New Securities Reform Q&A
By: Cydney Posner
Just barely in time for the start of the new era of securities reform, the SEC has just posted a new Q&A. (The answers assume an issuer’s eligibility to use the form, the offering type or the rule that is discussed.)
Free Writing Prospectuses
If an offering participant, other than the issuer, unintentionally distributes a free writing prospectus in a broad, unrestricted manner, pursuant to Rule 433(d)(1)(ii), the offering participant must file the free writing prospectus. That rule requires an offering participant to file any free writing prospectus that is used or referred to by that offering participant and distributed by or on behalf of that offering participant in a manner reasonably designed to lead to its broad unrestricted dissemination, even if the distribution was unintentional.
If an issuer uses a free writing prospectus at a time when EDGAR does not accept filings, to comply with Rule 433, which requires a filing no later than the date of first use, the issuer should file the free writing prospectus on EDGAR within the time frame provided in the Rule, even if the filing is not "accepted" by EDGAR until a later time. The SEC provides the following example: if an issuer first uses a free writing prospectus at 10:00 p.m. on a Monday night, the issuer is required to file the free writing prospectus no later than that Monday. The filing would satisfy the timely filing condition of Rule 433(d)(1), even if the issuer filed on that Monday after the closing of the EDGAR system.
An issuer free writing prospectus that contains both descriptions of terms of the securities and other information, may be filed the two components separately, as they have different deadlines. The issuer must file the "other information" component of the issuer free writing prospectus, other than the description of terms of the securities, no later than the date of first use. The issuer must file the description of the terms of the securities only if that description represents the final terms of the securities. If it does, the description of the final terms must be filed within two days after the later of the date of first use of that description and the date the final terms have been established for all classes of securities in the offering.
After the filing of a registration statement for an offering, a CEO’s interview on a live television or radio program, even if conducted by unaffiliated and uncompensated media, would be a written offer (assuming the substance of the interview constituted an offer at all) and would be a free writing prospectus and treated the same as any other unaffiliated, uncompensated media publication or broadcast: the issuer would have to satisfy its filing obligation with regard to the interview within four business days after the broadcast.
However, if the substance of the information in the CEO's interview with unaffiliated and uncompensated media were already contained in the registration statement, the issuer would not have to file the interview as an issuer free writing prospectus, even if the interview constituted an offer. The interview would still be an issuer free writing prospectus, but, under Rule 433(f)(2), it would not have to be filed. The SEC notes that the issuer will be responsible for determining whether the substance of the information has been filed previously (and on some panels, the SEC representatives were very, shall we say, literal, about this determination).
If the issuer free writing prospectus were not a media publication or broadcast, however, the free writing prospectus would have to be filed, even if the information in the free writing prospectus were contained in the filed registration statement. The Rule 433(f)(2) exclusion from filing applies only to media publications or broadcasts. In addition, the Rule 433(d)(4) exception from the issuer filing condition for issuer information would not be available, as that exception applies only to free writing prospectuses of offering participants other than the issuer where the information is contained in a previously filed prospectus or free writing prospectus relating to the offering.
The exceptions that apply to unpaid media free writing prospectuses are not applicable to paid broadcasts, like infomercials. In an IPO, paid broadcasts before effectiveness must be accompanied or preceded by a statutory prospectus. Because this condition cannot be satisfied for a broadcast, the free writing prospectus rules, Rule 164 and Rule 433, would not be available for that type of communication.
If an issuer free writing prospectus does not contain substantive changes from or additions to a previously filed free writing prospectus relating to an offering, that subsequent free writing prospectus would not need to be filed under the exception provided by Rule 433(d)(3).
If an issuer and underwriter agree that the underwriter will not use a free writing prospectus without the consent of the issuer, the consent given by the issuer to the use of an underwriter free writing prospectus under these circumstances is not, in and of itself, authorization or approval. In this regard, "authorized or approved" refers to the substance, not the use, of the free writing prospectus. If the issuer’s actions amount to "adoption" of or "entanglement" with the free writing prospectus, then the issuer would have approved or authorized the underwriter free writing prospectus (which could then require the issuer to file it).
Reg G would apply to free writing prospectuses for issuers that are required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act and would not apply to non-reporting issuers conducting an IPO or to voluntary filers. (For voluntary filers, however, the issue can be complicated. While Reg G technically does not apply, the failure to observe it can create optics problems and raise significant issues regarding compliance with the anti-fraud provisions. See Question 33 of the Non-GAAP FAQs.)
Unless the issuer files a free writing prospectus on Form 8-K or otherwise includes it or incorporates it by reference into the registration statement, Item 10(e) of Reg S-K (relating to non-GAAP measures in SEC filings) would not apply to a filed free writing prospectus, because a filed free writing prospectus is otherwise not part of the issuer’s registration statement.
The media provisions of the free writing prospectus rules apply to articles based on information provided to the media by or on behalf of the issuer or other offering participants. If a free writing prospectus (or the information contained in it) is not provided to the media by an issuer or other offering participant or by any person acting on their behalf, a media publication based on that free writing prospectus (or information) would not be a free writing prospectus of the issuer or other offering participant. For example, if an underwriter sends a free writing prospectus to its clients and a member of the media writes an article based on information on that free writing prospectus, but the member received the free writing prospectus from a client of that firm and not from the underwriter, the article will not be a free writing prospectus of the underwriter. If the issuer or underwriter, or a person acting on their behalf, provided, authorized or approved the publication, the free writing prospectus rules might apply to the publication. The SEC notes that the staff may request information about the role that the underwriter or issuer played in providing the free writing prospectus (or information) or the publication, at least in circumstances where their roles are not clear.
Well-Known Seasoned Issuer Definition
An issuer that believes that it is eligible, as a WKSI, to file an automatic shelf would determine its eligibility to file the automatic shelf at the time of filing, whether or not it has previously filed a shelf.
A WKSI with an automatic shelf will need to re-evaluate its status as a WKSI when it files its Form 10-K or Form 20-F for the fiscal year in which the automatic shelf is filed and becomes effective. For example, an issuer with a December 31 fiscal year end that files an automatic shelf on August 15, 2006 and files its Form 10-K for its 2006 FY on February 28, 2007, will need to re-evaluate its WKSI status on the date it files the Form 10-K. Further, for fiscal years ending after December 1, 2005, issuers will be required to indicate their WKSI status on their Forms 10-K or 20-F. Where an issuer that was a WKSI with an effective automatic shelf determines that it is no longer a WKSI at the time it files its annual report (or on the due date of that report), that issuer will need to amend its automatic shelf on the form that it is then eligible to use.
A Canadian issuer filing annual reports on Form 40-F under the Multi-Jurisdictional Disclosure System cannot be a WKSI. (This result is largely because the rules contemplate that the assessment of eligibility will be made annually. As adopted, only issuers filing annual reports on Form 10-K or Form 20-F are able to assess their eligibility annually under the eligibility determination date provisions.)
Ineligible Issuers
The definition of "ineligible issuer" in Rule 405 includes an issuer (including its subsidiary) that, within the past three years, was convicted of certain felonies or misdemeanors. A conviction by a foreign court as to the activities described in the relevant clauses of Section 15(b)(4)(B) of the Exchange Act would trigger ineligibility under the definition.
Automatic Shelf Registration Statements
In Part II of an automatic shelf registration statement, just as with regular unallocated shelf registration statements, the information included under "Other Expenses of Issuance and Distribution" should include only that information that is known at the time of filing the registration statement.
The calculation of registration fee table on the face of an automatic shelf registration statement should list each type of security being registered and either (i) state whether a filing fee is being paid with the filing (in which case the dollar amount of the fee should be set forth, as in the case of an unallocated shelf registration statement today), or (ii) indicate "$0" in the filing fee table and state that the filing fee will be paid subsequently in advance or on a pay-as-you-go basis.
If an automatic shelf registration statement originally registers one or more classes of securities and an additional class of securities is subsequently added by post-effective amendment, the 5.1 legality opinion for the additional class of securities must be filed at the time the class of securities is first included in an automatic shelf, whether the class is first included as part of the initial registration statement or in a post-effective amendment. The signed 5.1 opinion covering the specific securities sold in an offering must be filed as part of the registration statement or incorporated by reference into the registration statement no later than the time of the offering of the securities.
An issuer’s loss of eligibility as a WKSI after effectiveness of an automatic shelf but before its Section 10(a)(3) update will not affect the issuer's ability to use that automatic shelf until the time of its Section 10(a)(3) update.
Rule 172
The provisions of Rule 172 are available to dealers, whether or not they are participants in the underwriting, including dealers selling an unsold allotment. A dealer may not rely on Rule 174 to omit delivery of a prospectus where the dealer is participating in the offering or is selling an unsold allotment. Where Section 4(3) requires delivery of a prospectus, the dealer may rely on Rule 172 to satisfy its delivery obligation, except in the case of offerings of blank check companies.
Rule 172 provides that a final Section 10(a) prospectus will be deemed to precede or accompany the carrying or delivery of a security for sale for purposes of Section 5(b)(2) and provides a conditional exemption from Securities Act Section 5(b)(1) for written confirmations and notices of allocations. Clause (a) of Section 2(a)(10) provides an exception from the definition of "prospectus" for a communication that is sent or given after the effective date of the registration statement if "it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of Section 10 at the time of such communication was sent or given to the person to whom the communication was made." Rule 172 does not provide a means to satisfy the "sent or given" language in clause (a) of Section 2(a)(10). Footnote 561 (which you all read carefully, I'm sure) of the Securities Offering Reform adopting release states that "a final prospectus only filed as provided in Rule 172 will not be considered to be sent or given prior to or with a written offer within the meaning of clause (a) of Securities Act Section 2(a)(10)."
Rule 173
Rule 173 requires that each underwriter or dealer participating in a registered offering must provide to each purchaser from it a copy of the final prospectus or, in lieu of the final prospectus, a notice that the sale was made pursuant to a registration statement, within two business days following the "completion of such sale." For purposes of Rule 173, "completion of such sale" means the date of settlement. The date of sale under Securities Act Section 2(a)(3) may be earlier than the date of the "completion of such sale" for purposes of Rule 173.
Rule 3-10 of Regulation S-X
In the context of an automatic shelf for an unspecified amount of securities, the determination of the principal amount of securities being registered for purposes of Rule 3-10(g)(1)(ii) of Reg S-X would be based on the principal amount of the guaranteed securities being sold in the particular offering (similar to a Form S-3 or Form F-3 unallocated shelf that includes subsidiary issuers or subsidiary guarantors).
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