Securities Act Reform

By: Cydney Posner

On June 29, just one day before the departure from the SEC of Chairman William Donaldson, the SEC voted to approve sweeping changes to the registration, communications and offering processes under the Securities Act of 1933.

The SEC views this reform effort as part of the evolutionary continuum that commenced in 1966, with recognition of the anomaly of the differences in the disclosure regimes under the Securities Act and the Securities Exchange Act of 1934, which recognition ultimately led to the adoption of the integrated disclosure system in 1982. The current reform effort was driven primarily by two factors: the fundamental impact of technological advances, together with the recent enhancement and acceleration of reporting under the Exchange Act. During the open meeting at which the proposal was adopted, Alan Beller, the director of Corp Fin, noted that the new rules are premised on a landscape so changed in terms of technology, communications and globalization as to be unrecognizable to the drafters of the original Securities Act. As the release recognizes, "computers, sophisticated financial software, electronic mail, teleconferencing, videoconferencing, web casting, and other technologies available today have replaced, to a large extent, paper, pencils, typewriters, adding machines, carbon paper, paper mail, travel, and face-to-face meetings relied on previously." Nevertheless, the SEC's past efforts to address some of these incursions of modernity, such as electronic road shows and other electronic communications, could induce a serious case of cognitive dissonance, and some of these interpretations are expressly withdrawn in the release. In addition, recent changes to the Exchange Act disclosure regime, mandated by the Sarbanes-Oxley Act of 2002, provide more complete information to the capital markets on a more current basis and impose a more rigorous process. These changes have helped to lay the groundwork for reform and continued integration of the Securities and Exchange Acts.

In 1998, the SEC issued a radical 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, languished without approval. This subsequent effort, while advertised as merely incremental, is nevertheless quite far-reaching in its scope. The new rules attempt to harmonize, simplify and, in some areas, liberalize, a vast terrain, with reforms addressing communications related to registered securities offerings, timeliness of delivery of information to investors and procedural restrictions in the offering and capital formation process. The new rules shake up, to a significant degree, the way issuers have historically been permitted to communicate with potential investors in registered offerings, affecting not only the substance of communications, but also the timing of and physical media that may be used to make communications. The changes will also have a substantial impact on the ease and speed with which issuers, particularly larger issuers, will be able to access the capital markets, reflecting a shift in the SEC's focus from review of each registration statement to an ongoing process of review of Exchange Act reports. In some instances, with liberalization comes increased responsibility, as issuers, underwriters and other offering participants will face greater exposure to potential liability in light of the expanded scope of permitted communications and application of modified liability timing standards designed to ensure protection of investors in the event of materially deficient disclosures. The new rules will become effective on December 1, 2005.

HIGHLIGHTS OF THE NEW RULES

The new rules:

• Establish four categories of issuers, including a new category of well-know seasoned issuers (WKSIs), based on size, reporting history and other characteristics, that, to varying degrees depending on category, may take advantage of relaxed rules regarding communications and registration.
• Liberalize communications related to offerings by
  • Substantially revising the historic "gun-jumping" restrictions by providing several safe harbors for communications prior to and during an offering, including a bright-line safe harbor for communications that are made at least 30 days before filing;
  • Allowing the use for many issuers at any time of a free-writing prospectus, a written offer that is not a statutory prospectus, subject to compliance with various conditions, including SEC filing;
  • Recognizing the pervasiveness of electronic communications, including creating a new "access equals delivery" principle, under which electronic filing with the SEC of a final prospectus equals delivery of that prospectus and excluding real-time live-audience web casts from the definition of written communication; and
  • Including many helpful cure provisions.
• Modernize the registration process by
  • Permitting automatic immediate effectiveness of shelf registrations for WKSIs on a pay-as-you-go basis for each takedown, creating in effect a camouflaged "company registration" process;
  • Codifying the information that may be omitted from a base prospectus in a shelf registration; '
  • Eliminating the limitation of the amount of securities that may be registered on a shelf and requiring instead that the shelf be updated every three years with a new registration statement;
  • Permitting immediate shelf takedowns;
  • Allowing seasoned issuers with a $75 million public float to identify selling security holders in prospectus supplements, so long as the securities to be sold are outstanding at the time of filing of the registration statement;
  • Treating each filing of a prospectus supplement as a new effective date for purposes of determining liability for issuers and underwriters and otherwise rationalizing certain aspects of the liability scheme (with potentially increased liability in some instances);
  • Adopting an "access equals delivery" rule for final prospectuses; and
  • Once again, including helpful cure provisions.

NEW CONCEPTS

The new rules provide new or revise existing definitions for a number of elementary terms, including "offer," "prospectus" and "written communication." The new rules also introduce two new concepts:

WKSIs

The first new concept establishes a new class of issuers, referred to as "well-known seasoned issuers," or "WKSIs" (rhymes with "pixies"), defined as an issuer that isrequired to file reports pursuant to Section 13(a) or Section 15(d) of the Exchange Act and that satisfies the following requirements as of the date on which its status as a WKSI is determined: :

• the issuer must satisfy the registrant requirements on Form S-3 or Form F-3 (which include the requirements that the issuer be current in its reporting obligations under the Exchange Act and timely in satisfying those obligations for the preceding 12 calendar months); and
• the issuer, as of a date within 60 days of the eligibility determination date, either:
  • has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates (i.e., "public float" as calculated for purposes of S-3 or F-3 eligibility) of at least $700 million; or
  • has issued in the last three years, at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in registered offerings for cash (not exchange) and will register only non-convertible securities (other than common equity) and permitted full and unconditional guarantees (by parent companies of their majority-owned subsidiaries) unless, at the determination date, the issuer is eligible to register a primary offering under Instruction I.B.1 of Form S-3 (i.e., it also has $75 million in public float); and
• neither the offering nor the issuer may be of a type that falls within the category of ineligible issuers or offerings.

In a change from the proposal, WKSI status will be determined approximately annually. The WKSI eligibility determination date for an issuer will be the latest of:

• the time of filing of its most recent shelf registration statement; or
• the time of its most recent 10(a)(3) amendment (by post-effective amendment, incorporated Exchange Act report or form of prospectus) to a shelf registration statement (or if a 10(a)(3) amendment has not been filed on a timely basis, the date on which the amendment is required); or
• in the event that the issuer has not filed a shelf registration statement or filed a 10(a)(3) amendment to a shelf for 16 months, the time of filing of the issuer’s most recent annual report on Form 10-K or Form 20-F (or if not timely filed, its due date).

These thresholds were selected because companies that exceed them were presumed to have substantial analyst and media coverage as well as interaction with institutional investors, which were perceived to provide the checks and balances necessary to enable loosening of regulatory restrictions. WKSIs are the class of issuer most benefited by the liberalized new rules, and the SEC has directed Corp Fin to monitor whether the WKSI thresholds should be changed in the future.

In addition to the new category of WKSIs, the SEC uses existing categories of issuers to distinguish among issuers and the latitude with which they may operate under the new rules. These categories include:

• seasoned issuers (S-3 or F-3 eligible to use Form to register primary offerings of securities under General Instruction I.B.1, i.e., issuers with $75 million of public float, or issuers registering securities in reliance on General Instruction I.B.2, I.B.5, or I.C. of Form S-3; i.e., offerings of nonconvertible investment-grade securities, asset-backed securities and certain majority-owned subsidiaries),
• unseasoned issuers (required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but not primary S-3 or F-3 eligible) and
• non-reporting issuers (issuers not required to file and issuers voluntarily filing Exchange Act reports).

The other new concept is that of the "free-writing prospectus," which consists of written communications, including electronic communications, that constitute an offer outside of the statutory prospectus, permitted after the registration statement is filed. WKSIs may use a free-writing prospectus whether or not a registration statement has been filed. Free-writing prospectuses would not be part of the registration statement and, therefore, not subject to liability under Section 11 of the Securities Act, but would be subject to liability under Section 12(a)(2) and the antifraud provisions. More on free-writing prospectuses below.

LIBERALIZATION OF OFFERING COMMUNICATIONS

Under the current rules, offering communications are subject to various "gun-jumping" restrictions depending on the period during which the communications occur, regardless of the accuracy of the communication. Before the registration statement is filed, all forms of offer are prohibited. In the "waiting period," after filing of the registration statement and before its effectiveness, oral offers are permitted but written offers (including by e-mail, Internet, radio and television) may be made only by a "statutory prospectus" that conforms to the requirements of Securities Act, typically the "preliminary prospectus" filed with the SEC. After effectiveness, offering participants must continue to use a statutory prospectus to make offers, but may also use additional written offering materials if accompanied or preceded by a final statutory prospectus. These rules were designed to make the statutorily mandated prospectus the primary means for investors to obtain information regarding a registered securities offering. With the advent of the Internet and other forms of electronic communications, these restrictions have become increasingly quaint and largely impracticable.

Written Communication (Rule 405)

As usual, a lot of the action is in the definitions. The SEC's starting point for reform is the definition of "written communication," in which the SEC attempts to "clarify" various categories of media and communications. A lot of serious parsing remains, however. Written communications are defined to comprise virtually all methods of communication other than oral communication and will include written, printed, broadcast (such as radio and TV, regardless of the means of transmission) and graphic communications, including almost all electronic communications. The definition would not cover oral communications, such as live telephone calls (whatever the medium by which they are carried, including the Internet), other direct oral communications and communications that are carried live and in real-time to live audiences (such as a road show) and do not originate in recorded form or otherwise as a graphic communication, again regardless of the means of transmission. (Electronic road shows that do not fall within the exception above would be written communications for purposes of the Securities Act.) Written communications will not include individual telephone voice mail messages from live telephone calls but will include broadly disseminated or "blast" voice mail messages, including those that originate in graphic form. The SEC intends by this definition to capture new technologies as they develop. All communications that fall outside the definition are oral communications, including for purposes of Section 12(a)(2).

Graphic communication (a subset of written communication) is now defined to include any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROM, email, postings on Internet web sites and computers, computer networks and other forms of computer data compilation. The release explains that a communication may fall outside the definition of graphic communication because it originates live, in real-time to a live audience (for example, a live business news program broadcast by traditional means or on cable), but the communication may be a TV or radio broadcast and, therefore, a written communication. On the other hand, a live, in real-time communication that is transmitted by graphic means to a live audience would be an oral communication.

To illustrate the application of these definitions, the SEC provides the following examples:

• a live telephone call is not a written communication;
• a live telephone call that is recorded by the recipient is not a written communication;
• e-mails, facsimiles and electronic postings on web sites, by their nature, originate in graphic form and, therefore, are graphic communications;
• a live, in-person road show to a live audience is not a written communication;
• a live, in real-time road show to a live audience that is transmitted graphically is not a graphic communication;
• a live, in real-time road show to a live audience that is transmitted to an "overflow room" is not a graphic communication;
• a web cast or video conference that originates live and in real-time at the time of transmission and is transmitted through video conferencing facilities or is web cast in real-time to a live audience is not a graphic communication;
• the ability of a member of the audience to record a web cast or video conference that is presented live and in real-time to a live audience would not affect the status of that web cast or video conference;
• a live telephone call or video or web cast conference that is recorded by or on behalf of the originating party and then transmitted, or is transmitted other than live and in real-time, will be a graphic communication and therefore a written communication;
• a live telephone call or video or web cast conference that is recorded by the recipient and then re-transmitted by the recipient is a graphic communication by the recipient when it is re-transmitted; and
• an interview with an issuer’s chief executive officer conducted live as part of a television program is a written communication regardless of how the television signal is transmitted (whether over the airwaves, or through cable, satellite or Internet) and regardless of how it is received by the recipient (whether a television set or a computer).

Overview of New Communications Scheme

The SEC intends the new communications scheme to recognize the value of ongoing communications and to avoid undue interference with routine communications. The new rules provide safe harbors for certain non-offering-related communications pre- and post-filing, provide a bright-line 30-day test for pre-offering communications, expand the types of permitted post-filing offering-related communications that would not be "prospectuses," and permit the use of (mainly) post-filing offers in the form of "free-writing prospectuses" without violating Section 5. The cumulative effect of the new gun-jumping rules is as follows:

• WKSIs will be permitted to engage, at any time, in all communications, including use at any time of a "free writing prospectus," subject to compliance with conditions (including, in some cases, filing with the SEC, as discussed below) (Rule 163).
• All reporting issuers, certain asset-backed issuers and non-reporting foreign private issuers will, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information (Rule 168).
• Non-reporting issuers will, at any time, be permitted to continue to publish factual business information that is regularly released and intended for use by persons other than in their capacities as investors or potential investors (Rule 169).
• Communications by issuers more than 30 days before filing a registration statement will be permitted without violating the gun-jumping provisions (i.e., will not be prohibited offers, so long as they do not reference a securities offering that is or will be the subject of a registration statement) (Rule 163A).
• After the filing of a registration statement, all eligible issuers and other offering participants will be permitted to use a "free-writing prospectus," subject to compliance with conditions. Issuers that are in bankruptcy or that have violated the anti-fraud provisions of the federal securities laws would be ineligible issuers (Rules 164 and 433).
• Changes to Rule 134 will allow issuers and offering participants to communicate a broader category of routine information that will be excluded from the definition of "prospectus."
• The rules also expand the exemptions for research reports used by brokers and dealers (Rules 137, 138 and 139).
• Conforming changes have been made to Reg FD that make some communications in connection with registered offerings subject to Reg FD.

The table below is the SEC's summary of its new scheme for permitted communications:

These more permissive new rules on communications are designed to ensure that the communicators remain responsible for the communications by maintaining appropriate liability standards. For example, all free-writing prospectuses have liability under the same provisions (12(a)(2), 17(a) and 10(b) and 10b-5)) as are currently applicable to oral offers and statutory prospectuses. Written communications that are not prospectuses will not be subject to disclosure liability applicable to prospectuses under 12(a)(2), but will be subject to liability under the anti-fraud provisions of the federal securities laws.

New Final Communications Rules

Ongoing Communications During an Offering

The new rules include two separate non-exclusive safe harbors from the gun-jumping provisions for continuing ongoing business communications. The SEC has long recognized that regularly released ordinary factual business communications are not offers of securities. The SEC confirms that the new safe harbors do not affect in any way the Securities Act analysis, including existing interpretive guidance, regarding ordinary course business communications that are not within the safe harbors, and whether these communications were in fact offers under Section 2(a)(3) would depend on the facts and circumstances. The safe harbors are "use" exceptions, are not exclusive and do not create a presumption that any communication that falls outside the safe harbor is an offer. Reliance on one of the safe harbors does not affect the availability of any other exemption or exclusion under the Securities Act, and attempted compliance with one of the safe harbors does not act as an exclusive election. Business development companies and registered investment companies would be ineligible to use the safe harbors for factual businss information and forward-looking information.

Safe Harbor for Regularly Released Factual Business and Forward-Looking Information – Reporting Issuers (Rule 168)

The first safe harbor would permit reporting issuers, including asset-backed issuers and certain non-reporting foreign private issuers, to continue publication or dissemination of factual business and forward-looking information that has been regularly released in the ordinary course by or on behalf of a reporting issuer. A preliminary note makes clear that the safe harbor addresses "use" and relates to a communication; therefore, repeating the information in an offering-related manner will not affect the ability to rely on the safe harbor for the protected communication.

Factual Business Information.  To encourage reporting issuers to continue to provide factual business information, the SEC has adopted new Rule 168, which provides a non-exclusive safe harbor exception from the definition of "prospectus" in Securities Act Section 2(a)(10). (Technically, because it is not a prospectus, it would not be subject to the prohibition in Section 5(b)(1) on the use of a prospectus that is not a statutory prospectus or the prohibition in Section 5(c) on pre-filing "offers"). Factual business information would be defined 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.  The SEC's views of the value of forward-looking information have morphed from a prohibition (resulting from concerns as to its potentially misleading effect) to encouragement that it be provided to, in some instances, mandating that it be provided. The SEC believes that it would not be beneficial to require reporting issuers to suspend their ordinary course communications of this information, usually intended to keep the market informed, because they are raising capital in a registered offering.

The new safe harbor exclusion from the definition of "prospectus" would apply to the release or dissemination (but not the content, which would still would still have to satisfy the conditions of Securities Act Section 27A if the issuer wished to rely on the statutory safe harbor) of the following forward-looking information if the release or dissemination satisfies the other conditions of the Rule:

• projections of the issuer’s revenues, income, earnings 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 products or services of the issuer;
• statements about the issuer’s future economic performance, including statements of the type contemplated by the MD&A requirements; and
• assumptions underlying or relating to any of the foregoing information.

Conditions of Safe Harbors

"By or on Behalf of" the Issuer.  One of the conditions of the safe harbors is that the information be released or disseminated by or on behalf of an issuer. This condition would be satisfied if the issuer, an agent or a representative of the issuer, other than an offering participant that is an underwriter or dealer, authorized or approved its use before its release. The safe harbor would not be available for information released in a manner intended to circumvent either the conditions to use or the permitted manner of use of the information.

Regularly Released Information.  Factual business or forward-looking information will be considered "regularly released" if the issuer has previously released the same type of information in the ordinary course of its business, releases the 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. The method of dissemination, frequency and regularity must be consistent with the issuer's past practice, and the issuer must have a track record of releasing the particular type of information released (e.g., release of new types of financial information or projections would probably not satisfy the condition). There is no bright line or minimum time period specified, however, and the SEC notes that one prior release or dissemination could establish this track record. The rule is intended to cover both scheduled release as well as unscheduled or episodic releases, so long as that type of communication has previously been provided in that manner, taking into account the nature of the event triggering the communication. In addition, using new technologies is not necessarily outside the rule, but will require consideration of whether the manner or form of release is still essentially consistent, taking into account whether the new technology makes a material difference in the breadth or reach of dissemination.

Non-Offering Related Information. Publication of information about an offering outside the registration statement would be limited to statements allowed under Rule 134, Rule 135 or other exemptions or safe harbors or contained in a permissible free-writing prospectus. The safe harbor also excludes information released as part of the offering activities in the registered offering. For example, the text of an Exchange Act report might be protected under the safe harbor when filed, but if it were then incorporated by reference into a registration statement, that subsequent use would not be protected. Similarly, a copy of a prior release may originally have been regularly released in accordance with the safe harbor (and would be protected for that use), but if provided to investors or potential investors as part of offering activities or disclosed at a road show, the offering-related use would not be protected. 

Safe Harbor for Regularly Released Factual Business Information – Non-Reporting Issuers (Rule 169)

A narrower non-exclusive safe harbor exclusion from the definition of prospectus is applicable to non-reporting issuers. A non-reporting issuer’s release or dissemination of regularly released ordinary course factual business information would be protected under this safe harbor (and would not violate the prohibition on pre-filing offers) only if it is intended for use by persons other than in their capacities as investors or potential investors, such as customers and suppliers. The fact that a customer also may be a potential investor would not affect the availability of the safe harbor. In addition, the "intended" use is critical to the analysis: a widely disseminated communication (such as a press release) intended for use by a non-investor audience and otherwise meeting the conditions of the safe harbor will not lose protection if it is available to or received by investors or potential investors.

Under the safe harbor, factual business communications would be defined as:

• factual information about the issuer, its business or financial developments or other aspects of its business; and
• advertisements of, or other information about, the issuer’s products or services.

Other Permitted Communications Prior to Filing a Registration Statement

To encourage the availability of information, the SEC has made an effort to provide issuers with greater certainty that the release of information, when the risk of conditioning the market is remote, would not be considered an impermissible offer under the Securities Act. .

30-Day Bright Line Exclusion From Prohibition on Offers Prior to Filing Registration Statement – All Issuers (Rule 163A)

For all issuers, there is a new bright-line time period, ending 30 days prior to filing a registration statement, during which issuers may communicate without risk of violating the gun-jumping provisions (although the communications are still subject to the anti-fraud provisions in the event of material disclosure deficiencies). This 30-day bright line non-exclusive exemption from the definition of offer (for purposes of Securities Act Section 5(c)) is subject to the following conditions:

• The communication may not refer to a securities offering that is or will be the subject of a registration statement;
• The communication must be made "by or on behalf of the issuer" (i.e., potential offering participants may not use the exemption); and
• The issuer must take reasonable steps within its control to prevent further distribution or publication of the information during the 30-day pre-filing period.

The 30-day bright-line exclusion would not be available for communications made in connection with offerings:

• by a blank check company;
• by a shell company; or
• of penny stock.

Permitted Pre-Filing Offers for WKSIs (Rule 163)

Under new Rule 163, WKSIs, and other speaking on their behalf, other than underwriters or dealers, may engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions. Although exempt from the gun-jumping provisions, these communications would still be considered offers and subject to liability standards applicable to offers and other anti-fraud provisions of the federal securities laws, as well as Reg FD. (The new "automatic shelf" registration process, described below, means that, for the most part, WKSIs, will always have a registration statement on file and, as a result, this provision isn't really as daring as it first appears.) A written offer made under the exemption would, however, be viewed as a "free-writing prospectus," requiring a legend and filing (unless previously filed or furnished), but only when and if a registration statement or amendment is then filed. It would also be subject to the same cure and record-retention provisions as those applicable to free-writing prospectuses used after a registration statement. The Rule also provides that filing is not required if it would not be required under Rule 433 regarding free-writing prospectuses, if the communication was a free-writing prospectus used after filing of the registration statement. Finally, the filing conditions of Rule 163 will be satisfied if the filing conditions of Rule 433 (other than timing of filing) are satisfied (making available the accommodation applicable to media publications)..

Relaxation of Restrictions on Written Offering-Related Communications

The new rules expand the amount and types of permitted written offering-related communications that may be made by offering participants under the gun-jumping provisions after a registration statement is filed. 

Rule 134 Amendments

Rule 134 provides a safe harbor from the gun-jumping provisions for public notices about an offering that are limited to specific identifying information. Rule 134 is not available until a statutory Section 10 prospectus (a preliminary prospectus, or in the case of shelf registration, a base prospectus) is available. .

Expansion of Permitted Information. Rule 134 has been amended to permit additional types of written communications during an offering that will not be considered prospectuses. Amended Rule 134 will:

• permit increased 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 account opening 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 the Rule; and
• expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned.

Changes to Required Information. Under amended Rule 134, some of the prior requirements have been eliminated, including the requirements to refer in the legend to state securities laws or to specify whether the financing is a new financing or refunding.

While the new "access equals delivery" concept does not apply to Rule 134, Rule 134(c)(1) is being amended to allow Rule 134 notices to state from whom, and include a URL where, a statutory prospectus may be obtained. The requirement in Rule 134 that, in some cases, the notice must be accompanied or preceded by a Section 10 written prospectus may be satisfied in an electronic notice by including an active hyperlink to such a prospectus. For purposes of Rule 134, including a URL address to the statutory prospectus that is not an active hyperlink in an electronic communication does not mean that the prospectus has been delivered.

Permissible Use of Free-Writing Prospectuses (Rule 433)

Overview. The new rules permit extensive use of a "free-writing prospectus," a written communication that constitutes an offer, including an electronic communication, outside the statutory prospectus. Under the new rules, a free-writing prospectus is a permitted prospectus for purposes of Securities Act Section 10(b) and, as such, could be used without violating Securities Act Section 5(b)(1). As a result, offering participants may generally use free-writing prospectuses in conjunction with most registered capital formation transactions, as long as specified conditions are satisfied, without violating the SEC's gun-jumping provisions.

The nature of the conditions to be satisfied and the times when a free-writing prospectus may be used vary with the nature of the issuer and the offering. For example, prior to filing a registration statement, only a WKSI would be able to use a free-writing prospectus in reliance on proposed Rule 163. After filing of a registration statement, any eligible issuer or offering participant may use a free-writing prospectus. Written offers after effectiveness that are accompanied or preceded by a Section 10(a) final prospectus would not be prospectuses and, therefore, would not be free-writing prospectuses.

Free-writing prospectuses prepared by an issuer or containing information provided by an issuer must be filed with the SEC, but are not part of the registration statement. Similarly, any broadly disseminated free-writing prospectus prepared by underwriters or other offering participants and any description of final terms must also be filed. Other underwriter free-writing prospectuses not used by the issuer would not need to be filed. The trade-off for this liberalized communication is that the communicator is responsible for the communication; regardless of whether a free-writing prospectus is filed, any person using it would be subject to prospectus liability under Section 12(a)(2) and liability under the anti-fraud provisions of the federal securities laws.

Definition of Free-Writing Prospectus. Except as otherwise specifically provided or required by the context, a "free-writing prospectus" is defined as 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);
• Not a preliminary or summary prospectus or prospectus subject to completion, in compliance with SEC rules;
• Not a defined type of asset-backed issuer communication; and
• Not a prospectus at all, under clause (a) of Section 2(a)(10), because, at or prior to delivery, a final prospectus meeting the requirements of Section 10(a) was sent or given.

For example, a media publication or television or radio broadcast that is based solely on information that is filed with the SEC or available on an unrestricted basis, where there is no other involvement or participation by an offering participant, has been interpreted not to constitute an offer. As a result, a newspaper article based on a filed registration statement or free-writing prospectus, a filed or furnished press release or filed issuer information, so long as the issuer and other offering participants have not commented or otherwise been involved, would not be categorized as an offer under the gun-jumping provisions. In addition, communications that are not considered offers or prospectuses for purposes of the gun-jumping provisions, including Rule 134 notices, Rule 135 communications, regularly released factual business information, forward-looking information and research reports falling within the new safe harbors, would not be free-writing prospectuses.

Permitted Use of a Free-Writing Prospectus After the Filing of a Registration Statement Under Rule 433 (Rule 164).  Rule 164 permits the use of a free-writing prospectus ( i.e., the prospectus would be permitted under Section 10(b) for purposes of Section 5(b)(1)) where an eligible issuer has filed a registration statement and the conditions of Rules 164 and 433 are satisfied. 

Ineligible Issuers.  Offering participants may use free-writing prospectuses only if the issuer is eligible, except that even ineligible issuers, other than blank check, penny stock and shell companies, may use free-writing prospectuses that only describe the terms of the securities and the offering..

Ineligible issuers are issuers that, as of the determination date and unless ineligibility is waived by Corp Fin:

• are reporting issuers not current in their Exchange Act reports and other material required to be filed during the prior 12 months (note that they need not be timely, just current), other than excepted reports on Form 8-K (cf. the WKSI definition, which does not contain this exception from the currency requirement for 8-Ks);
• are asset-backed issuers where the depositor is not current in its Exchange Act filings;
• are (or were, or whose predecessors were, in the past three years)
  • blank check issuers,
  • shell companies, or
  • penny stock issuers;
  • are limited partnerships offering and selling their securities other than in a firm commitment underwriting;
  • have filed for bankruptcy or insolvency during the past three years;
  • 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 pending Section 8 or 8A proceedings; or
  • have (or whose subsidiaries have, during the time they were subsidiaries of the issuer) been convicted of any felony or misdemeanor described in certain provisions of the Exchange Act, have been found to have violated the anti-fraud provisions of the federal securities laws or have been made the subject of a judicial or administrative decree or order (including a settled claim or order, even where there is no admission of violation) prohibiting certain conduct or activities (generally, prohibiting future violations) regarding the anti-fraud provisions of the federal securities laws during the past three years.

Generally, eligibility is determined at the commencement of an offering and will not result in a change of status during an offering. Eligibility determinations will be made:

• if the offering is registered pursuant to Rule 415, at the earliest time after the filing of the registration statement at which the issuer, or in the case of an underwritten offering, the issuer or another offering participant, makes a bona fide offer, including through the use of a free-writing prospectus, in the offering; or
• otherwise at the time of filing of a registration statement covering the offering.

Conditions to Use of a Free-writing Prospectus.  Conditions to use of a free-writing prospectus after filing of a registration statement relate to delivery or availability of the statutory prospectus, contents of the free-writing prospectus, legends, filing and record retention.

Prospectus Delivery and/or Availability. Use of a free-writing prospectus by an offering participant is conditioned upon availability (and in some cases, delivery) of the issuer’s most recently filed Section 10 prospectus (other than a summary prospectus). Base prospectuses, preliminary prospectuses and prospectuses subject to completion that are permitted under SEC rules are statutory prospectuses that satisfy the requirements of Section 10.

Non-Reporting Issuers and Unseasoned Issuers.  For offerings by non-reporting or unseasoned issuers, the registration statement for the offering must be on file before offering participants may use free-writing prospectuses. Moreover, use of the free-writing prospectus is conditioned upon its being accompanied or preceded by the most recent statutory prospectus that satisfies the requirements of Section 10 if:

• the free-writing prospectus was prepared by or on behalf of, or used or referred to by, an issuer or other offering participant;
• consideration was or will be given by the issuer or an offering participant for the dissemination (in any format) of any free-writing prospectus (including any published article, publication or advertisement), or
• Securities Act Section 17(b) required disclosure that consideration was or would be given by the issuer or an offering participant for any activity (such as communication of a description of a security) described therein,

For example, the most recent statutory prospectus must precede or accompany the free-writing prospectus in the following situations:

• a direct written communication by an issuer or offering participant;
• a written communication or broadcast prepared by or on behalf of, or used or referred to by, an issuer or offering participant;
• the dissemination (in any format including publication or broadcast) of any free-writing prospectus (including any published article, publication or advertisement) for which consideration was or will be given by the issuer or an offering participant or Section 17(b) requires disclosure of payment; or
• a paid published or broadcast advertisement by an issuer or offering participant.

Seasoned Issuers and WKSIs.  For eligible seasoned issuers and WKSIs, a free-writing prospectus may be used after the filing of a registration statement containing a statutory prospectus. For shelf offerings, this preliminary prospectus could be a base prospectus. There is no "actual delivery" requirement. Users of the free-writing prospectus are required instead to add a generic legend indicating where the recipient can access or hyperlink to the preliminary or base prospectus by providing the URL for the SEC's website. The legend must include a toll-free number and, optionally, an email address where the prospectus may be requested. Under Rule 163, WKSIs may use free-writing prospectuses at any time before or after the filing of a registration statement. As above, written offers accompanied or preceded by a final prospectus would not be prospectuses.

Information in a Free-Writing Prospectus.  A free-writing prospectus does not have to contain any particular information, other than a legend, and may contain information that goes beyond the substance contained in the registration statement, so long as it satisfies the requirements of Rule 433. However, the information in the free-writing prospectus must not conflict with the information in the registration statement, including Exchange Act reports incorporated by reference into the registration statement, although it may be different from or additional or supplemental to information in the registration statement. Free-writing prospectuses may incorporate or refer investors to other information, so that investors will be advised to consider the information presented in the free-writing prospectus in context. Because it is a Section 10(b) prospectus, the SEC will have continuing oversight and enforcement authority, including the ability to halt the use of any materially false or misleading free-writing prospectus and to request copies to monitor usage.

Amendment to Rule 408. Rule 408 has been amended to make clear that a prospectus filed as part of a registration statement is not materially deficient simply because it does not contain information that is contained in a free-writing prospectus.

Disclaimers. Disclaimers of responsibility or liability that would be impermissible in a statutory prospectus or registration statement also would be impermissible in free-writing prospectuses. Impermissible legends or disclaimers can taint the materials, causing them to lose their status as permitted free-writing prospectuses. Examples include:

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

• indicates where a prospectus is available;
• recommends that potential investors read the prospectus, including Exchange Act documents incorporated by reference;
• advises investors that they can obtain the registration statement, including the prospectus and any incorporated Exchange Act documents, for free through the SEC's web site at www.sec.gov, and that they may request the prospectus from the issuer, any underwriter or dealer by calling a toll-free number; and
• indicates that the free-writing prospectus relates to a registered public offering.    

Filing Conditions.  A free-writing prospectus must be filed with the SEC in the following circumstances, unless otherwise exempt:

• where a free-writing prospectus is prepared by or on behalf of, or used or referred to by, the issuer (referred to as an "issuer free-writing prospectus"), the issuer must file that free-writing prospectus;
• where a free-writing prospectus, prepared by or on behalf of, or used by, an offering participant other than the issuer contains material information about the issuer or its securities that has been provided by or on behalf of the issuer (referred to as "issuer information"), but is not already contained or incorporated in the prospectus or a filed free-writing prospectus, the issuer must file that information;
• where a free-writing prospectus is used or referred to by an offering participant other than the issuer and is distributed, by or on behalf of such offering participant, in a manner reasonably designed to lead to its broad unrestricted dissemination, the offering participant must file the free-writing prospectus; and
• where a free-writing prospectus or portion thereof prepared by or on behalf of the issuer or other offering participant contains only a description of the final terms of the issuer’s securities in the offering, the issuer must file the free-writing prospectus or portion thereof after the final terms have been established for all classes of the offering within two days after the later of the date the terms became final or the date of first use.

• an underwriter includes a free-writing prospectus on an unrestricted web site or hyperlinks from an unrestricted web site to information that would be a free-writing prospectus; or
• an underwriter sends out a press release regarding the issuer or the offering that would be a free-writing prospectus.

The issuer must file a free-writing prospectus that includes a term sheet if it reflects the final terms of the securities being offered, regardless of who prepared it. Preliminary term sheets would not be subject to filing. All such written offering materials, whether or not filed, would be free-writing prospectuses.

More Cures--Immaterial or Unintentional Failures to File. Rule 164 provides the ability to cure any immaterial or unintentional failure to file or delay in filing the free-writing prospectus, without losing the ability to rely on the Rule. This cure provision would be available if a good faith and reasonable effort were made to comply with the filing condition, and the free-writing prospectus were filed as soon as practicable after the discovery of the failure to file. The cure provision is designed to avoid potential chilling of communications that could result due to uncertainty over possible Section 5 violations, a concern raised in response to the aircraft carrier proposal.

Record Retention Condition. Issuers and offering participants will be required, under Rule 433, to retain, for three years from the date of the initial bona fide offering of the securities in question, any free-writing prospectuses they have used that have not been filed with the SEC. Solely for purposes of Rule 164, but not any other record retention obligation, an immaterial or unintentional failure to retain a free-writing prospectus will not result in a violation of Section 5(b)(1) or the loss of the ability to rely on the exemption so long as a good faith and reasonable effort was made to comply with the record retention condition.

Road Shows.  Under the proposed rules, all electronic road shows would have been written offers and prospectuses, but also would have been permitted, subject to conditions, as free-writing prospectuses. That position was refined in the final rules. Under the revised definition of "graphic communication," a live, in real-time road show to a live audience (including simultaneously transmitted slides or other visual aids) that is transmitted graphically will not be a graphic communication and, therefore, not a written communication and, therefore, not a free-writing prospectus. It will still, however, be subject to Section 12(a)(2) liability and the other liability provisions of the federal securities laws. Road shows that do not originate live, in real-time to a live audience and are graphically transmitted are electronic road shows that will be considered written communications and, therefore, free writing prospectuses, permitted if in compliance with the rules. In-person road shows, including overflow rooms, will continue to be considered oral communications. The confusing electronic road show no-action letters for registered public offerings are being withdrawn as of the effective date of Rule 433, and issuers and underwriters will be able to make road shows available to all investors if desired.

For road shows that are free-writing prospectuses, the filing conditions of Rule 433 do not apply, except that, with respect to an IPO of common equity or convertible equity securities by a non-reporting issuer, a road show that is a free-writing prospectus must be filed unless the issuer makes at least one version of a "bona fide electronic road show" readily available without restriction electronically to any potential investor. If there is more than one "written" version, the unrestricted road show must be available no later than the other versions. For purposes of Rule 433, a "bona fide electronic road show" is a road show that is a written communication transmitted by graphic means that contains a presentation by management and, if the issuer is using or conducting more than one road show that is a written communication, includes discussion of the same general areas of information regarding the issuer, management and the securities being offered as the other "written" road shows. The bona fide version need not be identical to the others or address all of the same subjects, provide the same information or even provide an opportunity for Q&A just because the others provide one.

In another change from the proposal, the SEC has eliminated the specific obligation to file any material issuer information provided at an electronic road show. Communications, such as slides and other visual aids, transmitted simultaneously with a road show, where the communications are transmitted in a manner designed to make them available only as part of the road show and not separately, will be deemed to be part of the road show and treated in the same manner as the road show. (For e.g., if the road show is live and not a written communication, the visual aids will likewise not be a written communication and not required to be filed. Otherwise, a graphic or other written communication, provided separately or in a separate file designed to be available to be copied or downloaded separately, will be treated as a written communication and, if an offer, will be a free-writing prospectus.)

Treatment of Communications on Web Sites and Other Electronics Issues.  The new rules allow everyone to take greater advantage of the Internet. Rule 433 makes clear that an offer of an issuer’s securities that is contained on an issuer’s web site or hyperlinked from the issuer's web site to a third-party web site is considered a written offer of those securities made by the issuer and, unless otherwise exempt, would be a free-writing prospectus of the issuer, subject to the requirements of Rule 433. Hyperlinked information is considered part of the original hyperlinking written communication. For example, a research report that is not an offer under Rule 439 could become a free-writing prospectus of the issuer if hyperlinked from the issuer's website. In addition, an offer contained on the web site of an offering participant or on the web site of another person hyperlinked from the web site of an offering participant could be a free-writing prospectus of that offering participant.

Historical Information on an Issuer Web Site. Rule 433 addresses outstanding concerns about whether historical information that remains on an issuer's web site and is accessed at a later time would be considered "republished" at that later date, with associated securities law liability. The SEC's position is that historical information that is not an offer, such as regularly released factual business information, would not become an offer, even if accessed at a later time, unless it was updated, used or referred to (by hyperlink or otherwise) in connection with the offering.

In addition, Rule 433(e)(2), provides that historical information will not be considered a current offer of the issuer’s securities and, therefore, will not be a free-writing prospectus, if that historical information is separately identified as such and located in a separate section of the issuer’s web site containing historical information (i.e., "archived"). That historical information will become a current offer if it is incorporated by reference into or otherwise included in an offering prospectus or otherwise used or referred to in connection with the offering. The release suggests that another approach to previously published historical information, depending on the particular facts and circumstances. may be to date it or otherwise identify it as historical, so long as the information is not referred to in connection with the offering activities.

Media Publications.  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 the media and where the media publication is an offer by the issuer or other offering participant, then the media publication would be a free-writing prospectus of the issuer or offering participant. The SEC notes in particular that, where there is no other involvement of an issuer or other offering participant, media publications based on information filed with the SEC or available on an unrestricted basis have not generally been viewed as offers of the issuer or other offering participants. Therefore, unless offering participants are directly communicating or otherwise involved with the media, offering participants will not need to monitor media publications, according to the SEC. The treatment of the communication will depend upon whether the issuer or other offering participant prepared or paid for the publication or broadcast.

Prospectus Delivery or Availability--Prepared or Paid For by Issuer or Offering Participant. If an issuer or offering participant prepared, paid or gave consideration for, a published article, broadcast or advertisement, the issuer or other offering participant will have to satisfy the conditions for the use of a free-writing prospectus at the time of the publication or broadcast. For example, in the case of a non-reporting or unseasoned issuer, a statutory prospectus will have to precede or accompany the communication. As a result. in offerings by non-reporting and unseasoned issuers, issuers and offering participants will not be able to prepare or pay for published or broadcast written advertisements, "infomercials" or broadcast spots about the issuer, its securities or the offering that include information beyond that permitted by Rule 134. Seasoned issuers that are not WKSIs and offering participants will have to comply with applicable requirements, such as having the most recent statutory prospectus on file and filing the free-writing prospectus, if required.

Prospectus Delivery or Availability--Unaffiliated Media. Where the free-writing prospectus is prepared and published by media that are unaffiliated with and not paid by the issuer or offering participants, the free-writing prospectus could be published without violating the gun-jumping provisions, even where the statutory prospectus does not precede or accompany the media communication, although a filed registration statement and availability of a statutory prospectus would be conditions, except for WKSIs. Therefore, although an interview or other media publication or broadcast where an issuer or offering participant participates (but does not prepare or pay for the event) could otherwise be a free-writing prospectus, its use is not conditioned on prior or simultaneous delivery of the statutory prospectus. For example, unlike today, an underwriter or issuer would be permitted to invite the press to a live road show or an electronic road show, but an article including information obtained at that road show would be a free-writing prospectus of the issuer or underwriter and subject to the rules; however, a publication based solely on an unrestricted electronic road show may not be an offer if there were no involvement by the issuer or an offering participant. As another example, if a chief executive of a non-reporting issuer gave an interview to a financial news magazine without payment to the magazine for the article, the publication of the article after the filing of the registration statement would be a free-writing prospectus of the issuer that would have to be filed by the issuer after publication. In that case, there would be no requirement that a statutory prospectus precede or accompany the article at the time of the publication.

Filing. A free-writing prospectus authorized or approved by or on behalf of the issuer or an offering participant that is prepared and published by unaffiliated media without payment by the issuer or offering participants must be filed by the issuer or offering participant within four business days after they become aware of the article or first broadcast. Persons in the media would have no filing or other obligations under these provisions. Under Rule 433, issuers and offering participants may file:

• the media publication;
• all of the information provided to the media in lieu of the publication; or
• a transcript of the interview or similar materials that the issuer or other offering participant provided to the media, so long as all the information provided is filed.

Liability

Filed Free-Writing Prospectus Not Part of Registration Statement. A free-writing prospectus used after a registration statement is filed that complies with Rule 433 will be a Section 10(b) prospectus and will need to identify the registration statement to which it relates. It will not, however, be filed as part of the registration statement (unless the issuer elects otherwise), and will not be subject to Section 11 liability, but will be subject to liability under Section 12(a)(2) and the anti-fraud provisions of the federal securities laws.

Cross-Liability (Rule 159A). Many commenters expressed concerns about cross-liability for free-writing prospectuses. Rule 159A is intended to clarify when an offering participant, other than the issuer, is considered to offer and sell securities "by means of" a free-writing prospectus. Under Rule 159A, a person will not be considered to offer or sell securities by means of a free-writing prospectus solely because another person has used, referred to or filed the free-writing prospectus. More specifically, an offering participant other than the issuer will not be considered to offer or sell securities to a person "by means of" a free-writing prospectus unless:

• the offering participant used or referred to the free-writing prospectus in offering or selling the securities to that person;
• the offering participant offered or sold the securities to that person and participated in planning for the use of that free-writing prospectus by other offering participants and such free-writing prospectus was used or referred to in offering or selling securities to that person by one or more of such other offering participants (not including the typical inter-syndicate arrangement providing for sales out of the syndicate "pot," unless the arrangement contemplates use of free-writing prospectuses in the manner just described); or
• under the conditions for use of the free-writing prospectus in Rule 433, the offering participant is required to file the free-writing prospectus (although the status of an issuer as a seller under a free-writing prospectus is not addressed by this Rule).

Currently, Reg FD excludes from its operation any disclosure made in connection with a securities offering under the Securities Act, whether oral or written, other than certain offerings under Rule 415. Under the amendments, in light of the expansion of the scope of permissible communications, Reg FD will now be even more confusing than in the past; it will now be applicable to certain types of communications made in connection with certain types of registered offerings. As amended, Reg FD will now be applicable to communications in connection with registered offerings except for the communications specified in the list below

• 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,
• 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 Rule 135;
• a communication permitted by Rule 134; and
• an oral communication made in connection with the registered offering after filing of the registration statement for the offering.

Reg FD has always applied to certain shelf offerings, including shelves for secondary sales by selling stockholders. Reg FD is now being amended to clarify that, as to shelf offerings by selling stockholders under Rule 415(a)(1)(i), where the registered offering also includes a registered primary component, whether or not underwritten, for capital formation purposes, Reg FD does not apply, unless the issuer’s offering is included for the purpose of evading the rule.

Use of Research Reports (Rules 137, 138 and 139)

Rules 137, 138 and 139 provide safe harbors from the gun-jumping provisions for brokers and dealers publishing research reports around the time of an offering. These rules are being amended to allow incrementally greater dissemination. Issuers cannot use these safe harbors, and a hyperlink on an issuer’s web site during its registered offering to a research report could raise concerns that is has adopted the contents of the reports, making them free-writing prospectuses.

The new research rules will permit the distribution of independent research provided the distribution satisfies the conditions of the rules. For example, independent research that is prepared by an entity not participating in an offering but paid for by a participating broker or dealer will not satisfy the requirements of Rule 137 because it is distributed by an offering participant. A research report constituting an offer and not falling within a safe harbor will be considered a free-writing prospectus.

Definition of Research Report. A "research report" is defined as a written communication, as defined in Rule 405, that includes information, opinions or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision. This definition is intended to encompass all types of research reports, whether issuer-specific or industry research separately identifying the issuer. Because the safe harbors do not apply to oral communications, whether a particular oral communication by an offering participant is an offer will continue to depend upon the facts and circumstances.

Rule 137. Rule 137 provides that brokers or dealers will not be considered to be engaged in a distribution of an issuer’s securities and would therefore not be underwriters in the offering if they:

• are not participating in the registered offering of the issuer’s securities;
• have not received compensation from the issuer, its affiliates or participants in the securities distribution, among others, in connection with the research report; and
• publish or distribute the research report in the regular course of business.

Rule 138. Rule 138 permits a broker or dealer participating in a distribution of common stock and similar securities to publish or distribute research that is confined to the same issuer’s fixed income securities and vice versa (i.e., the offering is of fixed income securities and the report is on common stock), if it publishes or distributes that research in the regular course of its business. Previously, the issuer was required to be S-3 eligible. The Rule has been amended to expand the categories of eligible issuers to cover all reporting issuers that are current in their periodic Exchange Act reports and to certain foreign private issuers. Previously, Rule 138 required that the broker or dealer publish or distribute research in the regular course of business, but did not contain a condition that the research reports relate to the same types of securities. The new condition does not mean, however, that the broker or dealer must have a history of publishing research reports about the particular issuer or its securities.

Rule 139. Prior Rule 139 permitted a broker or dealer participating in a distribution of securities of a seasoned issuer or of certain non-reporting foreign private issuers to publish research concerning the issuer or any class of its securities, if, among other things, that research was in a publication distributed with reasonable regularity in the normal course of its business. Rule 139 also provided a safe harbor for industry reports covering smaller seasoned issuers, if the broker or dealer complied with restrictions on the nature of the publication and on the opinion or recommendation expressed in that publication.

The amendments to Rule 139 allow reports about a specific issuer that is current in its Exchange Act periodic reports and

• at the later of the time of filing its most recent
  • registration statement on Form S-3 or F-3 or
  • 10(a)(3) amendment to such registration statement
• is eligible to register a primary offering of securities on Forms S-3 or F-3, based on the $75 million minimum public float requirement; or
• at the time of reliance on the Rule, the issuer’s registration statement covers a primary offering of non-convertible investment-grade securities (General Instruction I.B.2).

Industry reports under Rule 139 can cover reporting issuers and certain non-reporting foreign private issuers. The safe harbor is not available if the issuer is or, during the last three years it or any of its predecessors was, a blank check, penny stock or shell company (other than a business combination-related shell company). The amendments remove the prohibition on the report's making a more favorable recommendation than the one it made in the last publication. The research report need not include any prior recommendations regarding the issuer or its securities, but it must contain similar types of information about the issuer or its securities as contained in prior reports. If projections are included, they must be provided for substantially all the issuers listed in the comprehensive list of securities contained in the report. Changes were also made to the rules regarding asset-backed issuers.

The new amendments also provide that research reports satisfying Rules 138 and 139 will not be considered offers or general solicitation or general advertising in connection with offerings relying on Rule 144A, nor will they constitute directed selling efforts or be inconsistent with the offshore transaction requirements of Reg S.

Finally, the amendments codify a staff position that the publication or distribution of research under Rules 138 and 139 is permitted in connection with a transaction under the proxy rules and would constitute a solicitation to which rules 14a-3 through 14a-15 do not apply (with the exception of Rule 14a-9, which would apply).

LIABILITY ISSUES

Information Conveyed by the Time of Sale

In the final release, through interpretive guidance and a new rule, the SEC attempts to address the anomalies arising out of the fact that the current Securities Act framework permits a final prospectus to become available after the purchaser has already committed to buy the security, that is, after the date of sale. The final release confirms the new interpretation (contained in the proposing release) regarding the antifraud provisions: under Sections 12(a)(2) and 17(a)(2), the existence of material misstatements and omissions will be assessed against the information available at the time the investor makes the investment decision.

The SEC interprets "Section 12(a)(2) and Section 17(a)(2) as meaning that, for purposes of assessing whether at the time of sale (including a contract of sale) a prospectus or oral communication or statement includes or represents a material misstatement or omits to state a material fact necessary in order to make the prospectus, oral communication, or statement, in light of the circumstances under which it was made, not misleading, information conveyed to the investor only after the time of sale (including a contract of sale) should not be taken into account. For purposes of Section 12(a)(2) and Section 17(a)(2), whether or not information has been conveyed to an investor at or prior to the time of the contract of sale currently is a facts and circumstances determination, and our actions today do not affect that determination. Such information could include information in the issuer's registration statement and prospectuses for the offering in question, the issuer's Exchange Act reports incorporated by reference therein or information otherwise disseminated by means reasonably designed to convey such information to investors. Such information also could include information directly communicated to investors (including, under the rules we are adopting today, through the use of free writing prospectuses)....Under our interpretation, the liability determination under Section 12(a)(2) or

Section 17(a)(2) as to an oral communication, prospectus, or statement, as the case may be, does not take into account information conveyed to a purchaser only after the time of sale (including the contract of sale), including information contained in any final prospectus, prospectus supplement, or Exchange Act filing that is filed or delivered subsequent to the time of sale (including the contract of sale) where the information is not otherwise conveyed at or prior to that time." New Rule 159 is designed to have the same effect as the interpretation.

In response to comments, the SEC makes clear that liability for omissions under Section 12(a)(2) and Section 17(a)(2) is not based on the mere omission of required or line-item prospectus information or other material information, but on material omission that render the information conveyed misleading, under the circumstances in which the communication in question is made.

With respect to determination of the time of sale, the SEC believes that "one appropriate time" to assess whether a purchaser has a claim under Section 12(a)(2), or whether there has been a violation of Section 17(a)(2), is the time of the contract of sale of the securities. The SEC notes that courts have held consistently that the date of a sale is the date of contractual commitment, not the date that a confirmation is sent or received or payment is made. The SEC also notes that under its interpretation, the time of contract of sale can be the time the purchaser either enters into the contract (including by virtue of acceptance by the seller of an offer to purchase) or completes the sale. The SEC indicates that, although it is not aware of significant conflicts between state contract law and federal law, it acknowledges that a contract could be formed at an earlier point under federal than state law. Federal law also governs any waiver under the federal securities laws, and "conditional contracts that bind the purchaser at an earlier date but provide that no contract of sale occurs until the final prospectus is provided would not be consistent with the definition of sale under the Securities Act nor the anti-waiver provisions of Securities Act Section 14."

In the event that the sellers need to convey additional or changed information after the time of the contract of sale, the SEC states they may terminate the old contract by agreement with the purchaser and enter into a new contract of sale based on the new information, and rights to damages with respect to the original contract of sale would terminate. Commenters raised questions about how this procedure would operate in light of the anti-waiver provisions. In the SEC's view, the procedure must be the "substantive equivalent of the termination by mutual agreement of the prior contract of sale and the entering into a new contract of sale." The procedure, which would be tested under a facts-and-circumstances analysis, would "conflict with federal law" unless the investor is provided with:

• adequate disclosure of the contractual arrangement;
• adequate disclosure of its rights under the existing contract at the time termination is sought;
• adequate disclosure of the new information that the seller seeks to convey; and
• a meaningful ability to elect to terminate or not terminate the prior contract and to elect to enter into or not enter into the new contract.

• the manner and prominence of the disclosure of the contractual arrangements and the investor’s rights under the old contract. Insufficient disclosure may not provide adequate notice and thus may be viewed as an unacceptable anticipatory waiver.
• the process by which the new or changed material information will be conveyed to the purchaser, including whether the new information has been identified as new or changed or is otherwise sufficiently prominent.
• the method by which the purchaser is required to make or communicate its decisions-- the purchaser must knowingly terminate the prior contract and knowingly enter into the new contract. Although an affirmative communication is not necessarily required, the method chosen should give the purchaser a meaningful ability to make its contractual decisions in light of the new or changed material information.

• any contractual provision to the effect that the seller is deemed to have communicated information to the purchaser would be a violation of the anti-waiver provisions of the federal securities laws; and
• a non-conditional contract that moves the time of sale forward to a different time would effectively be a waiver of substantive rights and a violation of the anti-waiver provisions.

Rule 412 has been revised to provide that information in a registration statement or prospectus may be modified or superseded regardless of whether the new information is contained in an Exchange Act report, prospectus supplement or prospectus that is part of or included in a registration statement. New Rule 430B provides that subsequently provided information deemed part of and included in or incorporated by reference into a registration statement or prospectus that is part of the registration statement would not modify or supersede any information conveyed to an investor at an earlier time of sale (including the time of the contract of sale) for purposes of determining the information conveyed to an investor at or prior to that time. This concept has also been included in issuer undertakings under Item 512 of Reg S-K.

Relationship of Section 12(a)(2) and Section 17(a)(2) Interpretation and Rule 159 to Section 11 Liability

Information contained in a prospectus or prospectus supplement that is part of a registration statement that is filed after the time of the contract of sale will be part of the registration statement for purposes of liability under Section 11 at the time of effectiveness, which may be at or before the time of the contract of sale. Investors rights are judged at different points for purposes of these different rules. Information that is deemed to be part of the registration statement as of the time of the contract of sale for shelf takedowns or as of effectiveness under Rule 430A, will not, under the SEC's interpretation or Rule 159, be taken into account under Section 12(a)(2) or Section 17(a)(2), unless the information is conveyed to an investor at or prior to the time of sale (including the contract of sale). Similarly, an investor’s rights under Section 11 will not be affected by information conveyed to an investor at or prior to the time of the contract of sale that is not included in or incorporated by reference into the registration statement at the time of effectiveness. The class of investors that may have a claim under Section 11 and Section 12(a)(2) may thus be different. As noted above, a free-writing prospectus that is not part of a registration statement will not be subject to Section 11 liability, although it will be subject to Section 12(a)(2) and Section 17(a)(2) liability.

Issuer as Seller

The SEC has adopted a new rule to clarify any confusion as to whether issuers may be held liable under Section 12(a)(2) to purchasers in the initial distribution of securities even though the sale may first be made to the underwriters. The new rule provides that, under Section 12(a)(2), an issuer in a primary offering of securities, regardless of the form of the underwriting arrangement, will be a seller and will be considered to offer or sell the securities to a purchaser in the initial distribution of the securities as to any of the following communications:

• any preliminary prospectus or prospectus of the issuer relating to the offering required to be filed pursuant to Rule 424;
• any free-writing prospectus relating to the offering prepared by or on behalf of or used or referred to by the issuer;
• the portion of any other free-writing prospectus relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and
• any other communication that is an offer in the offering made by the issuer to such purchaser.

Due Diligence

In the proposing release, the SEC had requested comment regarding whether any changes should be made to the concept of "reasonable investigation" under Rule 176, but has determined not to make any changes. However, the SEC did confirm that Section 11 requires a more diligent investigation that Section 12(a)(2) and that diligence practices viewed favorably under Section 11 would also be viewed favorably under Section 12(a)(2).

SECURITIES ACT REGISTRATION AMENDMENTS

New changes to the registration procedures include:

• Automatic shelf registration process for WKSIs;
• Clarification as to timing of information that must be included in shelf registration statements;
• Clarification of the Securities Act liability treatment of information provided in a prospectus supplement and Exchange Act reports incorporated by reference;
• Modification of the timing of effectiveness of shelf registration statements applicable to issuers in certain cases; and
• Some modifications relating to non-shelf offerings.

Procedural Changes Regarding Shelf Registration Statements

Information in a Prospectus (Rules 430B and 430C). New rule 430B, which codifies existing practice to a large extent, is a shelf offering corollary to Rule 430A that describes the type of information that primary shelf-eligible and WKSIs (but not other issuers) may omit from a base prospectus in a Rule 415 offering and include instead in a prospectus supplement, Exchange Act report incorporated by reference or a post-effective amendment. Rule 430B covers the following types of offerings:

• automatic shelf offerings by WKSIs;]
• immediate, delayed and continuous primary offerings by primary shelf-eligible issuers (Rule 415(a)(1)(x)), including certain asset-backed issuers;
• secondary offerings by certain primary shelf-eligible issuers, including for the purpose of adding information regarding the identities of and amounts of securities to be sold by selling security holders; and
• offerings of mortgage-backed securities (Rule 415(a)(1)(vii)).

Although, under Rule 430B, the base prospectus must comply with the applicable form requirements, registrants may use, as permitted prospectuses, base prospectuses that omit information that is not known or reasonably available, under Rules 409 and 430B, The base prospectus still must include, for other than automatic shelf registration statements, general descriptions of the types of securities and possible plans of distribution.

Rule 430B expands the amount of information that may be omitted from the base prospectus and, to satisfy the Section 10(a) requirements, added later in a prospectus supplement, through incorporation of an Exchange Act filing identified in a prospectus supplement or by post-effective amendment. Essentially, amendments to Forms S-3 and F-3 will permit all information required in the prospectus about the issuer and its securities to be incorporated by reference from Exchange Act reports or included in a supplement, including, for e.g., material changes to the plan of distribution (which now requires a post-effective amendment). If omitted information about an offering, such as the terms of the offering, the securities, the plan of distribution or the selling security holders, is incorporated from an Exchange Act report, Rule 430B requires that a prospectus supplement be prepared and filed pursuant to Rule 424 to disclose the Exchange Act report containing the information.

Rule 430B and amendments to Form S-3 and Form F-3 will now permit eligible seasoned issuers to add the identities of the selling security holders and all information about them required by Item 507 of Reg S-K to the resale registration statement after effectiveness by post-effective amendment, prospectus supplement or incorporated Exchange Act report (with identifying supplement). This accommodation is available only for automatic shelf registrations or if all of the following are satisfied:

• the resale registration statement identifies the initial offering transaction in which the securities or securities convertible into such securities, were sold (but not necessarily any subsequent resale transactions);
• the initial offering of such securities or converts is completed; and
• the securities or converts are issued and outstanding prior to initial filing of the resale registration statement.

Rule 430B (and Rule 430C) make clear that information contained in a prospectus supplement required to be filed under Rule 424, whether in connection with a takedown or otherwise, will be deemed part of and included in the registration statement containing the base prospectus to which the prospectus supplement relates for purposes of Section 11 liability. Supplements are deemed to be part of registration statements as follows:

• for a supplement required to be filed other than in connection with a takedown of securities, as of the date the prospectus supplement is first used (i.e., not the date that the supplement is given to a purchaser, but rather, the date that the prospectus is available to the managing underwriter, syndicate member or any prospective purchaser); and
• under Rule 430B only, for a supplement filed in connection with a takedown of securities pursuant to Rule 424(b)(2), (b)(5) or (b)(7), as of the earlier of the date it is first used or the date and time of the first contract of sale of securities in the offering to which the supplement relates.

Elimination of Amount Limitation. Previously, Rule 415 limited the amount of securities that could be registered for certain offerings to an amount which was reasonably expected to be offered and sold within two years. That limitation is being eliminated for S-3 and F-3 offerings (although it is retained for business combinations). However, amendments to Rule 415 provide that the shelf registration statement can be used for only three years (subject to a limited extension), and new shelf registration statements must be filed every three years, with unsold securities and fees paid allowed to be included in the new registration statement, where the shelf relates to an automatic shelf or offerings of securities that are mortgage-related, to be sold on a continuous basis or primary S-3 or F-3 delayed or continuous offerings (Rule 415(a)(vii), (ix), or (x)).

Automatic shelf registration statements are immediately effective. In other cases, as long as the new shelf is filed within three years of the original effective date, there is a six-month window for sales under the old shelf until the new shelf is declared effective (other than, obviously, for automatic shelves). Prior to effectiveness (or automatic effectiveness) of the new shelf, the issuer can amend the later shelf to include any securities (and related fees) remaining unsold on the older registration statement.

Immediate Takedowns. Rule 415 is also being amended to allow primary offerings on Forms S-3 or F-3 to occur immediately after effectiveness.

Elimination of At-the-Market Restriction for Seasoned Issuers. Rule 415 is also being amended to eliminate restrictions in clause (a)(4) on primary "at-the-market" offerings of equity securities by primary shelf eligible issuers. Under the revised Rule, an issuer that is registering a primary equity shelf offering pursuant to Rule 415(a)(1)(x) can register an "at-the-market" offering of equity securities without identifying an underwriter in its registration statement (and instead identifying it in a supplement) and without a limitation on the amount of the offering. The limitation will continue for Issuers that are not eligible to register primary equity offerings using Rule 415(a)(1)(x).

Amendments to Rule 424. Rule 424 is being amended to add new paragraph (b)(8), for forms of final prospectus not filed within the required timeframe under Rule 424, and new paragraph (b)(7), for prospectuses identifying selling security holders. A prospectus filed under new paragraph (b)(8) will still be characterized as "required to be filed" under the paragraph originally applicable to it, for e.g., with respect to Rule 430B.

Elimination of Rule 434. Rule 434, which permitted the use of term sheets in certain offerings, has been eliminated as superfluous.

Issuer Undertakings. Conforming changes to issuer undertakings under Item 512 of Reg S-K have been adopted. These changes relate to the treatment of information contained in prospectus supplements and the issuer's understanding and agreement with respect to inclusion of prospectus supplements as part of the registration statements with new effective dates,

Changes to Forms S-3 and F-3. Forms S-3 and F-3 are being amended to expand the categories of majority-owned subsidiaries that will be eligible to register their non-convertible securities, other than common equity, or guarantees.

Automatic Shelf Registration for WKSIs

The automatic shelf registration rules create a kind of faux "company registration," almost as proposed in the aircraft carrier, allowing WKSIs to have significantly greater latitude in registering and marketing securities. Under the automatic shelf registration process, eligible WKSIs may register unspecified amounts of different specified types of securities on immediately effective Form S-3 or Form F-3 registration statements and may add additional classes of securities and eligible majority-owned subsidiaries as additional registrants after the automatic shelf is effective. WKSIs using an automatic shelf will be permitted, but not required, to pay filing fees at any time in advance of a takedown or on a "pay-as-you-go" basis at the time of each takedown. The rules also permit the exclusion from an automatic shelf of more information from the base prospectus. As with other delayed shelf registration statements, the issuer will be considered to be in registration or offering its securities only when it offers securities in a takedown off its registration statement

Eligibility. An automatic shelf can be used in connection with registration statements on Form S-3 or Form F-3 for all primary and secondary offerings by WKSIs (and, in some instances, by majority-owned subsidiaries of WKSIs). The issuer would assess whether it meets the WKSI eligibility criteria on the initial filing date. Thereafter, the issuer will also reassess eligibility at the due date of each 10(a)(3) amendment. If an issuer is no longer eligible at that time, it will have to either post-effectively amend its registration statement onto the form it is then eligible to use or file a new registration statement on that form. Automatic shelf registration is not available for business combination transactions,

Information in a Registration Statement. Using an automatic shelf, a WKSI can omit more information from a base prospectus, including, in addition to information that is unknown and not reasonably available, the following:

• whether the offering is a primary or secondary offering;
• the description of the securities to be offered other than an identification of the name or class of the securities;
• the names of any selling security holders; and
• disclosure regarding any plan of distribution.

• the public offering price;
• any updating information regarding the issuer (whether or not a fundamental change);
• detailed description of securities, including information not contained or incorporated by reference in the base prospectus;
• the identity of underwriters and selling security holders; and
• the plan of distribution.

Unspecified Amount. An automatic shelf may include an unspecified amount of securities to be offered, without allocating the mix of securities offered or even among primary and secondary components. The base prospectus in the initial registration statement must, however, identify in general terms the names or classes of securities registered, such as "debt," "common stock" or "preferred stock." Issuers that qualify as WKSIs based only on their issuances of non-convertible securities may register only non-convertible securities, other than common equity, unless they also are primary Form S-3-eligible because they have a public float of $75 million or more.

For an automatic shelf only, these new rules remove the current restriction on adding classes of securities by post-effective amendment. To add new classes, an issuer must file a post-effective amendment, which will become effective immediately, to register an unspecified amount of securities of the new class. Disclosure about the new class may be added by supplement, incorporated Exchange Act report or post-effective amendment. If a WKSI determines after effectiveness to add a class of debt securities or guarantees, it will also need to qualify the related indentures under the Trust Indenture Act of 1939. Corp Fin has long taken the position that the indenture must be qualified when the registration statement, not a post-effective amendment, becomes effective. As a result, under the new rules for an automatic shelf, effectiveness of the post-effective amendment adding the debt securities will be deemed to be the time of effectiveness, and the Trust Indenture Act qualification requirement will be satisfied:

• for debt securities or guarantees included in the registration statement at original effectiveness, the trust indenture will be required to be included in the registration statement at the time that registration statement becomes effective; and
• for debt securities or guarantees added by post-effective amendment, the trust indenture will be required at the time that post-effective amendment becomes effective.

Pay as You Go. Under the new rules, for issuers electing to use the pay-as-you-go alternative, the issuer will not have to pay any filing fee at the time of filing the initial registration statement; instead, the shelf takedown will be the triggering event for a required fee payment. For each takedown, the WKSI can file a supplement that includes a fee table or a post-effective amendment including the same information. The WKSI must pay the calculated fee within the time required to file the supplement under Rule 424, but may cure a failure to pay if the issuer made a good faith effort to pay timely and then pays the fee within four business days of the original fee due date. The WKSI must file the supplement with the fee table reflecting payment of the fee on the cover page under Rule 424. A WKSI may pay a filing fee in advance of a takedown (and file a supplement with a fee table reflecting payment of the fee on the cover) or can "pay as you go" by depositing monies in a "lockbox" account for payment of filing fees when due, with the fee calculated based on the fee schedule in effect when the money is withdrawn from the lockbox account.

Automatic Effectiveness. All automatic shelf registration statements and post-effective amendments will become effective immediately upon filing without SEC staff review (unless the staff is requested to review a supplement involving novel and unique securities offerings submitted prior to the offering). In addition, new amendments to Rule 401(g) provide that an automatic shelf will be deemed to be filed on the proper form unless the SEC notifies the issuer after filing of its objection. The release states that, until notified, an issuer can conduct offerings with certainty of registration on the proper form and without violation of Section 5, but cannot proceed with subsequent offerings (not in progress) following notification unless it amends the registration statement to the proper form or otherwise resolves the issue with the SEC. Pending effectiveness of the post-effective amendment or new registration statement, the ongoing offering could continue if such offering is permitted by the post-effective amendment or new registration statement.

Duration. WKSIs using the automatic shelf procedure will be required to file new automatic shelf registration statements every three years that will, in effect, restate and amend their then-current registration statement. WKSIs will be prohibited from issuing securities off an automatic shelf that is more than three years old; however, the new registration statement will be effective immediately and will carry forward, at the issuer’s election, either any unused fees paid or unsold securities registered, thus avoiding interruption of an issuer’s securities offerings. (A similar requirement has been adopted for non-automatic shelf issuers with an additional six-month window to allow time for their registration statements to be declared effective.)

Unseasoned and Non-Reporting Issuers

Only a few changes apply to unseasoned and non-reporting issuers.

Expanded Use of Incorporation by Reference. Forms S-1 and F-1 have been amended to permit a reporting issuer that has filed at least one annual report and that is current in its reporting obligation under the Exchange Act to incorporate by reference from its previously filed Exchange Act reports and documents. Forward incorporation is not permitted. Successor registrants can incorporate by reference if their predecessors were eligible (i.e., if the succession was primarily to reincorporate in another jurisdiction or if all of the predecessor issuers were eligible at the time of the succession and the issuer continues to be eligible). Issuers that are not current and issuers that are or were, or any of whose predecessors were, during the past three years, blank check, penny stock or shell companies (other than business combination-related shell companies) will not be able to incorporate by reference. To be considered current, at the time of filing, the issuer must have filed all materials required to be filed pursuant to Exchange Act Sections 13, 14 or 15(d) during the preceding 12 calendar months (or for such shorter period that the issuer was required to file). In addition, the ability to incorporate by reference is conditioned upon the issuer's making its incorporated Exchange Act reports and other materials readily accessible on its web site, which condition may be satisfied by including hyperlinks directly to the materials filed on EDGAR (or another third-party web site where the reports or other materials are made available in the appropriate time frame and access to the reports or other materials is free of charge to the user).

The prospectus in the registration statement at effectiveness must identify all previously filed Exchange Act reports and materials, such as proxy and information statements, that are incorporated by reference. Materials filed after the registration statement is effective may not be incorporated by reference. An issuer eligible to incorporate must include the following in the prospectus:

• a list of the incorporated reports and materials;
• a statement that it will provide copies of any incorporated reports or materials on request;
• an indication that the reports and materials are available from the SEC through EDGAR or the public reference room;
• identification of the issuer’s web site address where incorporated reports and other materials can be accessed; and
• required disclosures regarding material changes in or updates to the incorporated materials.

PROSPECTUS DELIVERY REQUIREMENTS

Under current rules, a final prospectus must accompany or precede a written confirmation of sale of a security. However, the purchase commitment and the resulting contract of sale generally occur before the final prospectus is required to be delivered. Moreover, purchasers in the aftermarket may not even receive a final prospectus. Accordingly, as the SEC, quoting Professor Louis Loss, observes. "[a] prospectus that comes with the security does not tell the investor whether or not he or she should buy; it tells the investor whether he has acquired a security or a lawsuit." As a result, the SEC has concluded that actual delivery to purchasers of a final prospectus is not necessary. Under the new rules, issuers, brokers and dealers can 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 the cure period.

Access Equals Delivery (Rule 172(b))

Under Rule 172(b), a final prospectus will be deemed to precede or accompany a security for sale for purposes of Securities Act Section 5(b)(2) as long as the final 10(a) prospectus is filed or the issuer will make a good faith and reasonable effort to file it within the period required by Rule 424. Access equals delivery does not apply to preliminary prospectuses, S-8s, business combination transactions, exchange offers, registered investment companies and business development companies. Exchange Act Rule 15c2-8(d), which requires broker-dealers to take reasonable steps to comply promptly with written requests for copies of the final prospectus, will continue in effect. The filing condition does not apply to transactions by dealers requiring delivery of a final prospectus pursuant to Securities Act Section 4(3).

Notification (Rule 173)

In any transaction involving a sale by an issuer or an underwriter or a sale in which the final prospectus delivery requirements apply, Rule 173 requires that each underwriter or dealer participating in a registered offering (or, if the sale was effected by the issuer and not by or through an underwriter or dealer, then the issuer) must provide to each purchaser to which it sells, not later than two business days after the completion of the sale, a copy of the final prospectus or, in lieu of the final prospectus, 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 Rule 172. In addition, as a result of the operation of Rules 172 and 173, if a current final prospectus is filed, final prospectuses will no longer be required to be delivered in connection with market-making transactions by dealers affiliated with issuers. An investor can still request a final prospectus, but it would not have to be provided before settlement. Compliance with Rule 173 is not a condition to reliance on Rule 172 to satisfy final prospectus delivery, and failure to comply with Rule 173 will not result in a Section 5 violation. The offerings excluded under Rule 172 are also excluded from Rule 173. Transactions solely between brokers or dealers in reliance on Rule 153 are also excluded from Rule 173, but it continues to apply to the transaction between the broker or dealer and the underlying purchaser on whose behalf the transaction is effected.

Written Confirmations and Notices of Allocations (Rule 172(a))

Rule 172(a) provides an exemption from Securities Act Section 5(b)(1) that allows written confirmations and notices of allocation to be sent after effectiveness of a registration statement without being accompanied or preceded by a final prospectus. The final 10(a) prospectus must be on file. The exemption permits:

• written confirmations containing information limited to that called for in Exchange Act Rule 10b-10 and other information customarily included in confirmations, including any notice provided pursuant to Rule 173; and
• written communications from an offering participant to a customer or from an underwriter to dealers in the selling group notifying them of the transaction and their allocations of securities in a registered offering.

Transactions on an Exchange or Registered Trading Facility (Rule 153)

Rule 153 has been amended to allow brokers and dealers to satisfy their prospectus delivery requirements for transactions on an Exchange or registered trading facility, such as Nasdaq, if certain conditions are met. The change does not affect delivery obligations to purchasers other then brokers or dealers.

Aftermarket Prospectus Deliver (Rule 174)

Rule 174 requires that dealers deliver a final prospectus for 25 days after effectiveness in a IPO that will be listed on a national securities exchange or quoted on an electronic inter-dealer quotation system and for 90 days for blank check companies or non-reporting issuers not so listed. Rule 174 has been amended to provide that, during the aftermarket period, dealers can rely on Rule 172 to satisfy any aftermarket delivery obligations (other than for blank check companies). Rule 173 applies in part where Section 4(3) requires prospectus delivery and where there is no exemption from delivery under Rule 174.

ADDITIONAL EXCHANGE ACT DISCLOSURE PROVISIONS

Risk Factors

The SEC is finally catching up to the rest of the securities bar on this issue by adopting a new item requiring, as applicable, plain English risk factor disclosure in annual reports on Form 10-K and Exchange Act registration statements on Form 10, but not in Forms 10-KSB or Form 10-SB. The new item applies the same standard for risk factor disclosure in Securities Act registration statements to Exchange Act registration statements and annual reports. The amendments also require quarterly updates to reflect material changes in risk factors previously disclosed in Exchange Act reports, although unnecessary restatement or repetition of risk factors in quarterly reports is discouraged. The SEC believes that these new rules will also enhance the ability of reporting issuers to incorporate risk factor disclosure

from these Exchange Act reports into Securities Act registration statements to satisfy the risk factor disclosure requirements, which many practitioners have previously viewed as not possible under the prior rules.

Disclosure of Unresolved Staff Comments

Because the SEC views the new procedural changes adopted as eliminating incentives issuers have to resolve comments on their Exchange Act reports in a timely manner, it has adopted new rules requiring accelerated filers and WKSIs to disclose outstanding written staff comments that remain unresolved for a substantial period of time in their annual reports on Form 10-K or Form 20-F. More specifically, these issuers must disclose written comments made in connection with a review of Exchange Act reports that:

• the issuer believes are material;
• were issued more than 180 days before the end of the fiscal year covered by the annual report; and
• remain unresolved as of the date of the filing of the Form 10-K or Form 20-F.

Disclosure of Status as Voluntary Filer Under the Exchange Act

There will now be a new box on the cover page of Forms 10-K, 10-KSB and 20-F for an issuer to check if it is filing reports voluntarily. (However, the box is for disclosure purposes only and an issuer’s filing obligation will be unaffected by an incorrectly checked box.)

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