SEC Proposes to Reform Securities Offering Rules
SEC Seeks to “Modernize” Offering Regulations
In the preliminary comments to its 389-page proposal, the SEC expresses its desire to “modernize the securities offering and communications processes.” According to the SEC, “[s]ignificant technological advances over the last three decades have increased both the market’s demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate this information.”1 To better meet the needs of today’s markets and investors, the SEC proposes a number of reforms, including:
- dividing all issuers of securities into four categories: (i) well-known seasoned issuers; (ii) seasoned issuers; (iii) unseasoned issuers; and (iv) non-reporting issuers
- loosening current restrictions on oral and written communications by the issuer and other offering participants during the offering process
- liberalizing procedures relating to shelf registrations by certain issuers
Four Categories of Issuers
As noted above, the SEC suggests sorting issuers into four categories. The extent to which an issuer could take advantage of the relaxed restrictions proposed by the SEC would depend on the category to which the issuer belongs. The criteria for each category are described below.
Category 1: Well-Known Seasoned Issuer
A “well-known seasoned issuer” is an issuer that is required to file reports pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act) and that satisfies all of the following criteria:
- the issuer is current in its reporting obligations under the Exchange Act and timely in satisfying those obligations for the preceding 12 calendar months
- the issuer is eligible to register a primary offering of its securities on Form S-3 or Form F-3
- the issuer either (a) has outstanding a minimum $700 million of common equity market capitalization held by non-affiliates, or (b) has issued $1 billion in aggregate amount of debt securities in registered offerings during the past three years and register only debt securities
- neither the offering nor the issuer is of a type that falls within the category of ineligible issuers or offerings (discussed below)
Subject to certain conditions, a majority-owned subsidiary of a well-known seasoned issuer would be considered a “well-known seasoned issuer” in connection with the offer and sale of the subsidiary’s securities.
A “seasoned issuer” is an issuer that is eligible to use Form S-3 or Form F-3 to register primary offerings of securities. Majority-owned subsidiaries eligible to use Form S-3 or Form F-3 also would be considered “seasoned issuers.”
Category 2: Seasoned Issuer
An “unseasoned issuer” is an issuer that is required to file, or is voluntarily filing, reports pursuant to Section 13(a) or Section 15(d) the Exchange Act, but that does not satisfy the prerequisites to use Form S-3 or Form F-3 for a primary offering of its securities.
Category 3: Unseasoned Issuer
A “non-reporting issuer” would be an issuer that is not yet required to file reports pursuant to Section 13(a) or Section 15(d) of the Exchange Act and is not filing such reports voluntarily, such as an issuer undertaking an initial public offering.
Category 4: Non-Reporting Issuer
As noted further on in this alert, the SEC also has designated certain “ineligible issuers” – issuers who, although meeting the technical requirements of one of the four primary issuer categories, would not be eligible to take advantage of the relaxed restrictions contained in the SEC proposals.
As currently formulated, the so-called “gun-jumping” provisions of the Securities Act severely restrict communications by issuers and other offering participants (such as underwriters, brokers and dealers) in connection with the offer and sale of registered securities in a public offering.
Communications in Connection with a Registered Securities Offering
- Before a registration statement is filed (the “pre-filing period”), all offers, in whatever form – written or oral – are prohibited.
- After the registration statement is filed, but before it is declared effective (the “waiting period”), underwriters and dealers generally may solicit offers orally, but written communications are strictly limited to preliminary prospectuses that meet the requirements of Section 10(b) of the Securities Act, “tombstone ads” that comport with Rule 134 of the Securities Act, and summary prospectuses that comport with Rule 431 of the Securities Act.
- After the registration statement is declared effective (the “post-effective period”), offering participants may take advantage of the so-called “free-writing privilege” and utilize written materials other than a prospectus, but only if a final prospectus meeting the requirements of Section 10(a) of the Securities Act precedes or accompanies those other materials.
The SEC proposals, if adopted, would significantly expand the types and availability of communications that may be utilized during a public securities offering. The proposed rule amendments accomplish this by adopting new definitions and creating new exclusions, exemptions and safe harbors from the general prohibitions that currently exist in the federal securities laws.
The SEC proposals “define all methods of communications, other than oral communications, as written communications for purposes of the Securities Act.” Thus, the term “written communications” would include any written, printed, broadcast or graphic communication, where “graphic communication” would encompass any form of recorded electronic media, such as audiotape, videotape, facsimile, CD-ROM, e-mail or Internet Web site. The SEC’s definitions of “written communication” and “graphic communication” are not intended to include live telephone calls (even those carried over the Internet) and other direct oral communications, nor would they cover individual voicemail messages (although broadly-disseminated “blast” voicemail messages would satisfy the definitions). As proposed, an electronic road show – i.e., a road show transmitted over the Internet, or via e-mail, CD-ROM or other electronic medium – would qualify as a “graphic” and, hence, “written communication.”
SEC Proposal No. 1: Definitions for “Graphic Communication” and “Written Communication”
The proposals convey the SEC’s strong desire to provide more certainty regarding application of the gun-jumping prohibitions to dissemination of regularly-released “factual business information” during the offering process. To meet this challenge, the SEC proposes to implement a safe harbor for distribution by reporting issuers (i.e., well-known seasoned issuers, seasoned issuers and unseasoned issuers) of many types of information, including: factual information about an issuer or some aspect of its business; advertisements or other information about an issuer’s products or services; factual information about business or financial developments with respect to an issuer; dividend notices; and factual information set forth in an issuer’s Exchange Act reports. In the words of the SEC, “[w]e want to encourage reporting issuers to continue to provide this information.” Consequently, a reporting issuer would be allowed to continue to publish regularly-released factual business information, even when engaged in a public securities offering. Non-reporting issuers would enjoy a more limited safe harbor, and would be permitted to release factual business information “to persons receiving the information other than in their capacity as investors or potential investors.”
SEC Proposal No. 2: Safe Harbors for Regularly-Released Factual Business Information and Forward-Looking Information
Another area addressed by the SEC proposals is the practice by most reporting companies of releasing forward-looking statements and information. According to the SEC, it would be undesirable for a reporting issuer to suspend or withhold forward-looking information that otherwise would be communicated in the ordinary course of business, simply because the issuer is about to engage in a registered offering. The proposals would implement a safe harbor for certain forward-looking statements, including:
- 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 MD&A described in Item 303 of Regulation S-K and Regulation S-B, or Item 5 of Form 20-F
- assumptions underlying or relating to any of the foregoing information
The SEC proposals impose three conditions on use of these safe harbors: (i) the communications must be made by or on behalf of the issuer; (ii) the communications must not be related to the offering of securities; and (iii) the communications must be of the type that are regularly released.
Factual business information or forward-looking information would be considered “regularly released” if the issuer had previously released, and presently still releases, the same type of information in the ordinary course of its business, and the new release is materially consistent in timing, manner and form with the issuer’s similar past releases. Also, the method of releasing or disseminating the information would need to be consistent with prior practice.
It is important to emphasize that these safe harbors would exclude dissemination of any information about, or use in, a registered offering. For example, the safe harbor would be unavailable for the text of an Exchange Act report that is incorporated by reference into a registration statement or disclosure of information at a roadshow. Publication of information about an offering outside the registration statement would be limited to statements allowed by other exemptions or safe harbors, or that qualify as written materials that fall within the definition of “free-writing prospectus” described below.
30-day Bright-Line Test – In an effort to clarify application of the gun-jumping prohibitions to pre-filing communications, the SEC proposes a 30-day bright line exclusion from the gun-jumping rules. In essence, any communication made by or on behalf of the issuer more than 30 days before the filing of a registration statement would be permissible under the proposed rules, so long as: (i) the communication does not reference the offering; and (ii) the issuer has taken reasonable steps to prevent further distribution of the information during the 30-day window.
SEC Proposal No. 3: Pre-Filing Communications30-day Bright-Line Test
Additional Privileges for Well-Known Seasoned Issuer – In addition to access to the safe harbors and exclusions referenced above, a well-known seasoned issuer (but not other categories of issuers) also would be permitted “to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions.” Such communications would be permitted even during the 30-day window prior to filing. Note, however, that these communications would still be considered offers, and thus subject to liability under Section 12(a) of the Securities Act and the general anti-fraud provisions of the federal securities laws. Furthermore, any written offer by a well-known seasoned issuer during the pre-filing period would constitute a “free-writing prospectus” and would therefore be subject to some additional requirements, which are discussed below.
As noted above, under existing SEC rules, all issuers and other offering participants generally are prohibited from making written offers during the so-called “waiting period,” except in the form of a preliminary or “red herring” prospectus. Oral offers during the waiting period do not face similar limitations.
SEC Proposal No. 4: Communications During the Waiting Period
Free-Writing Prospectus – By defining a new class of communication – the “free-writing prospectus” – the SEC would all but eliminate the restrictions that currently prohibit written communications during the waiting period. If the SEC proposals are adopted, any written (including graphic) communication that is not a preliminary or statutory prospectus, but that constitutes an offer to sell (or a solicitation of an offer to buy) securities, will be deemed a “free-writing prospectus.”2 During the waiting period, any issuer or offering participant would be permitted to distribute and use a free-writing prospectus in connection with the offering, subject to certain conditions related to eligibility, inclusion of legends, filing, and record retention that vary depending on the character of the issuer. For example, a free-writing prospectus generally would need to be filed with the SEC no later than the first date it is used if it falls into one of the following categories:
- it is prepared by or on behalf of the issuer
- it is prepared by another offering participant and contains previously undisclosed material information about the issuer or its securities that was provided to the offering participant by the issuer
- it is prepared by another offering participant and is widely disseminated3
Furthermore, a free-writing prospectus distributed by an unseasoned issuer, or by an issuer in an initial public offering, would need to be preceded (or at least accompanied) by a preliminary (or red herring) prospectus,4 whereas a seasoned issuer would only need to include a legend and a hyperlink or URL to the preliminary prospectus on the Internet. The proposals demand that all free-writing prospectuses be retained for three years from the date of the pertinent offering.
Electronic Road Shows – As might be expected, electronic road shows would constitute freewriting prospectuses under the SEC proposals. However, unlike other “free-writing prospectus” materials, an issuer need not file electronic road shows, unless they include material information about the issuer not previously mentioned in the registration statement or other freewriting prospectuses related to the offering, and so long as the issuer broadcasts the road show or makes it electronically available to the general public.
Liability for Free-Writing Prospectus – Although a free-writing prospectus will be considered part of an offering, it is not filed as part of the registration statement. Consequently, it does not subject the issuer or other offering participants to liability under Section 11 of the Securities Act. However, a free-offering prospectus is covered by Section 12(a) of the Securities Act and the general anti-fraud provisions of the federal securities laws.
In an effort “to establish a significantly more flexible version of shelf registration for offerings by well-known seasoned issuers,” the SEC proposals introduce a concept called “automatic shelf registration.” An automatic shelf registration would enable a well-known seasoned issuer to file a registration statement for a shelf offering without specifying an amount of securities to be registered. The registration statement would become effective automatically upon filing, and filing fees would be payable in advance or on a “pay-as-you-go” basis.
The Shelf Registration Process for Well-Known Seasoned Issuers
“Automatic shelf registration” would be available to well-known seasoned issuers for primary and secondary offerings on Forms S-3 or F-3, but could not be used in connection with business combinations or exchange offers. As proposed, an eligible issuer could file a shelf registration statement for an indeterminate number of securities. The issuer would be permitted to add new classes of securities (or securities of an eligible majority-owned subsidiary) to the registration statement by filing a post-effective amendment.
SEC Proposal No. 5: Automatic Shelf Registration
Automatic shelf registration statements (and post-effective amendments) would be deemed effective upon filing without staff review. In addition, issuers would be able to assume that their registration statements are filed in the proper form, unless the SEC notifies the issuer of objections after the filing.
As proposed, an issuer would file new automatic shelf registration statements every three years to cover the class(es) of securities registered. So long as the issuer remains eligible to use the automatic shelf registration process, the new registration statement would be effective immediately, and any securities registered and fees paid using the old registration statement would be carried forward to the new registration statement.
In an effort to further reduce the burden associated with shelf registrations by well-known seasoned issuers, the SEC also proposes reducing the amount of information that must be included in the base prospectus of an automatic shelf registration. As is currently the case, an eligible issuer would be permitted to omit information pursuant to Securities Act Rule 409 that was unknown and not reasonably available, and under the proposals the issuer also would be permitted to omit information about the following:
- whether the offering is a primary or secondary offering
- the names of any selling security holders
- any plan of distribution for the offering securities
The proposals would provide issuers with the ability to add omitted information to a prospectus and incorporate certain information by reference from Exchange Act filings.
Issuers using the automatic shelf registration process would be permitted to pay filing fees in advance or on a pay-as-you-go basis at each takedown in an amount calculated for that takedown. Under the pay-as-you-go basis, the issuer would pay a small initial fee upon filing the initial registration statement, with the remainder of the required fee payment due when the prospectus supplement is filed in connection with a takedown.
SEC Proposal No. 6: Pay-As-You-Go Shelf Registration Fees
As proposed, certain issuers would not be eligible to take advantage of the relaxed restrictions on offering communications, use of free-writing prospectuses and liberalized shelf registration procedures. These “ineligible issuers” include, but are not limited to: reporting issuers that are not current in their Exchange Act filings; issuers who have received a “going concern” opinion from their auditors for the most recent fiscal year; issuers who have filed for bankruptcy or insolvency during the past three years; and issuers who have been found in violation of the securities laws in the past three years.
Certain Issuers Are Ineligible to Take Advantage of the Proposals
As noted at the beginning of this alert, the SEC has proposed changes in a number of areas pertinent to the public offering process. This alert addresses only a subset of the proposed changes. Holland & Knight wishes to make its clients aware that the proposed changes are not yet final – the SEC is soliciting public comments on the proposals for a limited period of time. You can consult with your Holland & Knight attorney(s) if you wish to learn more about how the proposed changes may affect your business, or if you wish to submit comments to the SEC staff.
This Public Companies Alert is a summary for general information and discussion only. It is not a complete analysis of the matters presented and may not be relied upon as legal advice which may often turn on specific facts. Readers should seek legal advice before acting with regard to the matters mentioned herein.
[C]onsistent with our belief that investors and the securities markets will benefit from greater permissible communications by issuers while retaining appropriate liability for these communications, we have sought to address the need for timeliness of information for investors by building on current rules and processes without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to the securities markets and capital.
Whether a particular communication constituted … an offer would, as today, be determined based on the particular facts and circumstances. Communications that would not be considered offers or prospectuses for purposes of the gun-jumping provisions, such as [tombstone ads], regularly released factual business information and forward-looking information falling within our proposed safe harbors, and research reports falling with the safe harbors provided by our rules, would not be free writing prospectuses.
3 A free-writing prospectus sent by an underwriter of the offering directly to its customers would not be considered “widely disseminated” under the SEC proposal and, hence, would not need to be filed. In contrast, if the underwriter or other offering participant posts the free-writing prospectus on an unrestricted Web site or issues a press release about the issuer, filing with the SEC would be required.
4 This requirement would effectively prevent non-reporting and unseasoned issuers from publishing or broadcasting written advertisements, infomercials or broadcast spots about the issuer or its securities in the midst of an offering, other than those that include no more information than allowed under Rule 134.