SEC Adopts Long-Awaited Securities Act Reform, Part I
by Michael L. Hermsen

On June 29, 2005, the Securities and Exchange Commission adopted significant modifications to the securities registration and offering processes under the Securities Act of 1933.¹ The new rules, which were adopted substantially as proposed,² are critically important to any company that accesses the public securities markets and to the investment banking firms that underwrite public offerings. The revisions will foster significant changes in the way substantially all public companies conduct their registered securities offerings, and will eliminate unnecessary and outmoded restrictions on the capital raising process. In addition, the revisions will require public companies to provide more timely information to investors. Finally, the revisions continue the SEC’s efforts toward integrating the disclosure processes under the Securities Act and the Securities Exchange Act of 1934.

The revisions do not affect the regulatory frameworks applicable to business combinations and exchange offers or to registered investment companies. Disappointingly, the SEC also did not address private placements and other exempt offerings. In addition, the revisions generally do not apply to blank check companies, shell companies, and blind pool offerings.

In the adopting release, the SEC stated that it believes the rule changes will:

• Facilitate greater availability of information to investors and the market;
• Eliminate barriers to open communication that have been made increasingly outmoded by technological advances;
• Reflect the increased importance of electronic dissemination of information;
• Make the capital raising process more efficient; and
• Define more clearly both the information and the timeliness of the availability of information against which an issuer’s statements will be evaluated for liability purposes.

This article discusses the new and revised rules and their impact on public companies (other than issuers of asset-backed securities). This Part I addresses the significant reforms to the rules regarding market communication. Part II, to appear in next month’s issue of WALL STREET LAWYER, discusses changes in registration procedures and requirements and delivery of information to investors.

Effectiveness and Transition

The revisions become effective on December 1, 2005.

The SEC has provided some mechanical guidance to public companies with respect to how to transition to the new regulatory regime.³

Highlights

Well-known seasoned issuers

The SEC has created a new category of public company called well-known seasoned issuer, which is a public company with a public float of at least $700 million or registered issuances of at least $1 billion of non-convertible securities, including registered high-yield debt and preferred stock, in the last three years. Well-known seasoned issuers qualify for the very simplified securities registration procedures, which approximate the concept of “company registration,” newly created by the SEC. These simplified procedures, including automatic effectiveness of shelf registration statements and “pay-as-you-go” filing fees, are discussed in Part II of this article. Well-known seasoned issuers also will gain increased flexibility to communicate with the market.

Liberalization in permitted communications during the offering process

Under current “gun-jumping” rules and SEC interpretations under Section 5 of the Securities Act, no communications that could be deemed “offers” of securities are permitted before a registration statement for the securities is filed with the SEC. In addition, written communications that could be deemed offers of securities are required, with limited exceptions, to conform to the content requirements of a statutory prospectus. Under the new rules, all issuers will benefit to some extent from the liberalizations of previous rules, including a safe harbor for communications made 30 days or more before a registration statement is filed, permitted use of free-writing prospectuses, and more flexible rules for electronic road shows.

Access equals delivery

Issuers, underwriters, and dealers will be permitted to comply with their obligation to deliver a final prospectus to purchasers through the electronic filing of the prospectus with the SEC via EDGAR rather than through physical delivery of a hard copy of the prospectus to the purchaser.

Incorporation by reference for S-1 issuers

Reporting issuers will be permitted to incorporate their existing SEC filings by reference to comply with the information disclosure requirements of a registration statement, including a Form S-1, but incorporation by reference to future filings will remain impermissible on Form S-1.

Categories of Issuers

The new rules create four categories of public companies. These categories are generally based on the type of company, the company’s Exchange Act reporting history, and the company’s equity market capitalization or fixed income issuance history. A company’s “category” will determine how the company fits into the new disclosure regime and the benefits it can obtain from the new and revised rules. The most far-reaching revisions and the greatest benefits apply to companies that are “well-known seasoned issuers.” This is because the SEC believes these are the most widely followed companies, and therefore need the fewest restrictions.

After December 1, the four categories of public companies will be:

• Non-reporting issuer. An issuer that is not required to file reports with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act (such as a company that is undertaking its initial public offering). Voluntary filers, such as most high-yield debt issuers, are considered non-reporting issuers for purposes of the new rules.
• Unseasoned issuer. An issuer that is required to file reports with the SEC, but is not eligible to register a primary offering of its securities on Form S-3 or Form F-3 (such as a company that completed its IPO within the last year).
• Seasoned issuer. An issuer that is eligible to register a primary offering of its securities on Form S-3 or Form F-3⁴ or that is eligible to offer a primary offering of non-convertible investment grade securities⁵ or investment grade asset-backed securities, or is a majorityowned subsidiary of such an issuer,⁶ in each case eligible to use Form S-3 or Form F-3.
• Well-known seasoned issuer. An issuer that (1) is eligible to register a primary offering of its securities on Form S-3 or Form F-3, (2) within 60 days of an eligibility determination date, either has a voting and non-voting common equity market capitalization, or “public float,” of at least $700 million held by non-affiliates (or, if the issuer does not meet the public float test and is registering nonconvertible securities only, has issued $1 billion aggregate principal amount of registered non-convertible securities, other than common equity, for cash during the past three years⁷ ), and (3) is not “ineligible” and is not making an ineligible offering.⁸ As discussed below, “ineligible issuers” have certain unfavorable characteristics, such as poor reporting compliance, that have caused the SEC to not extend to them the extreme latitude being given to well-known seasoned issuers.

A majority-owned subsidiary of a well-known seasoned issuer will be considered a well-known seasoned issuer⁹ if:

• The subsidiary itself meets the conditions for eligibility;
• The parent fully and unconditionally guarantees the subsidiary’s non-convertible securities, other than common equity, being offered¹⁰;
• The securities are guarantees of non-convertible securities, other than common equity, of (1) the subsidiary’s well-known seasoned issuer parent, or (2) another majority-owned subsidiary where those non-convertible securities are fully and unconditionally guaranteed by the well-known seasoned issuer parent; or
• The majority-owned subsidiary is offering non-convertible investment grade securities.

The majority-owned subsidiary may only register its securities as a well-known seasoned issuer on the parent’s automatically effective shelf registration statement. For example, if a subsidiary guarantee is to be added after effectiveness of the parent’s registration statement, either the parent must file a new shelf registration statement that will automatically become effective or the subsidiary must register its guarantee on whatever form it is otherwise eligible to use—which is subject to review by the SEC staff if the subsidiary is not itself eligible to use the automatically effective shelf registration statement procedures.

For purposes of determining status as a wellknown seasoned issuer, an issuer will measure its public float and the aggregate amount of its issuances of non-convertible securities using any day within 60 days of the later of the filing of the issuer’s most recent shelf registration statement or its most recent amendment to a shelf registration statement for purposes of complying with Section 10(a)(3) of the Securities Act. This amendment will most commonly occur through the filing of an annual report, but also can occur by filing a post-effective amendment or, under the revised rules, a new form of prospectus under Rule 424. If an issuer has not filed a shelf registration statement or amended a shelf registration statement for purposes of Section 10(a)(3) of the Securities Act for sixteen months, the issuer can test its eligibility using any day within 60 days of the date of filing of the issuer’s most recent Annual Report on Form 10-K or Form 20-F, as applicable.

Communication Reforms

As a starting point for its communication reforms, the SEC has defined “written communication” as any communication that is written, printed, broadcast on television or radio, or is a graphic communication.¹¹ The term does not encompass indirect oral communications, such as telephone calls, or direct oral communications, such as live, real-time communications to a live audience. However, if an oral communication is recorded for rebroadcast or transmission, that would be a written communication.

“Graphic communications” are a subset of written communications. A graphic communication is any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROMs, email, Web sites and computers, computer networks, and other forms of computer data compilation. ¹² Under this definition, postings on Web sites, including electronic roadshows, are considered written communications. Written communications also include broadly disseminated or “blast” voicemail messages that are more like broadcasts than communications that are commonly regarded as oral, or live.

In the adopting release, the SEC recognized the value of ongoing communications as well as the importance of avoiding unnecessary restrictions on offers of securities during a registered offering. The new and revised rules eliminate requirements that can interrupt unnecessarily an issuer’s normal and routine communications to the market while the issuer is preparing for or engaged in a securities offering, and enhance the ability of public companies to make written offers outside the statutory prospectus. Well-known seasoned issuers generally will be free from the gun-jumping restrictions of Section 5 of the Securities Act. Other issuers will have new freedoms to communicate around the time of a registered offering, including by means of a written offer other than a statutory prospectus, but will be subject to various restrictions based on their issuer category.

Regularly Released Factual Business and Forward Looking Information (Rules 168 and 169)

New Rule 168 provides a safe harbor from the definition of “prospectus” in the Securities Act to permit reporting issuers¹³ to continue to publish or disseminate regularly released factual business and forward-looking information. This rule largely codifies long-standing SEC staff guidance and practice that has been set forth in various releases since 1957.¹⁴ Rule 168 is intended to remove the uncertainty that issuers historically have endured when disclosing information at or near the time of a registered offering of securities but unrelated to the offering.

Rule 168 defines “factual business information” as:

• 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.

“Forward-looking information” is defined as:

• Projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items;
• Statements about management’s plans and objectives for future operations, including plans or objectives relating to the issuer’s products or services;
• Statements about future economic performance, including statements of the type contemplated by Item 303 of Regulation S-K (MD&A); or
• Assumptions underlying or relating to any of the foregoing three items.

The safe harbor also covers any factual business information and forward-looking information included in any of the issuer’s Exchange Act reports.

There are three conditions that must be satisfied in order to rely on the safe harbor provided by Rule 168.

1. By or on behalf of the issuer. The information must be released or disseminated by or on behalf of the issuer. To satisfy this requirement, the issuer or an agent or representative of the issuer—not an underwriter or dealer— must have authorized or approved the use of the information before it was released or disseminated. Underwriters cannot rely on this safe harbor.
2. Regularly released information. The issuer must have previously released or disseminated information of the same general type in the ordinary course of its business. The purpose of this provision is to enable a reporting issuer to continue its ordinary course practice of publicly releasing or disseminating factual business and forward-looking information. To satisfy this provision, the release or dissemination must be materially consistent in timing, manner, form, and method with the issuer’s past disclosures of the same or similar information. One prior release or dissemination can establish an adequate track record.
3. Non-offering related information. The communication may not contain information about a registered offering or be released or disseminated as part of the offering activities in a registered offering. Publication of information about a registered offering outside the registration statement or a prospectus is limited to statements allowed under Rule 134, Rule 135, or another exemption or safe harbor. For example, the safe harbor would not be available for the text of an Exchange Act report that is incorporated by reference into a registration statement or disclosed in a “freewriting prospectus.” It also would not be available for a copy of a press release that is specifically provided to investors or potential investors as part of an issuer’s offering activities or disclosure of information at a roadshow.

New Rule 169 provides a narrower safe harbor from the definition of “prospectus” for the release or dissemination of regularly released factual business information for all issuers, including non-reporting issuers. This safe harbor is not available for forward-looking information. To rely on Rule 169, the information must be intended to be used by persons other than in their capacity as investors or potential investors (i.e., customers and suppliers). The fact that a customer also may be a potential investor in the issuer’s securities would not affect the availability of the safe harbor if the conditions are otherwise met.

Rule 169 relies on the same definition of factual business information as Rule 168 except the definition under Rule 169 does not include the reference to dividend notices. As a result, nonreporting issuers cannot rely on this rule to issue a press release about dividends. The other provisions of the safe harbor provided by Rule 169 are the same as those that apply to reporting issuers under Rule 168.

Since reporting issuers can take advantage of the broader safe harbor provided by Rule 168, the safe harbor established by Rule 169 generally will be used only by non-reporting issuers.

Permitted Communications by All Issuers Prior to Filing a Registration Statement (Rule 163A)

New Rule 163A provides all issuers with a bright-line time period, ending 30 days prior to the filing of a registration statement, during which they may communicate without risk of violating the gun-jumping provisions of Section 5 of the Securities Act. Communications prior to this 30- day period have been excluded from the definition of “offer” for purposes of Section 5(c).

To rely on the 30-day bright line test of Rule 163A:

• Communications cannot reference a securities offering that is or will be the subject of a registration statement;
• Communications must be made by or on behalf of the issuer; and
• The issuer must 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. These “reasonable steps” will not require an issuer to remove information from its Web site, but the information must be referred to as “historical,” be appropriately dated, and not otherwise be referred to as part of the offering activities. In contrast, if an executive officer of an issuer gives an interview prior to the 30-day period, the issuer will not be able to rely on Rule 163A if the interview is published during the 30-day period. The publication of that interview likely will be considered a free-writing prospectus (discussed below).

Communications made in reliance on Rule 163A are not considered to be made in connection with a registered securities offering, so they are within the scope of Regulation FD¹⁵—the regulations prohibiting selective disclosure of material non-public information—and issuers must comply with all applicable requirements of that regulation.

Pre-Filing Offers Permitted for Well- Known Seasoned Issuers (Rule 163)

New Rule 163 provides well-known seasoned issuers with a much broader exemption from the prohibition on offers before the filing of a registration statement than Rule 163A provides for other issuers. Rule 163 permits eligible wellknown seasoned issuers to make unrestricted oral and written offers before a registration statement is filed without violating the Section 5 gunjumping restrictions. This exemption is only available for communications made by or on behalf of the issuer. Since well-known seasoned issuers likely will always have shelf registration statements on file with the SEC, this safe harbor may not be used very often in practice. Communications made in reliance on Rule 163 are still considered offers of securities and are subject to the existing liability standards that are applicable to offers of securities.¹⁶ In light of the revisions made to Regulation FD, all such communications also are subject to Regulation FD.

Written offers made in reliance on Rule 163 generally are considered “free-writing prospectuses,” and are required to be filed with the SEC promptly upon the filing of the related registration statement, as described in greater detail below. In addition, written offers must include a legend indicating that the issuer may file a registration statement with the SEC for the proposed offering and that, before investing, the reader should read the prospectus and other documents the issuer has filed with the SEC for more complete information about the issuer and the offering. The legend also must inform the reader where these documents can be obtained.

Expansion of Information Permitted to be Disclosed Under Rule 134

Existing Rule 134 provides a safe harbor from the gun-jumping provisions for limited public notices about an offering made after an issuer files its registration statement. Rule 134 has been amended to:

• Permit disclosure of more information about an issuer and its business, including where to contact the issuer;
• Permit disclosure of more information about the terms of the securities being offered;¹⁷
• Expand the scope of permissible factual information that may be provided about the offering itself, including information about the underwriter, 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 account opening and submitting indications of interest and conditional offers to buy the offered securities;
• Allow more factual information regarding procedures for auction or directed share plans and other methods of participation in offerings by officers, directors, and employees;
• Permit the issuer to correct inaccuracies in permissible information previously disclosed pursuant to Rule 134; and
• Expand the disclosure permitted regarding expected credit ratings.

The SEC has made clear that certain information cannot be disclosed in a communication made in reliance on Rule 134 until the information has been disclosed in the related registration statement. For example, in an IPO, price and price-related information cannot be disclosed in a communication made in reliance upon Rule 134 until a bona fide price range has been disclosed in the registration statement. The same rule applies to information concerning the use of proceeds.

Free-Writing Prospectuses (Rules 163, 164, and 433)

New Rules 163, 164, and 433 have been adopted to permit written communications, including electronic communications, that constitute offers outside the statutory prospectus to a greater extent than was previously permitted by the Securities Act. These written communications are called “free-writing prospectuses.”

Definition

A “free-writing prospectus” is any written communication that constitutes an offer to sell or a solicitation of an offer to buy securities that are or will be the subject of a registration statement and that is not a prospectus satisfying the requirements of Section 10(a) of the Securities Act and was not accompanied or preceded by a prospectus satisfying such requirements or the SEC’s rules permitting the use of a preliminary or summary prospectus subject to completion.¹⁸ Communications that comply with Rule 134, Rule 135, Rule 168, Rule 169, and research reports falling within the safe harbors for such communications (Rules 137, 138, and 139), are not free-writing prospectuses. Written communications made after the effectiveness of the registration statement that are accompanied or preceded by a prospectus also are not free-writing prospectuses.

Permitted content

Rule 433 permits information in a free-writing prospectus to go beyond, but not to conflict with, the substance of the information contained in the related registration statement.

Legends

Rules 164 and 433 require that each freewriting prospectus contain a legend indicating where the prospectus satisfying the requirements of Section 10 is available and recommending that potential investors read the prospectus, including the risk factors and the documents incorporated by reference. The legend also must state that the communication constitutes a written offer pursuant to a free-writing prospectus that is part of a registered public offering, and inform investors that a copy of the registration statement, and the documents incorporated by reference into the prospectus, can be obtained for free through the SEC’s Web site, and that a copy of the prospectus can be obtained by calling a toll-free number provided in the written communication.

If a free-writing prospectus is unintentionally used without the required legend, the issuer is permitted to cure the defect by retransmitting a copy of the free-writing prospectus that includes the required legend to each person who received the defective free-writing prospectus. (Consider the record-keeping nightmares that requirement will provoke.) If the legend cannot be included in the free-writing prospectus (for example, in the case of a published article), this information need only be contained in the free-writing prospectus that is filed with the SEC.

Certain legends or disclaimers may not be attached to a free-writing prospectus, including:

• Disclaimers regarding accuracy or completeness or reliance by investors;
• Statements requiring investors to read or acknowledge that they have read or understand the registration statement or any disclaimers or legends;
• Language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation of an offer to buy; and
• For information that must be filed with the SEC, statements that the information is confidential.

If any impermissible legend or disclaimer is included, the communication will not qualify as a free-writing prospectus and therefore will be required to meet the requirements of a statutory prospectus in order to be used.

Filing requirements

Each free-writing prospectus prepared by an issuer or containing information provided by an issuer generally is required to be filed. Filing deadlines vary depending on who prepared or is using the free-writing prospectus (the issuer or another offering participant), the contents of the free-writing prospectus, the source of the information (e.g., did the issuer provide material information ?) whether that information has already been made publicly available, and how widely the freewriting prospectus will be distributed. Rule 164 permits an offering participant to cure any immaterial or unintentional failure to file, or delay in filing, a free-writing prospectus, without losing the ability to rely on the rule. The cure is available if a good faith and reasonable effort was made to comply with the filing condition and the free-writing prospectus is filed as soon as practicable after the discovery of the failure to file.

Rule 433 requires issuers and offering participants, such as underwriters, to retain any freewriting prospectuses they have used that have not been filed with the SEC for three years from the date of the bona fide initial offering of the securities in question. For example, this recordkeeping requirement would apply to free-writing prospectuses prepared by underwriters that do not contain information provided by or on behalf of the issuer. Immaterial or unintentional violations of this recordkeeping requirement would not be a violation of the rule.

Liability implications

Although many free-writing prospectuses will be filed, they will not be considered part of a registration statement subject to liability under Section 11 of the Securities Act unless the issuer elects to file one as part of the registration statement. Free-writing prospectuses are, however, subject to disclosure liability under Section 12(a)(2) and under the antifraud provisions of the securities laws.

Treatment of media reports

If an issuer or any offering participant provides information about the issuer or the offering that constitutes an offer, whether orally or in writing, to a member of the media, and the media publication of that information may be considered an offer by the issuer or offering participant, the publication is a free-writing prospectus. For example, if a member of the press who attends a roadshow writes an article containing information from the roadshow, the article is a free-writing prospectus that is subject to the applicable rules, unless the roadshow is readily accessible to an unrestricted audience. Any such free-writing prospectus must be filed with the SEC by the issuer or offering participant involved within four business days after the issuer or offering participant becomes aware of its publication or broadcast. The obligation may be met by filing (1) the media publication, (2) all of the information provided to the media that generated the publication, or (3) a transcript of the interview or similar materials that the issuer or other offering participant provided to the media. A media publication need not be filed if the substance of the written communication has previously been filed with the SEC. Finally, the issuer or offering participant may file information the issuer reasonably believes is necessary or appropriate to correct information included in the media publication.

Continuing along the spectrum of possibilities, if an issuer or offering participant prepares, pays for, or gives consideration for the preparation, publication, or dissemination of, or uses or refers to, a published article, television or radio broadcast, or advertisement, the issuer or offering participant will have to satisfy the conditions for use of a free-writing prospectus as of the time of the publication or broadcast. This requirement does not apply if the free-writing prospectus is prepared and published or broadcast by news media that is not affiliated with or paid by the issuer or an offering participant.

When issuers can use free-writing prospectuses

Well-known seasoned issuers. Under Rule 163, eligible well-known seasoned issuers may use a free-writing prospectus at any time—before or after the filing of a registration statement. If it is used before the filing of a registration statement, the free-writing prospectus must be filed when the related registration statement is filed. Under Rule 164, a free-writing prospectus may be used by an offering participant after the filing of a registration statement containing a statutory prospectus, which may be a base prospectus that meets the requirements of Rule 430B in the case of shelf offerings.

Seasoned issuers. Under Rule 433, eligible seasoned issuers are permitted to use a freewriting prospectus if the following conditions are satisfied:

• A registration statement containing a statutory prospectus, which may be a base prospectus that meets the requirements of new Rule 430B in the case of shelf offerings, for the offering has been filed; and
• The user of the free-writing prospectus notifies the recipient, through a required legend, of the URL where the recipient can access, or hyperlink to, the preliminary or base prospectus, and includes a toll-free telephone number, and may include an e-mail address, through which a statutory prospectus may be requested.

Other issuers. Non-reporting and unseasoned issuers may use a free-writing prospectus if a registration statement containing a statutory prospectus for the offering has been filed. For these issuers, the free-writing prospectus must be preceded or accompanied by the most recent statutory prospectus if:

• The free-writing prospectus is prepared by or on behalf of, or used or referred to by, an issuer or other offering participants;
• Consideration has been or will be given by the issuer or offering participant for the dissemination of any free-writing prospectus, including any published article, publication or advertisement; or
• Section 17(b) of the Securities Act requires disclosure that consideration has been or will be given by the issuer or offering participant for any activity in connection with the freewriting prospectus.

To meet these requirements, non-reporting and unseasoned issuers likely will use free-writing prospectuses only in electronic communications where they can also deliver a copy of the required prospectus.

The statutory prospectus need not be delivered by the same means as the free-writing prospectus so long as it is provided at the required time. For example, the free-writing prospectus could contain a hyperlink to the statutory prospectus. However, merely referring to the availability of a statutory prospectus would not satisfy this condition. Thus, publications in print media and radio or television broadcasts generally will not be permitted for free-writing prospectuses, while emails and other Internet media could be used for free-writing prospectuses.

Once a statutory prospectus has been delivered, additional free-writing prospectuses may be transmitted without delivering a new statutory prospectus unless it has undergone a material change. After effectiveness of the registration statement, the final prospectus must accompany or precede any further free-writing prospectuses. In addition, in the case of an IPO, the statutory prospectus must contain a price range before it can be used for this purpose.

Ineligible issuers. Ineligible issuers generally may not use free-writing prospectuses. However, ineligible issuers other than blank check companies, shell companies, and penny stock issuers are permitted to use free-writing prospectuses that are limited to describing the terms of the securities being offered and the offering. Eligibility is to be determined at the commencement of an offering —either the time of filing of the registration statement or, in the case of a shelf takedown, the earliest time after the filing of the registration statement for the offering at which the issuer or another offering participant made a bona fide offer. Persons using a free-writing prospectus other than the issuer must have a reasonable belief that the issuer is not an ineligible issuer.

In general, “ineligible issuers” are issuers that have certain characteristics that may increase the potential for abuse. In particular, ineligible issuers are:

• Reporting issuers that are not current in their Exchange Act reports;
• Issuers that are, or during the past three years were, or any of their predecessors were blank check issuers,¹⁹ shell companies,²⁰ or penny stock issuers;²¹
• Issuers that are limited partnerships pursuant to the definitions contained in the SEC’s rollup rules and are not selling their securities in a firm commitment underwriting;²²
• Issuers that have filed for bankruptcy or insolvency during the last three years;²³
• Issuers that have been or are the subject of refusal or stop orders under the Securities Act during the past three years or are the subject of a pending proceeding under Sections 8 or 8A of the Securities Act; and
• Issuers that have (or with subsidiaries that have) been convicted of any felony or misdemeanor described in Section 15(b)(4)(B)(i) through (iv) of the Exchange Act, or been the subject of a judicial or administrative decree or order (including a settlement claim or order) prohibiting certain conduct or activities regarding the antifraud provisions of the federal securities laws, requiring that the issuer or certain affiliated persons cease and desist from violating the antifraud provisions of the federal securities laws, or determining that the issuer or certain affiliated persons violated the antifraud provisions of the federal securities laws.²⁴

These same issuers generally are not eligible for the automatically effective shelf registration statement procedures described in Part II of this article or the newly-adopted communications safe harbors, exemptions, and exclusions. However, upon an issuer’s request, the staff of the SEC can waive an issuer’s ineligibility upon a finding of good cause.

Electronic Road Shows (Rule 433)

Generally, all electronic communications, including electronic road shows, are considered graphic communications (and therefore a freewriting prospectus) and are permitted only if the conditions of Rule 433 described above are satisfied. However, the definition of graphic communications does not include communications that, at the time of communication, originate live, in real-time, to a live audience, and do not originate in recorded form or otherwise as a graphic communication, although the communication may be transmitted through graphic means (think live webcast versus a pre-recorded presentation).

Each road show presentation that is not excluded from the definition of graphic communication is considered a written communication that is treated as a free-writing prospectus. A road show that is a free-writing prospectus does not need to be filed with the SEC unless the road show is with respect to a non-reporting issuer that is registering an offering of common equity or convertible equity securities. In that case, the road show must be filed with the SEC unless the issuer makes at least one version of a bona fide electronic road show²⁵ for the offering in question readily available electronically without restriction to any potential investor at the same time as the other versions of the electronic road show are available.²⁶

Treatment of Information on a Web Site and Other Electronic Communication Issues (Rule 433)

An offer of securities that is contained on the issuer’s Web site or hyperlinked by the issuer to a third-party Web site is considered a written offer of such securities made by the issuer and, unless otherwise exempt, is a free-writing prospectus. If it is a free-writing prospectus, it is subject to all of the requirements described above. While a research report generally will not be an offer, an issuer’s hyperlink to that research report would make the research report a free-writing prospectus of the issuer.

Historical issuer information that is not an offer does not become an offer if it is accessed at a later time, unless it is updated or used or referred to in connection with an offering. Historical information generally will not be considered an offer of the issuer’s securities if identified as historical information and located in a separate “archive” section of the issuer’s Web site. One way to make sure that information is considered historical is to date all information on the Web site.

Amendments to Regulation FD

Currently, communications made during a registered offering of securities are excluded from the application of Regulation FD. Regulation FD has been amended so that it does not apply to disclosures made in the following communications:

• A registration statement filed under the Securities Act, including a prospectus contained therein;
• A free-writing prospectus used after filing the registration statement for the offering or a communication falling within the exception to the definition of prospectus contained in Section 2(a)(10)(a) of the Securities Act;²⁷
• Any other Section 10(b) prospectus;
• A notice of a proposed registered offering permitted by Rule 135;
• A communication permitted by Rule 134; and
• An oral communication made in connection with the registered offering after the filing of the registration statement for the offering.

Regulation FD also has been amended so that it does not apply to registered offerings by selling securityholders where the offering includes a registered offering for capital formation purposes by the issuer.

Research Reports (Rules 137, 138, and 139)

The SEC has amended Rules 137, 138, and 139, each of which describe circumstances under which a broker or dealer may publish research that might be deemed to constitute an offer without violating Section 5 of the Securities Act if that research is published around the time of a registered offering. For the first time, the SEC has defined a “research report” as a written communication that includes information, opinions, or recommendations with respect to, or an analysis of, a security of an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.

Rule 137 has been revised to provide that a broker or dealer that is not a participant in a registered offering but publishes or distributes research about any issuer that is undertaking an offering will not be considered to be engaged in the distribution of the issuer’s securities and would therefore not be an underwriter in the offering.

Rule 138 permits a broker or dealer participating in a distribution of an issuer’s common stock and similar securities to publish or distribute research that is confined to that issuer’s fixed income securities, and vice versa. The rule is available with respect to all reporting issuers that are current in filing their periodic Exchange Act reports, rather than only issuers that are Form S-3 or Form F-3 eligible as was previously the case. As a condition to the exemption, the broker or dealer must have previously published or distributed in the regular course of its business research reports on the types of securities that are the subject of the current report.

Rule 139 permits a broker or dealer participating in a distribution of securities by a seasoned issuer or certain non-reporting foreign private issuers publicly traded abroad to publish research concerning the issuer or any class of its securities if that research is in a publication distributed with reasonable regularity in the normal course of its business. The rule is only available with respect to reports on specific issuers that have at least a one-year reporting history, are current and timely in their Exchange Act reports, and are eligible to use Form S-3 or F-3 based on the $75 million minimum public float or investment grade securities provisions of those forms.

Rule 139 has been revised to eliminate the requirement that the reports be distributed with reasonable regularity, substituting a requirement that the broker or dealer must, at the time of use, have previously distributed or published at least one research report about the issuer or its securities. The rule also has been revised to expand the type of issuers that can be covered in an industryrelated report to include any reporting issuer (not just reporting issuers eligible to use Form S-3 or F-3 and non-reporting foreign private issuers), to remove the restriction on a broker or dealer making a more favorable recommendation than the one it made in its last publication, and to require that the research reports contain similar types of information about the issuer or its securities as those contained in prior reports.

In addition, Rules 137, 138, and 139 have been revised to make clear that research reports meeting the conditions of the applicable rule will not be considered offers or a general solicitation or general advertising in connection with offerings relying on Rule 144A, do not constitute directed selling efforts, and are not inconsistent with the offering transaction requirements of Regulation S.

Notes

1. See SEC Release No. 33-8591 (July 19, 2005), available at <www.sec.gov/rules/final/33-8591.pdf>.

2. See SEC Release No. 33-8501 (Nov. 3, 2004), available at <www.sec.gov/rules/proposed/33-8501.htm>.

3. See Securities Offering Reform Transition Questions and Answers, available at <www.sec.gov/divisions/corpfin/transitionfaq.htm>.

4. To do a primary offering of securities on Form S-3 or Form F-3, an issuer generally must have been subject to the requirements of Section 12 or 15(d) of the Exchange Act and have filed all material required to be filed pursuant to Sections 13, 14, or 15(d) for a period of at least 12 calendar months preceding the filing of the registration statement; must have timely filed all reports required to be filed during these 12 calendar months (with exceptions for certain Form 8-K’s); and must have an aggregate market value of its voting and non-voting common stock, held by non-affiliates of at least $75 million or more (i.e., public float).

5. The same tests set forth in Footnote 4 must be met except the public float test is replaced with a requirement that the security being offered be an investment grade security.

6. See General Instruction I.C to Form S-3 and I.A.5 to Form F-3, as modified by the revisions adopted by the SEC.

7. Issuers generally may include the principal amount of any debt and the greater of liquidation preference or par value of any nonconvertible preferred stock that has been issued in primary registered offerings for cash. Exchange offers, such as those pursuant to the line of no-action letters beginning with Exxon Capital Holding Corporation, cannot be included in determining the $1 billion threshold as the offerings are not for cash. Parent company issuers may include in their calculation the principal amount of their full and unconditional guarantees of non-convertible securities, other than common equity, of their majority-owned subsidiaries.

8. See amended Rule 405 under the Securities Act.

9. Id.

10. See Rule 3-10 of Regulation S-X for the requirements used to determine whether a guarantee is full and unconditional.

11. See amended Rule 405 under the Securities Act.

12. Id.

13. A “reporting issuer” is an unseasoned issuer, a seasoned issuer, or a well-known seasoned issuer.

14. See Publication of Information Prior to or After the Effective Date of a Registration Statement, SEC Release No. 33-3844 (Oct. 8, 1957), 22 Fed. Reg. 8359.

15. Rule 100(b)(2)(iv) of Regulation FD, 65 Fed. Reg. 51716, 51738 (Aug. 24, 2000), provides “this section shall not apply to a disclosure made . . . [i]n connection with a securities offering registered under the Securities Act . . . .”

16. See Sections 12(a)(2) and 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act, and the rules promulgated by the SEC under such sections.

17. For fixed income securities, issuers will be able to provide greater information about final interest rates and yield information. Also, issuers can disclose whether the securities being offered are convertible, exercisable, or exchangeable, and the ranking of the securities. Issuers also can disclose the permissibility or status of the investment under ERISA.

18. See amended Rule 405 under the Securities Act of 1933.

19. See Rule 419(a)(2) under the Securities Act for a definition of blank check company.

20. See Rule 405 under the Securities Act for a definition of shell company.

21. See Rule 3a51-1 under the Exchange Act for a definition of penny stock.

22. See Item 903(b) of Regulation S-K for a definition of partnership.

23. An involuntary bankruptcy proceeding will cause an issuer to be an ineligible issuer only upon the earlier of 90 days after the filing of an involuntary petition or the conversion of the case to a voluntary proceeding under federal bankruptcy or state insolvency laws. Also, ineligibility terminates if the issuer files an annual report with audited financial statements after it emerges from bankruptcy, insolvency, or receivership.

24. This last section of the definition related to settlements is applicable only on a prospective basis for settlements entered into after December 1, 2005. Settlements in effect before that date will not affect the determination of whether an issuer is an ineligible issuer.

25. A bona fide road show contains a presentation by at least some members of the issuer’s management and, if more than one version of the road show exists, covers the same general areas regarding the issuer, its management, and the securities offered as the other versions. It need not contain all of the same information and need not provide an opportunity for questions and answers or other interaction.

26. These electronic road show requirements replace the long line of no-action letters, beginning with Private Financial Network (Mar. 12, 1997), addressing the permissibility of electronic road shows.

27. This subsection excludes from the definition of “prospectus” communications sent or given after the effective date of the registration statement (other than statutory prospectuses permitted under Section 10(b) of the Securities Act) if it is proved that prior to, or at the same time as, such communication, a written prospectus was sent or given to the person to whom the communication was made.

About the Author

Michael Hermsen (mhermsen@mayerbrownrowe.com) is a partner in the Chicago office of Mayer, Brown, Rowe & Maw, LLP.