicial order prohibiting them from violating the federal securities laws; and (viii) have had any registration statement subject to a refusal order or stop order within the past three years.

4. Specifically, these communications would not be considered to be made in "connection with a securities offering registered under the Securities Act" for purposes of Rule 100(b)(2)(iv) of Regulation FD.

5. Note, however, that after effectiveness of the registration statement, the final prospectus would always be required to be provided with any free writing prospectus, whether or not an earlier statutory prospectus has been provided.

6. See Note 3.

7. Communications covered by Rule 163A would still be subject to Regulation FD, as they would not be considered to be made in "connection with a securities offering registered under the Securities Act" for purposes of Rule 100(b)(2)(iv) of Regulation FD.

8. See Guidelines for the Release of Information by Issuers Whose Securities are in Registration, Securities Act Release No. 5180 (Aug. 16, 1971).

9. This omission would be permitted pursuant to Rule 409.

10. See Note 3.

11. The Rules are not available for certain types of transactions, notably offerings registered on Form S-8.

12. The prospectus-delivery period is generally 40 days after effectiveness, although this period is shortened to 25 days in the case of listed IPOs under Rule 174 and 90 days in the case of unlisted IPOs. There is no requirement to deliver a prospectus if the issuer is an Exchange Act reporting company immediately before the registration statement is filed.

13. The SEC has not yet subjected foreign private issuers that file on Form 20-F to accelerated filing.

14. An "ineligible issuer" would include issuers that (i) are not timely in their Exchange Act reporting obligations; (ii) are blank check companies, shell companies, penny stock issuers or limited partnerships offering other than through a firm commitment underwriting; (iii) have received a "going concern" qualification from its independent auditors in the most recent fiscal year; (iv) have filed for bankruptcy in the last three years; (v) have been convicted of certain felonies or misdemeanors within the past three years; (vi) have entered into any settlement with any government agency alleging violations of the federal securities laws within the past three years; (vii) are subject to judicial order prohibiting them from violating the federal securities laws; and (viii) have had any registration statement subject to a refusal order or stop order within the past three years.

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Brian Cartwright is a partner in the Los Angeles office of Latham & Watkins LLP; Alexander F. Cohen is a partner in the London office of Latham & Watkins; Kirk A. Davenport is a partner and Ian Schuman is an associate in the New York office of Latham & Watkins LLP; and John J. Huber is a partner in the Washington, D.C. office of Latham & Watkins LLP. Any errors or omissions are, of course, solely the responsibility of the authors. The views and opinions are those of the authors and do not necessarily represent the views and opinions of Latham & Watkins LLP.

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