SEC Eases Switch Between Public And Private Offerings

From a business perspective, the new Rule enables issuers to more effectively take advantage of market conditions. Rule 155 will enable an issuer to switch from a private offering to a public offering if, based on the response to the private offering, there appears to be sufficient investor interest in a registered offering. In the face of weak demand, an issuer will be able to switch from a public to a private offering. Other related rule changes also will in many cases reduce the transaction costs of switching from a public to a private offering.

From a legal perspective, Rule 155 has two other important benefits. First, it provides a bright-line, easy to apply safe harbor from integration when switching between a public and private offering, in either sequence. At present, integration analysis usually involves a subjective application of a five factor test, followed by a judgment call by the issuer and its counsel. Because of the subjective nature of the analysis, the issuer is haunted by the possibility that the SEC could reach a different conclusion, which could, among other things, lead to an SEC enforcement action and rescission rights for purchasers.

The second benefit of Rule 155 is that it only provides for a short delay of up to 30 days when switching between public and private offerings. Because of the uncertainties inherent in traditional integration analysis, securities practitioners frequently recommend a longer waiting period, sometimes as long as six months.

In order to rely on the Rule 155 safe harbor for a private offering that is abandoned and followed by a public offering, four conditions must be met. First, no securities can have been sold in the private offering. Second, the issuer and persons acting on its behalf must have terminated all offering activity in the private offering before the issuer files the registration statement for the public offering.

Third, the prospectus filed as part of the registration statement must disclose certain information about the abandoned private offering. Specifically, the prospectus must prominently indicate 1) the size and nature of the private offering, including the amount sought to be raised, the type of securities offered privately and the general purpose of the abandoned private offering, 2) the date on which the issuer abandoned the private offering, 3) that offers to buy or indications of interest in the private offering were not accepted and 4) that the prospectus delivered in the registered offering supercedes any selling material used in the private offering.

Lastly, in order to qualify for the safe harbor, the issuer may not file the registration statement until at least 30 days after the termination of all offering activity in the private offering, unless in the private offering securities only were offered to persons who were (or who the issuer reasonably believes were) accredited investors or sophisticated. An offeree is sophisticated if the offeree or his or her purchaser representative has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.

For purposes of both Rule 155 safe harbors, "private offering" is a defined term. As defined, a private offering includes an unregistered offering of securities that is exempt from registration under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D. The safe harbor does not apply to private placements under Rule 505 of Regulation D.

Based on the Adopting Release for Rule 155, issuers should expect that the SEC staff may request supplemental information to ensure that the requirements for the private to public offering safe harbor have been met. According to the Release, in order to prevent misuse of the safe harbor, the SEC staff is being directed to monitor its use carefully. It is important for issuers to comply fully with the requirements of the safe harbor since the SEC has the power to delay the effectiveness of a registration statement if the requirements of the safe harbor have not been met.

In order to rely on this prong of the safe harbor, five conditions must be satisfied. First, no securities can have been sold in the registered offering. Funds cannot be placed in escrow. This violates the safe harbor and is no different than having sold the securities. Second, the issuer must have withdrawn the registration statement. Third, a cooling off period is required. The private offering may not be commenced until 30 days after the effective date of the withdrawal of the registration statement.

The issuer also must satisfy two disclosure requirements. The issuer must notify all offerees (not only purchasers) in the private offering that 1) the offering is not registered under the Securities Act, 2) the securities will be "restricted securities" and cannot be resold unless they are registered or an exemption from registration is available, 3) purchasers do not have the protection of Section 11 of the Securities Act, which imposes liability on an issuer and certain other persons for material misstatements in and omissions from a registration statement, and 4) a registration statement for the abandoned offering was filed and withdrawn, and the issuer must specify the date of the withdrawal.

In addition, if the issuer uses a private placement memorandum in connection with the private offering, it must disclose any changes in its business or financial condition that occurred after it filed the registration statement that are material to an investment decision in the private offering.

The abandoned public offering must also, of course, be a bona fide public offering. The safe harbor cannot be used to avoid the private offering prohibition on general solicitation or advertising. Therefore, the registration statement cannot be used to condition the market for the subsequent private offering.

Withdrawing a Registration Statement. The SEC also has amended Rule 477. This Rule permits a registrant to withdraw a registration statement if the SEC finds withdrawal to be consistent with the public interest and the protection of investors and if the SEC grants its consent to the withdrawal.

The amendments to Rule 477 will facilitate the withdrawal of a registration statement and will expedite the use of the Rule 155 public to private offering safe harbor. Under Rule 477 as amended, an application for the withdrawal of an entire registration statement that is made before the registration statement is declared effective will be granted upon filing unless, within 15 days thereafter, the SEC notifies the registrant that the application will not be granted. Affirmative SEC consent to the withdrawal no longer will be required in this context.

In the application for withdrawal, the registrant must include a statement that no securities were sold in the public offering. If the registrant intends to use the Rule 155 safe harbor following the withdrawal of the registration statement, it also must indicate in the application that it may do so. However, because the request for withdrawal is publicly available, to avoid a general solicitation, the statement should not include any information regarding the proposed terms of the private offering.

Offsetting Registration Fees. The SEC also has amended its rules pertaining to offsetting registration statement filing fees. In addition to being moved to Rule 457, which deals with the computation of fees, the current fee offset provisions have been amended to allow the registrant to apply the filing fees from a withdrawn registration statement within five years after the initial filing date of the withdrawn registration statement. The fee offset is permitted for registration statements filed by the same registrant or its successor, as well as by a majority-owned subsidiary or a parent that owns more than 50% of the original registrant's outstanding voting securities.

Lastly, Rule 457 was amended to codify two unrelated SEC staff interpretations. First, if a filing fee is paid for the registration of an offering and the same registration statement also covers the resale of the securities, no additional filing fee is required to be paid for the resale. Second, a filing fee is not required to be paid for the registration of an indeterminate amount of securities to be offered solely for market-making purposes by an affiliate of the registrant.

As indicated above, Rule 155 takes effect on March 7, 2001. However, the safe harbor may be relied on if an issuer has abandoned a private placement before the effective date of Rule 155 and files a registration statement after the Rule becomes effective. Similarly, the safe harbor can be relied on if a registration statement is withdrawn prior to the effective date of Rule 155 and a private offering is commenced after the safe harbor takes effect.