By: Cydney Posner
At an open meeting today, the SEC enthusiastically voted to propose new and amended rules and form changes to modify the registration, communications and offering processes under the Securities Act of 1933. The proposals address communications related to registered securities offerings, timeliness of delivery of information to investors and procedural restrictions in the offering and capital formation process. The release, which from all indications is around 400 pages, is not yet available. FYI, in a much more heated debate, the SEC also decided (with dissents by Glassman and Atkins) to adopt rules under the Investment Advisers Act of 1940 that require hedge fund advisers to register with the SEC.
In 1998, the SEC issued a far-reaching proposal for Securities Act reform, known, in part because of its volume and weight, as the "aircraft carrier." The 1998 proposal found wide support for its underlying premise--modernization--but drew heavy criticism of its specifics and, ultimately, was never adopted. In this subsequent attempt at 1933 Act reform, the SEC has opted for a more incremental approach, preserving the perceived benefits of the existing system, but modernizing areas perceived to be outmoded. The SEC believes that the recent rule changes resulting from SOX as well as those adopted on the SEC's own initiative have laid the groundwork for the new proposal by increasing issuer and regulatory focus on the timeliness and quality of 1934 Act filings.
The new proposal would relax the restrictions related to communications, procedures and delivery of information in varying degrees depending on the size of the issuer. The proposal would established a new class of issuers, referred to as "well-known seasoned issuers" or "WKSIs" for short, that would have substantial latitude in the offering process. "Well-known seasoned issuers" would include those issuers that have reported on a timely basis under the 1934 Act for one year and either:
These thresholds were selected because companies that exceed those thresholds were presumed to have substantial analyst coverage and institutional holdings, which were perceived to provide the checks and balances necessary to enable loosening of regulatory restrictions. (Analysts provide checks and balances?) Other issuers would be entitled to use the new communications rules to varying degrees, although some issuers, such as penny stock and blank check companies and shell companies and companies that have violated the securities laws or have experienced financial difficulties would be prohibited from taking advantage of the new rules. The communication rules would also be inapplicable to investment companies and M&A transactions.
- have $700 million of public float or
- have issued $1 billion in registered debt securities in the preceding three years and will register only debt securities.
Existing rules prohibit all gun-jumping (except by Google apparently) and restrict written communications after filing, as well as some post-offering communications in the quiet period (often including media interviews), regardless of the accuracy of the information provided. Under the new proposal, restrictions are relaxed to varying degrees for different classes of issuers, but would apply liability standards to the information disclosed. For all reporting issuers, at any time, regularly released factual business and forward-looking information would be permitted. For non-reporting issuers, factual business information that is regularly released to persons other than in their capacity as investors would be permitted at any time. For communications occurring more than 30 days before an offering, communications would be permitted so long as there is no reference to the offering. For WKSIs, oral and written communications would be permitted at any time, including the use of a "free-writing prospectus," discussed below, but would, in many cases, require filing with the SEC. Following effectiveness and prospectus availability, issuers and underwriters would be permitted to interact with the media, but potential liability would attach.
The proposal also establishes a new concept of a "free-writing prospectus," which consists of certain written communications outside of the statutory prospectus. Free-writing prospectuses would not be part of the registration statement and therefore not subject to Section 11 liability, but would be subject to Section 12(a)(2) and antifraud provisions. For unseasoned or non-reporting issuers, a statutory prospectus must accompany or precede the free-writing prospectus. Electronic roadshows would be considered to be free-writing prospectuses that must be filed unless a copy is posted on the issuer's website and available to the public generally. Similarly, media interviews would also be free-writing prospectuses and, if they involved issuers or underwriters, would be required to be filed with the SEC. The SEC recognizes that, conceivably, WKSIs would be permitted under the proposal to engage in TV ads promoting their offerings, but expects that the seriousness of the offering process would be respected. (I guess they haven't been watching any election advertising recently.) In addition, some routine procedural communications regarding the offering, such as those regarding scheduling, would be permitted.
The proposal would include a new interpretation regarding antifraud provisions: under Sections 12(a)(2) and 17(a)(2), the existence of material misstatements and omissions would be assessed against the information available when the investor makes the investment decision.
Under existing rules, a final prospectus, usually printed at great expense, must be delivered to the investor ...after the purchase has been made. Under the proposal, there would be no mandated method of prospectus delivery. Instead, the concept is that availability equals delivery, and SEC filing equals availability. Issuers must, however, notify investors that have purchased securities.
Registrations and Shelf Offerings
For WKSIs, shelf registrations would become effective automatically. WKSIs would be permitted to register unspecified classes of securities, without allocation and with no distinction between primary and secondary shares, and could pay in advance or "as-you-go."
For all shelf offerings, prospectus supplements would be deemed to be part of the registration statement. The proposal would also identify the type of information that may be omitted from the base prospectus in a shelf, essentially codifying current practice while providing more direction. The proposal would eliminate the rule that limits issuers to registering under Rule 415 only the number of shares intended to be sold within two years, but instead require that the shelf be updated every three years. The proposal would also permit immediate shelf takedowns (the end of the "48-hour" rule) and would allow changes to the plan of distribution through filing of a supplement. Seasoned issuers with $75 million in public float would be allowed to add the names of selling shareholders by supplement, so long as the securities were already outstanding.
The proposal would also require that risk factors be included, as applicable, in Forms 10-K. The proposal would permit incorporation by reference into Form S-1 by reporting issuers and eliminate the rarely used Forms S-2 and F-2. Accelerated filers would be required to disclose in their Forms 10-K material, unresolved Staff comments that were issued more than 180 days before the filing.