New SEC Rules Change Offerings Process For All Issuers

Originally published July 25, 2005

The SEC has issued final rules modifying and significantly advancing the registration, communications, and offering processes under the Securities Act of 1933 (Securities Act). Issued on July 19, 2005, the new rules eliminate restrictions on offerings that many have come to see as unnecessary and outmoded.

The new rules continue the evolution of the offering process and recognize the integral role that technology plays in timely informing the markets and investors about important corporate information and developments. The new rules also recognize the importance of the filings that an issuer makes under the Securities Exchange Act of 1934 (Exchange Act) and other publicly available information to form the basis for the market’s evaluation of the issuer and its securities.

New Rules Address Three Areas

The new rules will affect the offering process for all issuers, particularly those referred to in the new rules as "well-known seasoned issuers." These new rules, which will become effective 120 days after their publication in the Federal Register, address three main areas:

• communications related to registered securities offerings;
• registration and other procedures in the offering and capital formation processes; and
• delivery of information to investors.

Here is our summary of the new rules and their impact on communications and the offering process.

I. New Categories of Issuers

The new rules create the following new classes of issuers:

Well-Known Seasoned Issuers

, or WKSIs, are issuers that:

• are eligible to register a primary offering of their securities on Form S-3 or F-3;
• as of a date within 60 days of its eligibility determination date, have either (a) a worldwide market value of their outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or (b) issued, in the last three years, at least $1.0 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act;
• have been a reporting issuer under the Exchange Act for at least 12 months;
• are current in their reporting obligations under the Exchange Act and have timely filed all required materials; and
• are not "Ineligible Issuers" or "asset-backed issuers."

Most of the new rules regarding communications and the offering and capital formation processes affect WKSIs.

Seasoned Issuers

are issuers that are eligible to use Form S-3 or Form F-3 to register a primary offering of securities.

Unseasoned Issuers

are issuers that are required to file reports under the Exchange Act, or file such reports voluntarily (i.e., those issuers who file Exchange Act reports on a voluntary basis, not pursuant to Exchange Act or SEC rules mandating such filings), but do not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of their securities.

Non-Reporting Issuers

are issuers that are not required to file reports under the Exchange Act.

Ineligible Issuers

are excluded from using most of the new rules. Ineligible Issuers include issuers who, among other things, are not current in their Exchange Act reports, have filed for bankruptcy or insolvency during the past three years, have been or are subject to refusal or stop orders under the Securities Act, or have been found to have violated the anti-fraud provisions of the federal securities laws.

II. Communications Proposals

The Securities Act and related rules restrict the types of communications that issuers or other parties subject to the Securities Act’s provisions (such as underwriters) can use during the period commencing with or prior to the filing of the registration statement through the effective date of the registration statement or beyond. Violations of these restrictions generally are referred to as "gun jumping." The new rules adopt communications and offering reforms that significantly relax the restrictions on the types of communications that certain categories of issuers can make during a securities offering by allowing for the continuance of certain ongoing disclosures and greater use of written communications other than a prospectus.

Permitted Continuation of Ongoing Communications During a Registered Offering

The new rules create two separate, non-exclusive safe harbors from the "gun-jumping" restrictions during the course of an offering that allow (1) reporting issuers (including WKSIs, Seasoned Issuers, and Unseasoned Issuers), asset-backed issuers, and well-known non-reporting foreign private issuers to continue to publish regularly released factual business and forward-looking information and (2) Non-Reporting Issuers, including an issuer in an IPO, to continue to publish factual business information that has been regularly released to persons other than in their capacity as investors or potential investors. Information will be considered "regularly released" if the issuer releases the information in the ordinary course of its business, has previously released the same type of information in the ordinary course of its business, and the release is materially consistent in timing, manner, and form with the issuer’s similar past releases of such information. These new safe harbors require that the information be released or disseminated "by or on behalf of the issuer" and not include information about the registered offering or information released as part of the offering activities in the registered offering. For information to be considered released or disseminated "by or on behalf of the issuer," the issuer or its agent or representative, other than an offering participant who is an underwriter or dealer, must authorize or approve the release or dissemination of the communication before it is made.

Permitted Communications Prior to Filing a Registration Statement

The new rules create a bright-line exclusion, ending 30 days prior to the filing of a registration statement, during which all issuers, other than certain classes of Ineligible Issuers, may communicate without risk of violating the gun-jumping restrictions. Such communications may not reference a securities offering that is or will be the subject of a registration statement and must be made by or on behalf of the issuer. The issuer must also take reasonable steps within its control to prevent further distribution or publication of the information during the 30-day period immediately before the issuer files the registration statement. For reporting issuers, these communications will remain subject to Regulation FD.

In addition, WKSIs may engage in unrestricted oral and written offers at any time before a registration statement is filed without violating the gun-jumping provisions. These communications must be made by or on behalf of the issuer and are still subject to liability standards applicable to such offers, Regulation FD, and the anti-fraud provisions of the federal securities laws.

Relaxation of Restrictions on Written Offering-Related Communications

Rule 134 of the Securities Act provides a safe harbor from the gun-jumping restrictions for limited public notices about a securities offering made after an issuer files its registration statement. The new rules expand the amount and types of permitted written offering-related communications after a registration statement has been filed by amending Rule 134 to:

• permit more information about an issuer and its business, including where to contact the issuer;
• permit more information about the terms of the securities being offered;
• expand the scope of permissible factual information about the offering itself, including underwriter information, more details about the mechanics of and procedures for transactions in connection with the offering process, the anticipated schedule of the offering, and a description of marketing events;
• allow more factual information about procedures for opening an account and submitting indications of interest and conditional offers to buy the offered securities;
• allow more factual information regarding procedures for directed share plans and other participation in offerings by officers, directors, and employees;
• permit the correction of inaccuracies in permissible information previously disclosed pursuant to Rule 134; and
• expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned.

Permissible Use of Free Writing Prospectuses

The new rules permit the use of "free writing prospectuses," which include written materials that constitute offers, including electronic communications, outside the statutory prospectus beyond those that the Securities Act currently permits. The new rules define nearly all types of communication, other than purely oral communication (including telephonic), as written communications, but permit most types of written communications outside the statutory prospectus. A free writing prospectus may take any form and is not required to meet the informational requirements applicable to statutory prospectuses. However, the free writing prospectus may not conflict with the information in the registration statement, including Exchange Act reports incorporated by reference into the registration statement. Although the conditions to the use of a free writing prospectus depend on the nature of the issuer and the offering, use of the free writing prospectus by the issuer is generally conditioned upon filing the free writing prospectus with the SEC. In most cases, there is no condition that underwriters and dealers file the free writing prospectuses that they prepare, use, or refer to, unless used or referred to in a manner reasonably designed to lead to its broad unrestricted dissemination.

A WKSI may use a free writing prospectus at any time, even prior to the filing of a registration statement, so long as it includes a legend notifying the investor where the statutory prospectus may be accessed. Non-Reporting, Seasoned Issuers, Unseasoned Issuers, and other offering participants may use a free-writing prospectus after the registration statement has been filed. Ineligible Issuers may not use a free writing prospectus, other than those limited to descriptions of the terms of the securities being offered and the offering.

With respect to offerings of securities of eligible Non-Reporting Issuers (including an initial public offering) or Unseasoned Issuers, the statutory prospectus must accompany or precede the free writing prospectus if the issuer or an offering participant prepares or pays for the dissemination of the free writing prospectus. Once the statutory prospectus has been sent to the investor, additional free writing prospectuses may be provided without having to deliver additional statutory prospectuses. The statutory prospectus may be delivered by providing a hyperlink to the statutory prospectus in the free writing prospectus.

For offerings of securities by eligible Seasoned Issuers, the use of a free writing prospectus is not conditioned upon delivery of the statutory prospectus, so long as the free writing prospectus contains a legend notifying the recipient of the filing of the registration statement and the URL for the SEC web site where the recipient can access or hyperlink to the preliminary or base prospectus. For shelf offerings, this statutory prospectus can be a base prospectus.

Electronic Road Shows and Web Site Postings

A road show, graphically transmitted in real-time to a live audience, including "live" conferences with investors, live road shows, and road shows telecast in real-time to a live audience, as well as any slides or other visual aids provided or transmitted as part of the road show, will not be a written communication or a free writing prospectus, although it is subject to the liability provisions of the federal securities laws. Electronic road shows that are not live and transmitted in real time are considered free writing prospectuses, although permitted if the rules for free writing prospectuses are satisfied. Electronic road shows that qualify as free writing prospectuses that are used in an initial public offering of common or convertible equity securities must comply with the filing conditions unless the issuer makes a version readily available without restriction electronically to any potential investor. Electronic road shows for other offerings will generally not have to be filed.

Any free writing prospectus used by any person, whether or not it is filed, will be subject to Section 12(a)(2) liability and the antifraud provisions of the federal securities laws. However, a free writing prospectus will not be a part of the registration statement and thus will not be subject to Section 11 liability.

Regulation FD

The new rules amend Regulation FD to specify the circumstances, in terms of both the type of offering and the means of communication, in which issuer communications would be excluded from the operation of Regulation FD in connection with registered securities offerings. As amended, Regulation FD does not apply to disclosures made in the following communications in connection with a registered public offering that is of the type excluded from Regulation FD:

• a registration statement filed under the Securities Act, including a prospectus contained therein;
• a free writing prospectus used after filing of the registration statement for the offering and satisfying the requirements of Rule 433, or a communication falling within the exception to the definition of prospectus contained in clause (a) of Securities Act Section 2(a)(10);
• any other Section 10(b) prospectus;
• a notice permitted by Securities Act Rule 135;
• a communication permitted by Securities Act Rule 134; and
• an oral communication made in connection with the registered offering after filing of the registration statement for the offering under the Securities Act.

The new rules also amend Regulation FD to clarify that Regulation FD does not apply to offerings by selling security holders that also include an offering by the issuer for capital formation purposes.

Use of Research Reports

The new rules expand the circumstances in which a broker or dealer can publish research on an issuer or the securities offered around the time of the offering without violating the prohibitions on pre-filing offers and impermissible prospectuses. The new rules define "research report" as a written communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security of an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision. It encompasses all types of research reports, whether issuer-specific or industry research separately identifying the issuer.

III. Liability Issues

The new rules also address the "discrepancies in time" between the time that a purchaser enters into a contract of sale for a security and the later time that a prospectus or other information becomes available. Currently, the Securities Act registration regime allows issuers to provide "final" offering information after an investor has entered into a contract to purchase a security, which information is often intended to update previously disclosed information and "cure" any prior misstatements or omissions.

The new rules impose liability based on disclosures made at or prior to the time that an investor enters into a contract of sale, rather than the later time at which a final prospectus or other information is delivered. The SEC has adopted new Rule 159 to implement these new liability reforms, which provides in part that "any information conveyed to the purchaser only after that time of sale will not be taken into account" in determining whether a prospectus, oral statement, or other statement includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements not misleading at the time of sale.

The new rules are intended to reinforce the SEC’s view that the interpretation that the quality of information should be assessed at the time of the contract of sale is "unassailable," and instead, investors should have materially complete and accurate information at the time of sale.

The new rules also make it clear, through new Rule 159A, that an issuer of securities in certain types of offerings continues to have liability under the Securities Act as a "seller" of the securities, regardless of the form of securities underwriting arrangement. These new rules provide, for example, that the issuer remains liable for misstatements or omissions in "free writing prospectuses" prepared on its behalf, or in other communications made on the issuer’s behalf, regardless of whether the prospectus was prepared or the communication was made by a representative of the issuer.

IV. Securities Act Registration Rules and Amendments

Shelf Offerings

Under the new rules, all WKSIs and Seasoned Issuers may take advantage of a number of modifications to simplify the shelf registration process.

Relationship between the Base Prospectus and Prospectus Supplement Clarified

Under new Rules 430B and 430C, the SEC codified the types of information that may be omitted from the base prospectus of a shelf registration statement at the time of effectiveness. All information required in the prospectus regarding the company and its securities may be incorporated by reference from Exchange Act reports or provided in a prospectus supplement, thereby avoiding the need for a post-effective amendment to the registration statement. Information incorporated by reference from an Exchange Act report will need to be filed on a prospectus supplement.

Date of Inclusion of Prospectus Supplement and New Effective Dates

The new rules establish that a prospectus supplement filed in connection with a shelf registration statement will be deemed to be part of, and included in, such registration statement for liability purposes under Section 11 as of the earlier of (1) the date it is first used after effectiveness or (2) the date of the first sale of securities in the offering to which the supplement relates. The date of first use refers to the date that the prospectus is available to the managing underwriter, syndicate member or any prospective purchaser. A new effective date is established each time a prospectus supplement is filed. The new effective date does not affect SEC form eligibility or constitute an updating of the registration statement and prospectus. It also does not modify or supersede any information that was contained in the registration statement or a prior prospectus that had an earlier effective date for purposes of a prior takedown. In addition, it does not change the date at which disclosure is evaluated under Section 11 for underwriters, as liability of an underwriter will continue to be assessed based on the time when it became an underwriter. Moreover, the new rules clarify that for experts, such as auditors, a new effective date is not created and new consents and corresponding procedures are not required as a result of the rule changes.

Elimination of Certain Offering Restrictions

A number of offering reforms were adopted that liberalize the use of shelf registrations. In summary, the rules provide as follows:

• Instead of limiting the amount of securities registered on a shelf registration statement to an amount that an issuer intends to offer or sell within two years from the registration statement effective date, shelf registration statements can now be used for three years after the initial effective date of the registration statement. A new shelf registration statement must be filed prior to the three-year expiration, with unsold securities and unused fees carried forward. For Seasoned Issuers that are not WKSI eligible, to ensure that the registrant is not locked out of the market, the new rules provide that the registrant may continue to use the shelf for six months after the end of the three-year period provided certain conditions are met.
• Offerings can now occur immediately after effectiveness of a shelf registration statement. A shelf issuer may conduct an "at-the-market" offering of equity securities, free of the current requirement to use an underwriter in its registration statement and free of any volume limitations. An "at-the-market" offering involves sales at varying prices at whatever price the market will bear, in contrast to a conventional fixed price offering.
• Form S-3 and Form F-3 would permit the registration of offerings of guarantees by majority-owned subsidiaries of non-convertible securities of other majority-owned subsidiaries or of the parent.
• Selling security holders may be identified in and added to the registration statement covering the resale of securities after effectiveness using a prospectus supplement, as well as by means of a post-effective amendment, if:

1. the resale registration statement identified the specific private transaction pursuant to which the securities were originally sold; and
2. outstanding
prior to the initial filing of the resale registration statement. However, for purposes of securities not yet outstanding prior to the initial filing of the resale registration statement, such as that of a private investment in public equity (a PIPE), the SEC will continue to require that the selling stockholder table be amended by post-effective amendment.

Automatic Shelf Registration for Well-Known Seasoned Issuers

WKSIs benefit from increased flexibility in terms of the timing of effectiveness of shelf registration statements and payment of registration fees, and are subject to fewer informational requirements when filing a shelf registration statement.

Automatic Effectiveness and Updating Every Three Years

The new rules provide that shelf registration statements filed by WKSIs, and any post-effective amendments thereto, become effective automatically upon filing, without SEC staff review. However, in the new rules, the SEC clarified that automatic effectiveness is not mandatory, so a WKSI may opt to file a registration statement that will not go effective automatically, thus subjecting itself to the possibility of staff review. If the registrant no longer qualifies as a WKSI, then, when providing its Section 10(a)(3) update, the registrant will need to file a post-effective amendment to be on a form that the registrant is eligible to use or file a new registration statement.

Information in the Shelf Registration Statement

The new rules allow certain information to be omitted from the WKSI base prospectus. Specifically, the WKSI may omit:

• any allocation between primary or secondary offerings;
• the identities of any selling security holders and the amounts of securities to be registered on their behalf; and
• any plan of distribution for the securities.

Information omitted from the base prospectus may be included by incorporation by reference to the registrant’s subsequent Exchange Act reports, filed as a prospectus supplement under Rule 424, or pursuant to a post-effective amendment. However, adding new types of securities or new eligible issuers, such as majority-owned subsidiaries, would require filing of a post-effective amendment. The filing of a post-effective amendment by a WKSI would, as noted, be automatically effective without the potential for SEC staff review and therefore less burdensome. However, new signatures, consents, and opinions may be required with a post-effective amendment.

The final rules liberalize a number of important offering mechanics for WKSIs. Specifically, the rules provide as follows:

• WKSIs do not need to specify an amount or allocate the shelf.
A WKSI is able to register an unspecified amount of securities to be offered without indicating whether the securities would be sold in primary offerings or secondary offerings on behalf of selling security holders, and therefore without allocating the securities between itself as the issuer, its eligible subsidiaries or selling security holders. However, WKSIs that are eligible through issuances of debt securities may register only non-convertible debt obligations.
• WKSIs may opt to pay their SEC filing fees on a "pay-as-you-go" basis.
Under the pay-as-you-go method, a WKSI would pay the appropriate registration fee during a takedown and include the calculation of fee table in the prospectus supplement. The new rules also provide a cure period of four business days following the original fee due date if certain requirements are met. The new rules clarify that WKSIs may opt to pay their filing fee under the old method, which was to pay the fee upon initial filing of the prospectus.
• WKSIs may add new classes of securities to the shelf.
WKSIs may add new classes of securities to an automatic shelf registration statement after effectiveness by filing a post-effective amendment. Disclosure about the new class of securities could be provided in the post-effective amendment, prospectus supplement or Exchange Act report that was incorporated by reference and discussed above.

Elimination of Forms S-2 and F-2

The new rules eliminate Form S-2 and Form F-2 as the forms were rendered unnecessary by changes to Form S-1 and Form F-1. Form S-1 and Form F-1 were each amended to permit expanded use of incorporation by reference to Exchange Act filings for all issuers (other than Ineligible Issuers) that (1) have filed at least one annual report and are then current in their reporting obligations; and (2) make their Exchange Act reports readily accessible on their websites.

V. Prospectus Delivery Requirements

Believing that Internet usage has increased sufficiently to allow adoption of a prospectus delivery model that relies on timely access to filed information and documents, the SEC has adopted the "access equals delivery" model, which enables issuers, brokers, and dealers to satisfy their final prospectus delivery obligations if a final prospectus is or will be on file within the time required by the new rules, including a cure period. A final prospectus will be deemed to precede or accompany a security for sale as long as the final prospectus meeting the requirements of Securities Act Section 10(a) is filed, or the issuer makes a good faith and reasonable effort to timely file the final prospectus. The new rules also include a cure provision that allows the issuer to cure an unintentional failure to file if it has made a good faith and reasonable effort to comply with the filing condition and files the prospectus as soon as practicable after discovery of the failure to file. Delivery of the preliminary prospectus in initial public offerings continues to be required.

Exceptions to the more liberal prospectus delivery rules are made in the case of certain offerings, such as those made pursuant to Form S-8, or in connection with business combination transactions and exchange offers. In addition, registered investment companies and business development companies are not entitled to rely on the new rules.

In transactions involving a sale by an issuer or underwriter to a purchaser, or in which the final prospectus delivery requirements apply, the purchaser must be provided, not later than two business days after completion of the sale, either a copy of the final prospectus or a notice providing that the sale was made pursuant to a registration statement or in a transaction in which a final prospectus would have been required to have been delivered in the absence of the new rules. The investor can request a final prospectus, which does not have to be provided before settlement.

Written confirmations and notices of allocation, including e-mail notifications to inform investors of their allocations, may be sent after effectiveness of the registration statement without being accompanied by a final prospectus. Brokers or dealers effecting transactions on a registered exchange or through a trading facility of a registered national securities association, or through a registered alternative trading system, will be deemed to satisfy their prospectus delivery obligations if (1) the final prospectus is timely filed by the issuer; (2) securities of the same class are trading on that exchange or through that trading facility or alternative trading system; (3) the registration statement is effective; and (4) neither the issuer nor any underwriter or participating dealer is the subject of a pending proceeding in connection with the offering. Dealers may rely on timely filing of the final prospectus to satisfy any aftermarket delivery obligations.

VI. Exchange Act Reports

The new rules require all issuers (other than Small Business issuers) to include disclosure of their most significant business risk factors in their Form 10-K filings. These risk factors must be provided in plain English, appear under a "Risk Factors" caption, and generally be of the same type as is required to be included in Securities Act registration statements. Issuers are not required to include risk factors concerning the particular securities offering. Issuers must also disclose material changes to previously disclosed risk factors (but not a full restatement of the risk factors themselves) in their quarterly reports on Form 10-Q.

The new rules also require WKSIs and accelerated filers to disclose in their Form 10-Ks all written Staff comments concerning the issuer’s Exchange Act reports that were issued more than 180 days prior to the end of the fiscal year covered by the Form 10-K, that the issuer believes are material, and that remain unresolved as of the date that the 10-K is filed.

The new rules also require voluntary Exchange Act filers to indicate their voluntary filer status by checking a new box on the cover page on Forms 10-K, 10-KSB and 20-F.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.