SEC proposes amendments to Rule 163

News Brief
December 21, 2009

By Cydney Posner

The SEC today proposed amendments to Rule 163(c) under the Securities Act that would allow a well-known seasoned issuer (WKSI) to authorize an underwriter or dealer to act as its agent or representative in communicating about offerings of the issuer's securities prior to the filing of a registration statement.

As part of Securities Offering Reform in 1995, the SEC adopted Rule 163, which allowed WKSIs, without violating the "gun-jumping" provisions of the Securities Act,  to engage in unrestricted oral and written offers before filing a registration statement. (As you may recall, a WKSI is an issuer that meets the registrant requirements of Form S-3 or Form F-3, has at least $700 million in worldwide market value of outstanding voting and non-voting common equity held by non-affiliates (or has issued, for cash, within the last three years at least $1 billion aggregate principal amount of non-convertible securities through primary offerings registered under the Securities Act), and is not an "ineligible issuer," as defined.) Rule 163 exempts an offer made "by or on behalf of" a WKSI, but, under the current rule, a communication is deemed to be "by or on behalf of" a WKSI if the issuer or agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it is made.  At the time of adoption of the Rule, the SEC expected that WKSIs would usually have automatic shelf registration statements on file that could be used for registered offerings and, therefore, that it would be unusual for WKSIs to make offers prior to the filing of a registration statement in reliance on the Rule 163 exemption.  As it turns out, however, many WKSIs have not filed ASRs or their ASRs may not register all of the types of securities that they may want to offer.

In that event, if a WKSI wants to make offers before a registration statement is filed, it must rely on Rule 163. However, Rule 163 creates some impediments to a WKSI's communications with broader groups of potential investors.  For example, if a WKSI wanted to assess the level of investor interest in its securities before filing, it would be allowed under Rule 163 to communicate directly with potential investors, but if it had insufficient knowledge about potential investors or did not want to contact them directly out of Reg FD concerns, it might want to rely on its investment bankers for that purpose (who could conceal the issuer's identity).  However, as the SEC reads Rule 163, it does not permit an offering participant who is an underwriter or dealer to make communications, or to authorize or approve communications, as an agent or representative of a WKSI. To further liberalize Rule 163 to address this issue, the SEC is proposing to amend the "by or on behalf of an issuer" definition in Rule 163(c) so that, under certain circumstances, underwriters or dealers can be agents or representatives of WKSIs under the rule.

Under the proposed amendment, an underwriter or dealer could be an agent or representative of a WKSI under Rule 163 if the following conditions were satisfied:

  • the underwriter or dealer receives written authorization from the WKSI to act as its agent or representative before making any communication on its behalf
  • the issuer authorizes or approves any written or oral communication (presumably, the contents of an oral communication) before it is made by an authorized underwriter or dealer as agent or representative of the issuer
  • any authorized underwriter or dealer that has made any authorized communication on behalf of the issuer in reliance on Rule 163 is identified in any prospectus contained in the registration statement that is filed for the offering to which the communication relates

None of the proposed amendments would affect any other provisions of Rule 163, including the following:

  • all communications made by or on behalf of the issuer and in reliance on Rule 163 would continue to be subject to Reg FD
  • every written communication that is an offer made in reliance on the Rule 163 exemption would contain substantially the legend required by the rule
  • every written communication that is an offer made in reliance on the Rule 163 exemption would be filed with the SEC as a free writing prospectus when the registration statement, or amendment to the registration statement, is filed

The proposed amendments are for the limited purpose of enabling issuers to authorize underwriters or dealers to approach potential investors on their behalf, not to allow unrestricted communications by any market participant or to permit underwriters, without prior authorization, to gauge interest in the market and then present the issuer with an unsolicited proposal for an offering. Any written or oral communication made by an authorized underwriter or dealer would be an issuer communication, and any approved written (not oral) communication made pursuant to the proposed amended rule would need to be filed as an FWP when a registration statement for the offering is filed. (The amendment is not intended to affect the "reverse inquiry" process, under which, in certain note programs, an investor purchases securities from the issuer through an underwriter or dealer that is not designated in the prospectus as the issuer's agent by having the underwriter approach the issuer with an interest from the investor.) As is currently the case, communications made in reliance on Rule 163 are not considered to be made in connection with a registered securities offering for purposes of the exclusion from Reg FD. As a result, underwriters using the rule for material non-public information would need to obtain confidentiality agreements (or the issuer would need to disclose the information).  In addition, "any misuse of the information for trading by any person subject to a confidentiality agreement would be covered under either the "temporary insider" or the misappropriation theory of insider trading." 

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