More New and Updated SEC Interps

By Cydney Posner

The SEC has posted a number of new and revised compliance and disclosure interps, including an update of all of the FD interps. An (N) below signals that the interp is new.

Securities Act Sections

Where the offer and sale of convertible securities or warrants are being registered under the Securities Act and are convertible or exercisable within one year, the underlying securities must be registered at the same time as the convertible securities or warrants. The analysis is that an offering of both securities is deemed to be taking place. If the securities are not convertible or exercisable within one year, the issuer may choose to delay registration of the underlying securities, but they must be registered no later than the date they become convertible or exercisable by their terms, if no exemption for the conversion or exercise is available. Where securities are convertible only at the option of the issuer, the purchaser is, in effect, making an investment decision to accept the underlying security and, as a result, the underlying securities must be registered at the same time the offer and sale of the convertible securities are registered.

Section 3(a)(9)

U.S. issuers acquiring Canadian companies often use an offering structure designed to allow Canadian security holders of the acquired business to defer a tax event in the sale of those securities. Canadian law will currently tax the disposition of shares in a Canadian enterprise through a business combination, but provides an exemption where the consideration is paid in securities of another Canadian issuer. To allow Canadian shareholders to qualify for this tax deferral, U.S. issuers have effected acquisitions with the shares of a Canadian subsidiary the common shareholders of which indirectly share the same dividend, liquidation and voting rights as held by common shareholders of the U.S. parent. The Canadian subsidiary's shares also carry the right to convert into shares of the U.S. parent. Unfortunately, however, the U.S. parent may not rely on Section 3(a)(9) to exempt the conversion of subsidiary shares into parent shares. Section 3(a)(9) exempts from registration exchanges of securities by the issuer exclusively with its own security holders. By its terms, the exemption is not available for issuer exchanges of its securities with the security holders of another person, even including security holders of a subsidiary. Notwithstanding other similarities between the parent and subsidiary shares, ownership of a subsidiary's securities in this fact pattern intrinsically represents an ownership interest in the subsidiary that is not directly shared by security holders of the parent. As a result, conversion to the parent's securities cannot satisfy the "same-issuer" requirement of Section 3(a)(9). (N)

Securities Act Section 5 

See question under Section 2(a)(3) above.

A company completes a private placement of securities in reliance on Section 4(2) and then files a registration statement for the resale of the privately placed securities. After the filing of the registration statement but prior to its effectiveness, the company commences and completes a second private placement that is consistent with the interpretive guidance on general solicitation provided in Securities Act Release No. 8828 (Aug. 10, 2007).  (See the posting dated 8/16/07) The company can include the securities from the second private placement in the pending resale registration statement prior to effectiveness so long as the second private placement is consistent with the interpretive guidance in the release and is completed before the company files a pre-effective amendment to include the securities from the second private placement in the resale registration statement. (N)

Offers and sales must be suspended during the waiting period of a post-effective amendment to an effective registration statement if the post-effective amendment is filed for the purpose of a Section 10(a)(3) amendment and the prospectus is already stale for 10(a)(3) purposes. In addition, sales, but not offers, must be suspended during the pendency of a post-effective amendment filed for the purpose of complying with the Reg S-K Item 512(a)(1) undertakings, such as a fundamental change or a material change to the plan of distribution. While offers may continue, if the prospectus is used to make the offers, it should not be materially deficient. A post-effective amendment filed to add selling stockholders does not require a suspension of offers and sales by selling stockholders already named in the registration statement. (N)

Securities Act Rules 

Rules 153, 153a and 153b 

An issuer has registered an "at the market" offering of its common stock in reliance on Rule 415(a)(4) and has engaged a broker-dealer to sell the securities into the existing trading market. Because an "at the market" offering by a broker-dealer on behalf of an issuer is a primary offering of the issuer's securities, the broker-dealer has a prospectus delivery obligation with respect to the offering into the trading market. However, the broker-dealer may not rely on Rule 153 to satisfy that prospectus delivery obligation because Rule 153 applies only to transactions between brokers, but does not affect a broker's prospectus delivery obligation to purchasers other than brokers or dealers. As a consequence, brokers or dealers effecting transactions in the issuer's securities under the registration statement may have a prospectus delivery obligation to their clients who acquired those securities (which may be satisfied in reliance on Rule 172) and similarly may have an obligation to provide a notice pursuant to Rule 173. Rule 173 excludes transactions solely between brokers or dealers in reliance on Rule 153, but not as to other purchasers of the issuer's securities under the registration statement. (N)

Rule 401 

Rule 401(g)(2) requires an issuer to file a new registration statement or post-effective amendment "promptly" once the staff notifies the issuer of its objection to the issuer's use of an automatic shelf registration statement. The "promptly" requirement also extends to responding to staff comments, if any, and submitting a request for effectiveness of the new registration statement or post-effective amendment. (N)

Rule 415 

A registration statement under Rule 415 cannot be declared effective without an opinion of counsel as to the legality of the securities being issued, even when no immediate sales are contemplated. However, when sales are not expected in the near future, a registration statement can be declared effective if the registrant files a qualified opinion of counsel, subject to the understanding that an unqualified opinion will be filed no later than the closing date of the offering of the securities covered by the registration statement. An updated opinion of counsel with respect to the legality of the securities being offered may be filed in a Form 8-K report rather than a post-effective amendment to a Form S-3 shelf registration statement. This position is limited to opinions of counsel regarding the legality of the securities being offered, which are required to be filed in connection with shelf takedowns. (Note that this interpretation had previously required the opinion to be filed prior to any sales or contracts of sale. According to Corporate Counsel, concern that the opinion would be required to be filed too early in the offering process led to a dialogue between the Staff and the Securities Law Opinions Subcommittee of the Federal Regulation of Securities Committee at the ABA meeting in Chicago earlier this month, resulting in this change to the interpretation.)

Securities Act Forms 

Form S-3 — General Instructions I.A.1 to I.A.8 

To satisfy Instruction I.A.3 of Form S-3, an issuer must have been subject to the requirements of Exchange Act Section 12 or 15(d) for a period of at least twelve months. An issuer that timely filed its Exchange Act reports during the past twelve months, but was not subject to Section 12 or 15(d) for a portion of that period (and therefore was reporting on a voluntary basis during that portion), would be eligible to use Form S-3 only under the conditions specified in the Lamar Advertising Co. no-action letter (Nov. 18, 1996). (N)

Form S-3 — General Instructions I.B.1 to I.B.6 

An issuer intended to grant rights to subscribe to shares of common stock (on a pro rata basis to all shareholders) after it filed a registration statement on Form S-3. The issuer could not rely on General Instruction I.B.4 to file a Form S-3 registration statement to cover the issuance of the shares on exercise of the rights because the rights were not outstanding at the time of the filing of the registration statement and the issuer would not be able to satisfy the requirement that an annual report and other disclosures be provided to the holders of the rights prior to the filing of the registration statement. Similarly, an issuer could not conduct a takedown of the securities off an effective unallocated shelf registration statement in reliance on General Instruction I.B.4 if the rights are not outstanding at the time of the takedown. The issuer could file a Form S-1 to register the rights offering if the offering would be made on a continuous basis in reliance on Rule 415(a)(1)(ix). In addition, although General Instruction I.B.4 of Form F-3 does not have the same requirement to provide specified information to the holders of the rights, Form F-3 does require that the rights be outstanding at the time the registration statement is filed. Therefore, similar to Form S-3, foreign private issuers could not rely on General Instruction I.B.4 of Form F-3 to conduct such offerings. (N)

Form S-3 — General Instructions I.D.1 to I.D.5 R 

If an automatic shelf registration statement initially registers one or more classes of securities and a new class of securities is subsequently added to that automatic shelf registration statement by post-effective amendment, the 5.1 opinion for the new class of securities must be filed at the time the class of securities is first included in the automatic shelf, whether as part of the initial registration statement or in a post-effective amendment. A 5.1 opinion for the specific securities sold in a particular offering must be filed as part of the registration statement or incorporated by reference into the registration statement no later than the closing date of the offering of the securities. This position is limited to opinions of counsel regarding the legality of the securities being offered, which are required to be filed in connection with shelf takedowns. (See question under Rule 415 above.)

After its Form 10-K is filed, a registrant has a change in accounting principles (or changes in segment presentation or discontinued operations), which will cause the financial presentation in its subsequent Forms 10-Q to differ from that in its most recent Form 10-K. In this situation, Item 11(b)(ii) of Form S-3 would require the annual audited financial statements filed in the Form 10-K to be restated to reflect the change in accounting principles (or changes in segment presentation or discontinued operations). However, financial statements for which Item 11(b)(ii) of Form S-3 would require restatement may not necessarily need to be restated for incorporation by reference in a Form S-8. Form S-8 does not contain express language similar to Item 11(b)(ii) of Form S-3, requiring the restatement of financial statements to reflect specified events, and General Instruction G.2 of Form S-8, which requires that "material changes in the registrant's affairs" be disclosed in the registration statement, does not necessarily mandate restatement. The fact that financial statements eventually will be retroactively restated does not necessarily mean that there are "material changes in the registrant's affairs," thereby requiring the financial statements to be restated for inclusion, or incorporation by reference, in a Form S-8. The registrant is responsible for determining if there has been a material change and, if so, the related information that is required to be disclosed in a Form S-8. Similarly, it is the auditor's responsibility to determine if it will issue a consent to use of its report in a Form S-8 if there has been a change in the financial statements in a subsequent Form 10-Q and the financial statements in the Form 10-K have not been retroactively restated. (N)

The Item-by-Item instructions for Item 7 of Form D indicate that an issuer must enter the date of the first sale of securities in the offering if the issuer is filing a "new notice." If an issuer is filing an amendment to a Form D filing, the issuer must provide current information about the date of first sale in the amendment. Rule 503(a)(4) provides that an issuer that files an amendment must provide current information in response to all requirements of the form, regardless of why the amendment is filed. For example, if, in the original Form D, the issuer indicated that the first sale has "Yet to Occur" and if, by the time of the amendment, the date of first sale is known, then the issuer must disclose the actual date of first sale in the amendment. (N)

Regulation S-K

In the event that, in 2009, a company recovers (or "claws back") a portion of an executive officer's 2008 bonus, the portion of the 2008 bonus recovered in 2009 should not be deducted from 2009 bonus or total compensation for purposes of determining, pursuant to Items 402(a)(3)(iii) and (iv), whether the executive is an NEO for 2009. If the executive is an NEO for 2009, the SCT should report, for the 2008 year, in the Bonus column (column (d)) and Total column (column (j)), amounts that are adjusted to reflect the "claw-back," with footnote disclosure of the amount recovered. The CD&A should discuss the reasons for the "claw-back" and how the amount recovered was determined where, under the instruction to Item 402(b), "necessary to an understanding of the registrant's compensation policies and decisions regarding the named executive officers." (N)

Item 402(i)(1) calls for the Nonqualified Deferred Compensation Plan Table to provide the specified information "with respect to each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified." Accordingly, where an equity award has vested and the plan under which it was granted provides for the deferral of its receipt, this item requires the deferred receipt of the award to be included in the Nonqualified Deferred Compensation Plan Table, whether the deferral is at the election of the NEO or pursuant to the terms of the equity award or plan. (N)

Where the child of X, a director of the registrant, is employed by the registrant and receives yearly compensation exceeding $120,000 and the child's compensation is not reported under Item 402 (since the child is not an NEO or an officer or director), the child's compensation is required to be disclosed under Item 404(a) because the child is a related person and has a material interest in his or her yearly compensation.

The application of Exchange Act Sections 13(d), 13(g), 14(a), 14(c) and 14(d) to a class of securities depends upon whether the class is registered under Exchange Act Section 12. If unregistered securities convey a right to acquire or are convertible into or exercisable for Section 12-registered securities, the unregistered securities are not treated as Section 12-registered securities for purposes of determining whether Sections 13(d), 13(g), 14(a), 14(c) and 14(d) apply, with one exception: Exchange Act Rule 13d-3(d) will require certain security holders to treat the unregistered securities as if they had been exercised for or converted into the Section 12-registered securities for purposes of Sections 13(d) and 13(g). (N)

Section 16 and Related Rules and Forms

Rule 16a-9(a) exempts from Section 16 "the increase or decrease in the number of securities held as a result of a stock split or stock dividend applying equally to all securities of a class, including a stock dividend in which equity securities of a different issuer are distributed." This rule is available to exempt the disposition of fractional shares incidental to a reverse stock split where the cash-out of fractional shares, like the reverse split itself, applies equally to all securities of the class, and there is no choice to receive fractional shares instead of cash. (N)

Regulation FD

An issuer may be able to selectively confirm a forecast it has previously made to the public without triggering the rule's public reporting requirements. In assessing the materiality of an issuer's confirmation of its own forecast, the issuer should consider whether the confirmation conveys any information above and beyond the original forecast and whether that additional information is itself material. That may depend upon, among other things, the amount of time that has elapsed between the original forecast and the confirmation (or the amount of time elapsed since the last public confirmation, if applicable). For example, a confirmation of expected quarterly earnings made near the end of a quarter might convey information about how the issuer actually performed. In that respect, the inference a reasonable investor may draw from such a confirmation may differ significantly from the inference he or she may have drawn from the original forecast early in the quarter. The materiality of a confirmation also may depend upon, among other things, intervening events. For example, if it is clear that the issuer's forecast is highly dependent upon a particular customer and the customer subsequently announces that it is ceasing operations, a confirmation by the issuer of a prior forecast may be material. A statement by an issuer that it has "not changed," or that it is "still comfortable with," a prior forecast is no different than a confirmation of a prior forecast. Moreover, under certain circumstances, an issuer's reference to a prior forecast may imply that the issuer is confirming the forecast. If, when asked about a prior forecast, the issuer does not want to confirm it, the issuer may simply wish to say "no comment." If an issuer wishes to refer back to the prior estimate without implicitly confirming it, the issuer should make clear that the prior estimate was as of the date it was given and is not being updated as of the time of the subsequent statement.

Reg FD does not create a duty to update or otherwise change existing law with respect to any duty to update.

An issuer may be able to review and comment on an analyst's model privately without triggering Reg FD's disclosure requirements, depending upon whether, in so doing, the issuer communicates material nonpublic information. For example, an issuer ordinarily would not be conveying material nonpublic information if it corrected historical facts that were a matter of public record. An issuer also would not be conveying such information if it shared seemingly inconsequential data which, pieced together with public information by a skilled analyst with knowledge of the issuer and the industry, helps form a "mosaic" that reveals material nonpublic information. It would not violate Reg FD to reveal this type of data even if, when added to the analyst's own fund of knowledge, it is used to construct his or her ultimate judgments about the issuer. An issuer may not, however, use the discussion of an analyst's model as a vehicle for selectively communicating — either expressly or in code — material nonpublic information.

An issuer may provide material nonpublic information to analysts as long as the analysts expressly agree to maintain confidentiality until the information is public. For purposes of the exclusion in Rule 100(b)(2)(ii) of Reg FD, the issuer does not need to obtain the additional statement that the recipient agrees not to trade on the information. (But, outside the context of Reg FD, the recent Cuban case could lead to a different result.) If a recipient of material nonpublic information subject to such a confidentiality agreement trades or advises others to trade, he or she could face insider trading liability.

If an issuer wishes to rely on the confidentiality agreement exclusion of Reg FD, it is not sufficient to get an acknowledgment that the recipient of the material nonpublic information will not use the information in violation of the federal securities laws; the recipient must expressly agree to keep the information confidential.

Any disclosure, including road show materials, used "in connection with" a registered public offering need not be disclosed under Reg FD so long as the offering is of the type excluded from Reg FD. All other road shows are subject to Reg FD in the absence of another applicable exclusion. For example, a disclosure in a road show in an unregistered offering is subject to Reg FD as is a disclosure in a road show made while the issuer is not in registration and is not otherwise engaged in a securities offering. If, however, those who receive road show information expressly agree to keep the material nonpublic information confidential, disclosure to them is not subject to Reg FD.

Where, in connection with a private placement of shares that will be followed by a resale registration statement on a Form S-3, the company and its investment bankers conduct mini-road shows over a three-day period during the private placement, Reg FD applies regardless of the subsequent filing of the resale registration statement. The road shows are made in connection with an offering by the issuer that is not registered (i.e., the private placement).

An issuer can disclose material nonpublic information to its employees (who may also be shareholders) without making public disclosure of the information. Rule 100(b)(1) states that Reg FD applies to disclosures made to "any person outside the issuer." Reg FD does not apply to communications of confidential information to employees of the issuer. An issuer's officers, directors and other employees are subject to duties of trust and confidence and face insider trading liability if they trade or tip.

If an issuer has a policy that limits which senior officials are authorized to speak to persons enumerated in Rule 100(b)(1)(i) – (b)(1)(iv), disclosures by senior officials not authorized to speak under the policy will not be subject to Reg FD. Selective disclosures by senior officials not authorized to speak are made in breach of a duty of trust or confidence to the issuer and are not covered by Reg FD, but may, however, trigger liability under existing insider trading law.

Rule 101: Definitions

To make public disclosure of material nonpublic information under Reg FD by means of a conference call, the issuer must provide advance notice of the call. Adequate advance notice under Reg FD must include the date, time, subject matter and call-in information for the conference call. Public notice should be provided a reasonable period of time ahead of the conference call. For example, for a quarterly earnings announcement that the issuer makes on a regular basis, notice of several days would be reasonable. However, the period of notice may be shorter when unexpected events occur and the information is critical or time sensitive. If a transcript or re-play of the conference call will be available after the call has occurred, e.g., on the issuer's website, issuers are encouraged to indicate in the notice how, and for how long, the record will be available to the public.

In general, including information in a document publicly filed on EDGAR with the SEC within the time frames that Reg FD requires will satisfy the rule's public disclosure requirement--the document need not be an 8-K. In considering whether that disclosure is sufficient, however, companies must take care to bring the disclosure to the attention of readers of the document, must not bury the information and must not make the disclosure in a piecemeal fashion throughout the filing.

For purposes of Reg FD, there is no waiting period after making a filing or furnishing a report on EDGAR before making disclosure of the same information in a non-public meeting; the issuer need only confirm that the filing or furnished report has been accepted for filing on EDGAR and is publicly available on EDGAR.

During a nonpublic meeting with analysts, an issuer's CEO provides material nonpublic information on a subject she had not planned to cover. Although the CEO had not planned to disclose this information when she entered the meeting, after hearing the direction of the discussion, she decided to provide it, knowing that the information was material and nonpublic. This disclosure would be considered an intentional disclosure that violated Reg FD because no simultaneous public disclosure was made. A disclosure is "intentional" under Rule 101(a) when the person making it either knows, or is reckless in not knowing, that the information he or she is communicating is both material and nonpublic. In this example, the CEO knew that the information was material and nonpublic, so the disclosure was intentional, even though she did not originally plan to make it.

A speech that discloses material nonpublic information at a shareholder meeting open to the public, but not covered by the press, or webcast or broadcast by any electronic means, will not satisfy Reg FD's public disclosure requirement. Under Rule 101(e), public disclosure of information required to be disclosed by Rule 100(a) can be made either by furnishing or filing with the SEC a Form 8-K disclosing that information or by disseminating the information through another method or combination of methods of disclosure "that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public." A meeting that is open to the public but not otherwise webcast or broadcast by any electronic means is not a method of disclosure "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."

The mere presence of the press at an otherwise non-public meeting attended by persons outside the issuer described in paragraph (b)(1) of Rule 100 under Reg FD does not render the meeting public for purposes of Reg FD.

Guidance regarding the circumstances under which information posted on a company web site would be considered "public" for purposes of evaluating the (1) applicability of Reg FD to subsequent private discussions or disclosure of the posted information and (2) satisfaction of Reg FD's "public disclosure" requirement is provided in the SEC's interpretive release, "Commission Guidance on the Use of Company Web Sites," Exchange Act Release No. 58288 (Aug. 1, 2008).  (See the posting dated 8/11/08)

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