On November 3, 2004, the Securities and Exchange Commission issued proposed rules to reform the regulatory regime that governs securities offerings. This was not the SEC’s first foray into this area. In 1998, the SEC had proposed a broad reconstruction of the offering and disclosure rules that had ultimately foundered. The November 2004 proposals were more modest in scope than the 1998 proposals, which had earned the appellation "aircraft carrier." Yet, though more modest in scope, the November 2004 proposals are significant within the area they seek to regulate - the offering process under the Securities Act of 1933 (the "1933 Act") - and even more significant in that these rules were ultimately adopted.

The new rules governing offerings under the 1933 Act became effective on December 1, 2005. One of the most important effects of the new rules is to alter the way a generation (or two) of securities law practitioners have viewed the regulatory lay-of-the-land governing communications around the time of an offering. Some of the most recurrent problems surrounding offerings had been magnified in recent years by the emergence of information dispersion technologies that stretched the traditional models for thinking about issues like "gun jumping" and what types of communications constituted a "writing." The new rules comprise the SEC’s attempt to deal with these changes and to adapt the 1933 Act to the twentyfirst century.

This short summary of the new rules is aimed at the securities law practitioner and in-house counsel who must now adopt a new set of tools for evaluating the problems of who can say what around the time of an offering. Rather than provide an exhaustive critique of the new rules (or a lengthy paraphrase of the adopting release), we hope to provide a practical framework for thinking about the new rules that will assist in identifying and analyzing the problems of applying the 1933 Act to offerings made in an environment where digital reproduction, remote access, internet publication, streaming video, DVDs, CD ROMs, and yet-to-emerge technologies challenge the structure of the statute.

Basic Structure Of The Securities Act Of 1933

Section 5 of the 1933 Act breaks the time surrounding an offering of securities into three periods. The first is the time preceding the filing of a registration statement with the SEC. The second is the period from the time of filing of the registration statement until the registration statement becomes effective. The third period is the time after the registration statement becomes effective. Each period has, under the statute, restrictions on the types of communications in which participants in the offering may engage, summarized by the following chart:

Before Filing a Registration Statement

No communication, written or oral, that constitutes an "offer" (very broadly construed) of a security is permitted.

After Registration Statement is Filed, but Before Effectiveness
  • Offers may be made in writing including by e-mail or internet), by radio, or by television and may only be in the form of "statutory prospectus" that conforms to the information requirements of §10 of the 1933 Act.

  • Oral offers are permitted.

After Effectiveness of Registration Statement
  • Written offers may be made only through a statutory prospectus, but additional written offering materials can be used if a final prospectus that meets the requirements of §10(a) of the 1933 Act is sent or given prior to or with those materials.

  • Oral offers are permitted.

This statutory scheme gave rise to two related types of problems. First is the issue of which types of communications constituted "offers"1? The 1933 Act defines the term "offer" broadly, and many types of communications could be problematic. Are press releases about imminent product launches "offers" of securities? What about trade press interviews? Securities practitioners developed a set of tools for analyzing these problems, but the problems had become more nettlesome as the confluence of ubiquitous information on the internet, the requirements of real-time disclosure under the Securities Exchange Act of 1934, and the proliferation of analysts, made analysis of whether a prohibited "offer" had been made more difficult. Second, the convergence of technologies made it more difficult to distinguish "written" from "oral" communications. New technology has emerged that allows "oral" presentations to be duplicated, stored, and distributed with a facility previously reserved for written text. Thus, the classic questions of which materials could be displayed at, or taken from, road show presentations had become difficult.

"Gun Jumping" Reforms

Background: The Previous "Gun Jumping" Landscape

One issue that arises in connection with securities offerings is whether pre-filing communications constitute impermissible "offers" before a registration statement has been filed. The problem arises because of the broad definition of what constitutes an "offer" under §5. The SEC and the courts have taken the position that all forms of publicity that may stimulate investor and dealer interest or condition the market and thereby act as a preliminary step in the selling effort are "offers" within the meaning of the 1933 Act. Thus, interviews by officers appearing in the trade press, articles about an issuer in newspapers or magazines, optimistic publicity about forthcoming products, or other publicity that had the effect of raising public awareness of an issuer could pose the threat of "jumping the gun." This required issuers to be extremely careful about pre-filing publicity. This caution, however, came into increasing conflict with the greater availability of information that technology has provided and securities markets that are now used to constant flows of information.

New Rule 163 - Pre-Filing Free Writing For Wksis. Rule 163 is a nonexclusive safe harbor from the §5 prohibition of "offers" during the first period outlined above - the period before the issuer files a registration statement. Rule 163 is available only to WKSIs and not to other issuers nor to underwriters.2 Thus, it is important to bear in mind that all previous guidance by the SEC in the area of "gun jumping" will continue to be relevant for underwriters and for issuers that are not WKSIs - the context of the traditional IPO.

Rule 163 provides that "an offer by or on behalf of such [WKSI] issuer is exempt from the prohibitions in §5 . . . on offers to sell, offers for sale, or offers to buy its securities before a registration statement has been filed" if the following conditions are met:

  • The written communication has a legend on it, as specified by Rule 163.

  • The written communication is filed with the SEC promptly upon filing of the registration statement relating to the offering (unless it has been filed before - e.g., in a periodic report - or is exempt under Rule 433).

  • The written communication does not relate to an "ineligible offering" - principally communications relating to M&A transactions.

The practical effect of Rule 163 is that a WKSI issuer may take written statements that would previously have been considered "gun jumping" (speeches to analysts, newspaper articles, trade press coverage, etc.) and cleanse them from "gun jumping" by essentially tipping them into the red herring prospectus. Note, however, that Rule 163 is not an exemption from the antifraud provisions of the securities laws, and issuers should not rush to include in their red herring prospectuses all of the types of disclosures that may be protected by Rule 163. Thus, Rule 163, though helpful to the problem of gun jumping, is not a panacea, and prevention of gun jumping will still be a consideration in the offering process.

New Rule 163a - Pre-Filing 30-Day Free Fire Zone. Rule 163A is a nonexclusive safe harbor from the §5 prohibition of "offers" during the first period outlined above - the period before the issuer files a registration statement. In contrast with Rule 163, Rule 163A is available to all issuers, from the most seasoned issuer to the voluntary filer. Rule 163A provides that any communication made more than 30 days before the date of the filing of the registration statement that does not reference the offering does not constitute an "offer" under §5 of the 1933 Act. Moreover, communications under Rule 163A are not "free writing," which would have to be filed with the registration statement, as noted above.

In order for the communication to be exempt, however, it must be made "by or on behalf " of the issuer - meaning that the exemption is not available to underwriters acting on their own. In order to solve the problem that the issuer could use the Rule 163A exemption to launch communications in the exempt period that are targeted at the period within 30 days of the offer, Rule 163A requires that the issuer take reasonable steps within its control to prevent further distribution or publication of such communication during the 30 days immediately preceding the date of filing the registration statement.

New Rules 168 And 169 - Factual Information And Projections By Reporting Companies - Any Time. Rules 168 and 169 provide nonexclusive safe harbors that codify and expand the previous SEC interpretive positions that allowed reporting issuers to meet their obligations to file periodic reports and make available factual business information3 without running afoul of the 1933 Act’s prohibition on gun jumping. These exemptions are available with respect both to "factual business information" and "forward looking information;" the latter because the SEC continues to encourage the release of projections.

Rule 168 - Factual Business Information And Forward-Looking Statements By Reporting Issuers - Any Time. Rule 168 is available only to issuers that are required to file under the Securities Exchange Act of 1934 - not issuers participating in an IPO or voluntary filers. Rule 168 is a safe harbor that allows publication of "factual business information" and "forward-looking information" before and after filing a registration statement without violating §5 of the 1933 Act.

Rule 168 defines both "factual business information" and "forward-looking information." It is important to note that neither term includes information about a securities offering; public dissemination of information about the fact of an offering or its terms will not qualify for this safe harbor. As is the case with Rule 168, the rule applies only to information released by or on behalf of an issuer, and is, thus, not available to underwriters.

There are two important conditions on the availability of the Rule 168 exemption:
    • The issuer must have previously released Rule 168 information in the ordinary course of its business.

    • The manner of the release must be consistent with past practice as to time and form.

Rule 169 - Factual Business Information Only - Non-Reporting Issuers And Voluntary Filers - Any Time. Rule 169 is similar to Rule 168, but is more limited in scope. It is also available to a wider class of issuers - including voluntary filers and IPO companies. Again, Rule 169 is not available to underwriters. Rule 169 provides a nonexclusive safe harbor from the application of §5 to the release of "factual business information" at any time. The definition of "factual business information" is, however, more narrow than in the context of Rule 168.4 Forward-looking information is not covered by Rule 169.

The conditions to the availability of Rule 169 are also more restrictive than Rule 168:

    • The issuer must have previously released Rule 168 information in the ordinary course of its business.

    • The manner of the release must be consistent with past practice as to time and form.

    • The information must be released for intended use by persons, such as customers and suppliers, other than in their capacities as investors or potential investors in the issuer’s securities, by the issuer’s employees or agents who historically have provided such information.

New Rule 134 - Post-Filing Tombstones Liberalized. The previous iteration of Rule 134 had allowed some limited disclosures about an offering in the period following filing of the registration statement. The information previously permitted was very limited and took the form of a "tombstone" having a prescribed type of information about the offering and almost no information about the issuer. The new Rule 134 permits the more detailed information to be disseminated once the red herring is on file by means of "tombstone" release.

New Free Writing Rules

Background: Emerging Technology And "Writing." Many of the most vexing questions for participants in the offering process have involved which communications constituted "written" communications regulated in the post-filing period. Were road show slides that were not given to participants "written"? Were written scripts read aloud at road shows or over the phone "written"? What about video recordings of oral presentations? Automated mass telephone recordings? In short, the digital revolution had overwhelmed a statute written with earlier communications technology in mind.

New Rules’ Definition Of "Free Writing" Prospectus. The key to the new regulatory regime is the definition of "free writing." As noted above, a WKSI can use "free writing" for communications even before a registration statement is filed, if the free writing is included in the registration statement when filed. The new Rules 164 and 433, described below, allow issuers and underwriters to make written offers of securities in the period after a registration statement has been filed by means of a "free writing prospectus." Thus, understanding the operation of the definition of "free writing" is crucial to the new scheme.

Under the new rules a "free writing prospectus" is any "written communication" that is an "offer" in the period after a registration statement is filed, except:

  • A traditional red herring prospectus included in the registration statement before the registration statement becomes effective.

  • A final prospectus included in a registration statement at the time it becomes effective.

  • A communication accompanied by a final statutory prospectus after the time a registration statement becomes effective.

It is important to parse this definition in order to grasp the new regulatory scheme. The term "written communication" is very broad and incorporates the SEC’s attempt to fit modern technology into the mold of the 1933 Act. Thus, "written communication" includes the standard items - written and printed texts. "Written communication" also includes radio and television broadcasts, regardless of how transmitted (webcast, DVD, or other digital media) and "graphic communications." As the SEC noted in its adopting release:

As a starting point for reform, we are defining all methods of communication, other than oral communications, as written communications for purposes of the Securities Act. While we have addressed the issue of electronic communications in a number of different contexts, at this time we are adopting rules making it clear that all electronic communications (other than telephone and other live, in real-time communications to a live audience, as discussed below) are graphic and, therefore, written communications for purposes of the Securities Act. In this manner, we intend to encompass new technologies. Accordingly, we are adopting new definitions of "graphic communication" and "written communication" to promote consistent understanding of what constitutes such a communication in view of the technological developments since the enactment of the Securities Act and to significantly reduce remaining uncertainty regarding the permitted means for delivery of information under the Securities Act.

As adopted, the definition of "graphic communication" includes any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet web sites, and computers, computer networks, and other forms of computer data compilation.

The definition of graphic communication does not include a communication that, at the time of the communication, originates live, in real-time, to a live audience and does not originate in recorded form or otherwise as a graphic communication. Any such communication is not a graphic communication even if it is transmitted through a means of graphic communication.

To summarize, any communication that is not "oral" is deemed to be written. Every "written communication" that is an "offer" (broadly defined) is a "free writing prospectus" unless it is a red herring prospectus, a final statutory prospectus, or written communication accompanied by a final statutory prospectus.

The following are examples of the application of these definitions, provided by the SEC:

  • A live telephone call is not a written communication.

  • A live telephone call that is recorded by the recipient is not a written communication.

  • Emails, facsimiles, and electronic postings on web sites, by their nature, originate in graphic form and, therefore, are graphic communications;

  • A live, in-person road show to a live audience is not a written communication.

  • A live, in real-time road show to a live audience that is transmitted graphically is not a graphic communication.

  • A live, in real-time road show to a live audience that is transmitted to an "overflow room" is not a graphic communication.

  • A webcast or video conference that originates live and in real-time at the time of transmission and is transmitted through video conferencing facilities or is webcast in real-time to a live audience is not a graphic communication.

  • The ability of a member of the audience to record a webcast or video conference that is presented live and in real-time to a live audience would not affect the status of that webcast or video conference.

  • A live telephone call or video or webcast conference that is recorded by or on behalf of the originating party or parties and then transmitted, or is otherwise transmitted other than live and in real-time, will be a graphic communication and therefore a written communication.

  • A live telephone call or video or webcast conference that is recorded by the recipient and then retransmitted by the recipient is a graphic communication by the recipient when it is retransmitted.

  • An interview with an issuer’s chief executive officer conducted live as part of a television program is a written communication regardless of how the television signal is transmitted (whether over the airwaves, or through cable, satellite, or Internet) and regardless of how it is received by the recipient (whether on a television set or a computer).

New Rule 164 - Post-Filing Free Writing By Eligible Issuers. Rule 164 provides a nonexclusive safe harbor from §5 of the 1933 Act for issuers and other offering participants (such as underwriters) after a registration statement has been filed if the following conditions are met:

  • The issuer is an "eligible issuer" - a WKSI, unless the free writing prospectus is only a description of the terms of the offering, in which case most non-WKSIs are also eligible.

  • A participant in an offering other than the issuer, such as an underwriter, must reasonably believe that the issuer is an "eligible issuer."

  • The offering must be an eligible registered offering.

  • The conditions of Rule 433 must be met.

New Rule 433 - Conditions To The Use Of Free Writing Prospectus - Post Filing. Rule 433 sets forth the conditions to the use of a free writing prospectus.

Prospectus Delivery Requirements. The prospectus delivery requirements under Rule 433 differ depending on the status of the issuer:

  • If the issuer is a WKSI or a "seasoned issuer,"5 the issuer and other offering participants, such as underwriters, may, for most offerings, use a free writing prospectus after a registration statement has been filed without any requirement to deliver a statutory prospectus. WKSIs and seasoned issuers must, however, legend such free writing prospectuses to alert investors where a statutory prospectus may be obtained.

  • Offers involving other issuers, such as nonreporting issuers and voluntary filers, may be accomplished through a free writing prospectus only after a statutory prospectus that includes price range information is on file. The free writing prospectus must also be accompanied, or preceded, by a statutory prospectus, with limited exceptions. An electronic free writing prospectus may fulfill this condition by including an active hyperlink to the statutory prospectus.

Consistency with Registration Statement. The free writing prospectus may include information that is not in the registration statement. The information in the free writing prospectus may not, however, "conflict with" information in the registration statement or the issuer’s other public filings.

Legends. Free writing prospectuses must contain a legend referring the recipient to the SEC’s website for more information about the issuer and the offering.

Filing Requirements. Rule 433 requires that issuers file free writing prospectuses prepared by them or on their behalf in virtually all circumstances. Other offering participants, such as underwriters, that disseminate a free writing prospectus in a manner reasonably designed to lead to its "broad unrestricted dissemination" will generally need to file the free writing prospectus. These filings must be made the same day that the free writing prospectus is first used.

Road Show Materials. Communications that are real time communications to live audiences are not "written communications" under the new rules unless they are broadcast or disseminated as recordings. Therefore, a live road show presentation is not a free writing prospectus and need not be filed. Also, materials presented at the live road show presentation are not free writing prospectuses and need not be filed.

Road shows that are recorded, or otherwise reduced to a "written communication" by retransmission or dissemination in recorded form are, on the other hand, "written communications" under the rules.

Rule 433 provides, however, that road show presentations that have been reduced to written communications need not be filed unless the road show presentation is for an IPO. Even in the case of an IPO, the road show materials need not be filed if the issuer makes one copy of an actual live road show presentation and makes it freely available to any person.

Information on, or Hyperlinked to, the Issuer’s Website. Information on an issuer’s website, or that is hyperlinked from the issuer’s website, is a free writing prospectus and must be filed unless another exemption (such as Rule 168 or 169) is available. Under Rule 433 "historical issuer information that is identified as such and located in a separate section of the issuer’s [w]ebsite containing historical issuer information, that has not been incorporated by reference into or otherwise included in a prospectus of the issuer for the offering and that has not otherwise been used or referred to in connection with the offering" will not be considered an "offer" of securities subject to §5 of the 1933 Act.

Media Free Writing. Google’s highly publicized gun jumping incident in the summer of 2004 led, many believe, to this aspect of Rule 433. The founders of Google had granted an interview to Playboy, just days in advance of the company’s initial filing with the SEC. The interview was published during the period before the registration statement became effective, and the SEC forced Google to delay one of the most visible IPOs in recent memory for this "gun jumping" violation.

Under the new rules, any written offer for which an issuer or any other offering participant or any person acting on its behalf provided, authorized, or approved information that is published by an unaffiliated broadcaster or publisher is a free writing prospectus. Such a third-party free writing prospectus need not be filed on the same schedule and statutory prospectuses need not precede or accompany them, however, if the following conditions are met:

  • No payment is made or consideration given by or on behalf of the issuer or other offering participant for the written communication or its dissemination.

  • The issuer or other offering participant files the written communication with the SEC within four business days after the issuer or other offering participant becomes aware of the publication or broadcast.

The filing of the media report may include information that the issuer or offering participant reasonably believes is necessary or appropriate to correct information included in the media report. Additionally, in lieu of filing the actual written communication, the issuer or offering participant may file a copy of all materials provided to the media.

Record Retention. Rule 433 requires retention of all free writing prospectuses that are not required to be filed for three years from the time the securities are first offered.

Summary

Given the new rules, it is possible to add the new concepts to the traditional grid mandated by the 1933 Act:

Before Filing a Registration Statement

No communication, written or oral, that constitutes an "offer" (very broadly construed) of a security is permitted.
  • Pre-filing written communications permitted for WKSIs under Rule 163.

  • 30 day pre-filing bright line safe harbor for all offering participants under Rule 163A.

  • Safe harbor for factual information and forward-looking statements under Rules 168 (reporting issuers) & 169 (any issuer).

After Registration Statement is Filed, but Before Effectiveness
  • Offers may be made in writing (including by email or internet), by radio,or by television and may only be in the form of "statutory prospectus" that conforms to the Information requirements of §10 of the 1933 Act.

  • Oral offers are permitted.
  • Safe harbor for factual information and forward-looking statements under Rules 168 (reporting issuers) & 169 (any issuer).

  • "Free writing prospectus" available to permit written communications outside the statutory prospectus under Rules 168 & 433.

  • "Road show" presentations generally do not constitute written offers that need to be filed under Rule 433.

After Effectiveness of Registration Statement
  • Written offers may be made only through a statutory prospectus, but additional written offering materials can be used if a final prospectus that meets the requirements of §10(a) of the 1933 Act is sent or given prior to or with those materials.

  • Oral offers are permitted.
  • Safe harbor for factual information and forward-looking statements under Rules 168 (reporting issuers) & 169 (any issuer).

  • "Free writing prospectus" available to permit written communications outside the statutory prospectus under Rules 168 & 433.

Footnotes

1. 1933 Act, §2(a)(3) defines an "offer" to include "every attempt or offer to dispose of… a security… for value."

2. The new rules define a new category of issuer, the "well-known seasoned issuer," or WKSI. Regulation S-K, Item 405. A WKSI, generally speaking, must have $700 million of public float and be eligible to use Form S-3.

3. The term "factual business information" includes, without limitation, information contained in an issuer's periodic reports; factual information about the issuer, its business or financial developments, or other aspects of its business; advertisements of, or other information about, the issuer's products or services; and dividend notices. The term "forward-looking information" includes, without limitation, forward-looking information contained in an issuer's periodic reports; projections of the issuer's revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items; statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer; statements about the issuer's future economic performance, including statements of the type contemplated by the MD&A rules; and assumptions underlying forward-looking information.

4. The term "factual information" under Rule 169 means factual information about the issuer, its business or financial developments, or other aspects of its business; and advertisements of, or other information about, the issuer's products or services.

5. Generally speaking, a "seasoned issuer" is an issuer that is eligible to use Form S-3 or Form F-3 to register primary offerings of securities. See Form S-3.

We are providing this Corporate Update as a commentary on current legal issues, and it should not be considered legal advice, which depends on the facts of each situation. Receipt of this Corporate Update does not establish an attorney-client relationship. The listed attorneys and/or other attorneys may provide services in connection with a particular matter.