New SEC interps posted for 1933 and 1934 Acts, rules and forms

By Cydney Posner

The SEC has just posted some new interps under the Securities Act and Exchange Act and related rules and forms. (For your reference, a number of revised interps were also published at the end of March related to Rule 10b5-1.)

Securities Act

Securities Act Section 2(a)(4)

• When a statutory trust registers the offer and sale of beneficial units in multiple series, or a limited partnership registers the offer and sale of limited partnership interests in multiple series, on a single registration statement, each series should not be treated as a separate registrant. Even though a series of beneficial units or limited partnership interests may represent interests in a separate or discrete set of assets – and not in the statutory trust or limited partnership as a whole – unless the series is a separate legal entity, it cannot be a co-registrant for Securities Act or Exchange Act purposes. For these types of offerings, the disclosure in the Securities Act registration statement or Exchange Act report should be presented on a series basis, including series-level (1) financial statements and audit opinions, (2) business and property descriptions, (3) risk factor disclosure, and (4) evaluations and disclosure about the effectiveness of disclosure controls and procedures and internal controls and procedures. In addition, materiality determinations generally should be made at the series level. While the "Controls and Procedures" section of the periodic report (Item 9A in the 10-K and Item 4 in the 10-Q) should clarify that the scope of the evaluation and disclosure covers each series individually, as well as the registrant as a whole, the certifications required by Exchange Act Rule 13a-14(a) or 15d-14(a) may not be modified and must be made in the form required.

Securities Act Section 3(a)(9)

• An issuer that retains and pays a third party for the purpose of consulting with institutional investors as to what they would consider to be an acceptable exchange offer would not satisfy the condition of Section 3(a)(9) that "no commission or other remuneration be paid or given directly or indirectly for soliciting such exchange." For examples of the types of activities of a third party, such as a financial advisor, that are consistent with the Section 3(a)(9) exemption, see the Seaman Furniture Co., Inc. no-action letter (Oct. 10, 1989) issued by Corp Fin.

Securities Act Section 5

• While a pre-effective conditional offer is not prohibited by Section 5, a pre-effective sale is prohibited by Section 5(a). When an issuer and underwriter contemplate conducting an electronic offering by soliciting conditional offers, such as through a modified Dutch auction, prior to effectiveness of the registration statement, they should implement certain safeguards so that a conditional offer is not in substance a sale and thus complies with Section 5. A conditional offer will generally not be deemed a sale if:

An offeree generally should be required to affirmatively reconfirm a conditional offer if:

• there is a material change to the Section 10 prospectus available at the time of the original conditional offer,
• the offering prices below or more than 20% above the price range in the prospectus, or
• more than 15 days elapse between the submission of the conditional offer and acceptance.

The issuer and underwriter should also make sure that pre-acceptance communications do not violate Section 5(b)(1). Assuming the Section 10 compliant preliminary prospectus is available prior to the time conditional offers are solicited, a description of the offering procedures, offering milestones and account opening instructions, such as on a website, will generally not be "offers" for purposes of Section 5(b)(1), to the extent permitted by Rule 134.

Securities Act Rules

Rule 415 — Delayed or Continuous Offering and Sale of Securities

• If Form S-1 is used for a continuous offering, the prospectus may have to be revised periodically to reflect new information since, unlike Form S-3, the form does not provide for incorporation by reference of subsequent periodic reports. For example, in a continuous offering on a Form S-1 pursuant to Rule 415(a)(1)(ix), a registrant wants to update the prospectus to include Exchange Act reports filed after the effective date of the Form S-1. Item 512(a)(1) of Reg S-K requires certain changes, including a Section 10(a)(3) update, to be reflected in a post-effective amendment. Other changes may be made in a prospectus supplement filed pursuant to Rule 424(b). If the registrant files a post-effective amendment, it could incorporate by reference previously filed Exchange Act reports if it satisfied the conditions in Form S-1 allowing incorporation by reference.

Rule 424 — Filing of Prospectuses, Number of Copies

• In registration statements for secondary offerings, if the company is eligible to rely on Rule 430B when the registration statement was originally filed, the company may add or substitute selling shareholders to a registration statement related to a specific transaction by prospectus supplement. The supplement is filed under Rule 424(b)(7).

If the company is not eligible to rely on Rule 430B when the registration statement is initially filed, it must file a post-effective amendment to add selling shareholders to a registration statement related to a specific transaction that was completed prior to the filing of the resale registration statement. A Rule 424(b) prospectus supplement may be used to post-effectively update the selling shareholder table to reflect a transfer from a previously identified selling shareholder. The new investor’s shares must have been acquired or received from a selling shareholder previously named in the resale registration statement and the aggregate number of securities or dollar amount registered cannot change.

Rule 144(d) — Holding Period for Restricted Securities

• A company issues a convertible note with interest payable in shares of the company. The decision to pay the interest on the convertible note in the form of shares is solely at the discretion of the company. In determining whether the Rule 144(d)(1) holding period requirement has been satisfied with regard to the shares received as interest, the holding period of the note may be tacked to the holding period of the shares.

Rule 144(e) — Limitation on Amount of Securities Sold

• [an interp has been withdrawn. I believe, but am not sure, that it’s the interp providing that when aggregation is required to determine compliance with Rule 144(e), non-U.S. sales must be aggregated with domestic sales.]

Rule 401 — Requirements as to Proper Form

• As set forth in Rule 401, a registration statement must meet the form requirements at the time it is first filed, and also at the time of any Section 10(a)(3) post-effective amendment. A registration statement on one form may be changed to any other form for which it is then eligible by pre-effective or post-effective amendment, with one exception. An issuer may not file a pre-effective or post-effective amendment to change a registration statement that is not an automatic shelf registration statement to an automatic shelf registration statement. Instead, the issuer must file a new registration statement on Form S-3 or Form F-3, designated as an automatic shelf registration statement. Except for registration statements and post-effective amendments described in Rule 401(g), once a registration statement is declared effective, it is deemed to be on the proper form.

Rule 430A — Prospectus in a Registration Statement at the Time of Effectiveness

• The instruction to paragraph (a) of Rule 430A provides that changes in volume and price representing no more than a 20% change in the maximum offering price set forth in the registration statement fee table may be made pursuant to a Rule 424(b)(1) prospectus supplement. The 20% threshold may be calculated using the high end of the range in the prospectus at the time of effectiveness and may be measured from either the high end (in the case of an increase in the offering price) or low end (in the case of a decrease in the offering price) of that range.

Securities Act Forms

Form 1-A (for Reg A Offerings)

• An offering statement on Form 1-A can be filed only in paper form at the SEC's main office, 100 F Street, N.E., Washington, D.C. 20549. There is no filing fee for filing an offering statement on Form 1-A.
• Although the facing page of Form 1-A states that the delaying legend in Rule 252(g)(2) is optional, the legend is required to give the Corp Fin staff the time necessary to determine the level of review (either full review, no review, or partial review), assign the filing, and conduct any review of the filing. If the delaying legend is omitted from a filing, it may be added later by amendment. If the delaying legend is not included in the filing or removed under Rule 252(g)(3), the filing will be qualified automatically in 20 days, and the staff will be precluded from reviewing the filing. In that case, the staff can only consider what recommendation to make to the SEC, either to allow the Form 1-A to be qualified automatically by operation of the terms of Regulation A, or to recommend that the SEC issue an order to suspend the Regulation A exemption.
• A company does not incur Exchange Act reporting obligations after its Form 1-A offering statement is qualified. Because offers and sales under Regulation A are exempt transactions under the Securities Act, the offering does not subject the issuer to reporting obligations under Section 15(d) of the Exchange Act.
• For offerings of limited partnership or limited liability company interests on Form 1-A, an issuer should attempt to comply with the SEC's interpretive views on substantive disclosure requirements set forth in Securities Act Release No. 6900 (June 17, 1991). In addition, the disclosure guidelines in all Securities Act Industry Guides, such as Industry Guide 3 relating to bank holding companies and Industry Guide 5 relating to interests in real estate limited partnerships, should be followed in drafting a Form 1-A offering statement.. The Industry Guides are available. Industry Guide 2 relating to oil and gas operations has been codified in a new Subpart 1200 series of Reg S-K entitled "Disclosure by Registrants Engaged in Oil and Gas Producing Activities." In this regard, to the extent that industry guides are codified into Reg S-K, the new Reg S-K industry disclosure items should be followed in drafting the Form 1-A offering statement.
• The offering circular should discuss any federal tax consequences that are material to the Regulation A offering, and a supporting tax opinion be filed as an exhibit to the offering statement on Form 1-A.
• Issuer is conducting a Regulation A offering of units consisting of common stock and warrants to purchase common stock. The warrants will not be exercisable until at least one year from the completion of the Regulation A offering, and the issuer intends to register the exercise of the warrants on a registration statement when they become exercisable. Because the warrants are not exercisable for at least one year, the issuer is not deemed to be offering the common shares underlying the warrants in the Regulation A offering. Hence, the exercise price of the warrants will not be included in calculating the aggregate offering price under Securities Act Rule 251(b), although the warrant value as part of the unit will be included. The registration statement covering the exercise of the warrants can be filed and declared effective before the expiration of one year so long as the warrants by their terms cannot be exercisable before one year from the completion of the Regulation A offering.

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

• A company engages in a trust preferred financing in which the company issues a subordinated note to a special purpose subsidiary, and the special purpose subsidiary issues to investors cumulative preferred shares with financial terms that generally mirror the note, except that the preferred shares are convertible into common stock of the company. The subsidiary exists only to hold the note and issue the preferred shares; the interest and principal payments on the note are the sole source of cash for the subsidiary to pay dividends and the liquidation preference on the preferred shares. The note permits the company to defer interest payments for a specific time period, and that deferral is not a default. If interest payments on the note are deferred, the subsidiary may defer the payment of quarterly dividends on the preferred shares, and the unpaid dividends will accrue and accumulate. Finally, the trust preferred financing is treated as company indebtedness for GAAP financial reporting and rating agency purposes. On these facts, for purposes of determining whether the company satisfies the requirements of Instruction I.A.5 of Form S-3 if a company defers interest payments on the subordinated note and its subsidiary correspondingly defers payment of quarterly dividends on the trust preferred shares, the trust preferred financing should be treated as company indebtedness. Since there was no default on the note, there is no violation of Instruction I.A.5.

Exchange Act Rules

Manipulative and Deceptive Devices and Contrivances: Rule 10b5-1

• A person who has adopted a written trading plan or given trading instructions to satisfy Rule 10b5-1(c) plans to sell the securities in reliance on Rule 144. The person does not need to modify the Form 144 to state that the representation regarding the seller’s knowledge of material information regarding the issuer is as of the date the Rule 10b5-1 plan was adopted or instructions given, rather than the date the person signs the Form 144, because the form already includes the representation.

Rule 12g-4

• A company has filed a Form 25 which will become automatically effective on a Sunday. Once the Form 25 is effective, the company may file a Form 15, which will immediately suspend its Exchange Act reporting obligations. The company’s next Form 10-Q is due on the same Sunday the Form 25 will become effective. If the company files the Form 15 on the next business day, it will not be required to file the Form 10-Q.

Section 16 and Related Rules

Rule 16a-2 – Persons Subject to Section 16

• Rule 16a-2(c) provides that "a ten percent beneficial owner not otherwise subject to Section 16 of the Act must report only those transactions conducted while the beneficial owner of more than ten percent of a class of equity securities of the issuer registered pursuant to Section 12 of the Act." A person is subject to Section 16 solely as a result of being a member of a group, as described in Section 13(d)(3) and Rule 13d-5(b), that beneficially owns more than 10 percent of a class of equity securities. If that person no longer agrees to act together with the other group members for the purpose of acquiring, holding, voting or disposing of equity securities of the issuer, his or her membership in the group terminates. Group membership is construed the same way for purposes of Section 16(a) and Rule 16a-2(c) as for purposes of Section 13(d). Therefore, if after ceasing to act as a member of the group, the person’s beneficial ownership does not exceed 10 percent of a class of issuer equity securities registered under Section 12, and the person is not otherwise subject to Section 16 with respect to the issuer, Rule 16a-2(c) does not require the person to report his or her transactions in issuer equity securities that occur after the person ceases to act as a member of the group.

Exchange Act Forms

Form 10-Q

• If a company is current but not timely in its reporting obligations, it may still check the "yes" box on the cover page of a Form 10-Q indicating that it has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months, even if all required reports were not filed on time, so long as they are filed by the date of the filing of the Form 10-Q.

Form 20-F

• A foreign private issuer that has prepared its financial statements in a currency other than U.S. currency must provide the current and historical exchange rate information required by Item 3.A.3 of Form 20-F. An issuer may use any reliable source for the rates of exchange as long as it identifies the source. One example of a reliable source is the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Although the Federal Reserve Bank of New York is no longer publishing these exchange rates on its web site, it is still certifying them for customs purposes. The Board of Governors of the Federal Reserve Bank publishes these exchange rates on a weekly basis on its web site.

Exchange Act Form 8-K

Item 2.02 Results of Operations and Financial Condition

• When a registrant reports "preliminary" earnings and results of operations for a completed quarterly period (some of which amounts may even be estimates), in issuing this preliminary earnings release, the registrant must comply with all of the requirements of, and instructions to, Item 2.02 of Form 8-K.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

• If an Item 5.02(e) Form 8-K is filed to disclose an annual non-equity incentive plan award, the registrant is not required to provide disclosure pursuant to Item 5.02(e) of target levels with respect to specific quantitative or qualitative performance related-factors, or any other factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the registrant. This position is consistent with the treatment of similar information under Instruction 4 to Item 402(b) of Reg S-K and Instruction 2 to Item 402(e)(1) of Reg S-K.

Regulation S-K

Item 10 – General

• If a registrant discloses a financial measure or information that is not in accordance with GAAP (or calculated exclusively from amounts presented in accordance with GAAP) that was prepared in accordance with, but not required to be disclosed by, guidance published by a government, governmental authority or SRO that is applicable to the registrant, this information is considered to be a "non-GAAP financial measure" for purposes of Reg G and Item 10 of Reg S-K. Unless this information is required to be disclosed by a system of regulation that is applicable to the registrant, registrants that disclose this information must provide the disclosures required by Reg G or Item 10 of Reg S-K, if applicable, including the quantitative reconciliation from the non-GAAP financial measure to the most comparable measure calculated in accordance with GAAP. This reconciliation should be in sufficient detail to allow a reader to understand the nature of the reconciling items.

Item 301 – Selected Financial Data

• Item 301 of Reg S-K requires a foreign private issuer to disclose the exchange rate into U.S. currency of the foreign currency in which the financial statements are denominated. For purposes of this requirement, Item 301 provides that the rate of exchange means the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Although the Federal Reserve Bank of New York is no longer publishing the foreign exchange rates on its web site, it is still certifying them for customs purposes. The Board of Governors of the Federal Reserve Bank publishes these exchange rates on a weekly basis on its web site. The registrant should use this source of exchange rate information for purposes of Item 301.

Items 308 and 308T – Internal Control over Financial Reporting

• The guidance provided in Question No.3 of the FAQs for Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports does not relate to reverse acquisitions between an issuer and a private operating company, and the surviving issuer in a reverse acquisition is not a "newly public company" as that term is used in Exchange Act Release No. 54942 (Dec. 15, 2006). However, the staff acknowledges that it might not always be possible to conduct an assessment of the private operating company or accounting acquirer’s internal control over financial reporting (ICFR) in the period between the consummation date of a reverse acquisition and the date of management’s assessment of ICFR required by Item 308(a) of Reg S-K. The staff also recognizes that, in many of these transactions, such as those in which the legal acquirer is a non-operating public shell company, the internal controls of the legal acquirer may no longer exist as of the assessment date, or the assets, liabilities and operations may be insignificant when compared to the consolidated entity. In the instances described above, the staff would not object if the surviving issuer were to exclude management’s assessment of ICFR in the Form 10-K covering the fiscal year in which the transaction was consummated. However, when the transaction is consummated shortly after year-end and the surviving issuer is required to file an amended Form 8-K to update its financial statements for its most recent year-end, that filing is equivalent to the first annual report subsequent to the consummation of the transaction, and future annual reports should not exclude management’s report on ICFR. Similar conclusions may also be reached in transactions involving SPACs.

In lieu of management’s report, the issuer should disclose why management’s assessment has not been included in the report, specifically addressing the effect of the transaction on management’s ability to conduct an assessment and the scope of the assessment if one were to be conducted.

In addition, the staff notes that a reverse acquisition between two operating companies may often present facts that would preclude an issuer from concluding that management’s assessment may be excluded from the issuer’s Form 10-K. Consequently, issuers in this situation are encouraged to discuss with the staff whether it is appropriate to exclude management’s report on ICFR.

Notwithstanding management’s exclusion of its report, the issuer must include the ICFR language in the introductory portion of paragraph 4 of the Section 302 certification, as well as paragraph 4(b), because the issuer is subject to Section 404(a) of the SOX.

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