Some CDI Updates From the SEC

By Cydney Posner

The new CDIs cover a variety of topics. Note in particular the last CDI, which is a clarification about CD&A that seems to be a change (at least in emphasis) from prior interpretations as suggested by some staff comments we have received.

SECURITIES ACT SECTIONS

Securities Act Section 5

• An Exchange Act reporting company that is conducting an exempt offering pursuant to Regulation S and Rule 144A and intends to include material non-public information in its offering memo cannot satisfy its Reg FD obligations by filing the complete offering memo as an exhibit to an Item 7.01 Form 8-K during the time the memo is being distributed to potential investors because the filing of the complete offering memo would likely would be inconsistent with the exemptions. To avoid this concern while still complying with Reg FD, the company could file a Form 8-K that sets forth the material non-public information that is included in the offering memo, including information about the offering of the type permitted to be disclosed pursuant to Securities Act Rule 135c.

SECURITIES ACT RULES

Rule 144(d) - Holding Period for Restricted Securities 

• In a private placement, Company A sells mandatorily exchangeable Notes that can be exchanged for a fixed number of shares of Company B, an affiliate of Company A, either at Company A's option or upon the occurrence of certain events outside the investor's control. For purposes of Rule 144(d)(1), the investor's Rule 144(d) holding period for the Company B Shares would begin at the time the investor originally acquired the Notes from Company A and not when the investor later receives the Company B Shares in exchange for the Notes. Upon sale of the Notes, there is deemed to be a concurrent private offering of the underlying Company B Shares, and the investor has no subsequent investment decision to make because the exchange is either at Company A's option or occurs automatically upon the occurrence of certain events outside the investor's control. In contrast, if the Notes also included a provision allowing the exchange to occur at the investor's option and the investor decided to exchange the Notes for Company B Shares, then the holding period for the Company B Shares would begin on the date of the exchange. If, however, the Notes also included this provision but the exchange occurred not because of the investor's decision but because of either Company A's decision or the occurrence of certain events outside the investor's control, then the holding period for the Company B Shares would begin at the time the investor originally acquired the Notes from Company A.

Rule 144(h) - Notice of Proposed Sale

• Rule 144(h) provides that the Form 144 must be transmitted for filing "concurrently" with either the placing of a sale order with a broker or the execution of the sale directly with a market maker. "Concurrently" means that the Form 144 should be transmitted for filing on the same day as the placing of the sale order or the execution of the sale. For example, if a person is filing a Form 144 by mail, he or she meets the requirements of Rule 144(h) if the Form is mailed on the same day as the placing of a sale order or the execution of the sale. The envelope should be addressed to the SEC's Office of the Secretary.

Rule 430B - Prospectus in a Registration Statement After Effective Date

• Under Rule 430B, a primary shelf-eligible issuer that is not a WKSI may not file a resale registration statement for a dollar amount of unspecified common shares by making a general statement that the registration statement covers common stock previously sold by the company in unregistered transactions and then, after the effectiveness of the registration statement, specify the common shares registered. Where the resale of securities is being registered on behalf of the selling securityholders, the initial transaction for the sale of the securities must be completed, and the resale registration statement must identify the initial transaction. Because the resale registration statement must register specific securities, the issuer can include the amount of securities in the registration statement fee table pursuant to Rule 457(a).

Rule 433 - Conditions to Permissible Post-Filing Free Writing Prospectuses

• Under Rule 433(f)(2)(i), an issuer or offering participant does not have to file a free writing prospectus if the substance of that free writing prospectus has "previously been filed" with the SEC. However, for Rule 433(f)(2)(i) to be available, the substance of the free writing prospectus must have previously been filed, not furnished, with the SEC.
• Where an officer participates in an interview with unaffiliated and uncompensated media and provides, as part of the interview, a package of written materials consisting only of the issuer's SEC filings for possible use in the media publication, under Rule 433(f)(2)(i), the issuer is not obligated to file as a free writing prospectus either the package of written materials or the media publication so long as the package of written materials includes only information that has previously been filed with the SEC.

REGULATION S-K

Item 401 - Directors, Executive Officers, Promoters and Control Persons

• If Item 401(a) and Item 401(e) director information is omitted from a proxy statement pursuant to Instruction 3 of Item 401(a), (which instruction provides that no information need be given regarding a director whose term of office will not continue after the meeting), this information is still required to be included in a Form 10-K that otherwise provides its Part III information by incorporation by reference from the proxy statement. Instruction 3 of Item 401(a) applies only to proxy statements and information statements.
• Item 401(e) information about a director's business experience is required to be disclosed even if the director is appointed by holders of a class of preferred stock. In this situation, the company may either provide the same information about this director as it would for directors nominated by the board or it may disclose that the preferred shareholder has advised the company that the shareholder has appointed this director because of the reasons specified, which would be the Item 401(e) information provided to the company by the shareholder that the company would then include in its filing.

Item 402(b) - Executive Compensation; Compensation Discussion and Analysis

• A company is not required to discuss in CD&A executive compensation, including performance target levels, to be paid in the current year or in future years. The CD&A covers only compensation "awarded to, earned by, or paid to the named executive officers." Although Instruction 2 to Item 402(b) provides that the CD&A should also cover actions regarding executive compensation that were taken after the registrant's last fiscal year end, that disclosure requirement is limited to those actions or steps that could "affect a fair understanding of the named executive officer's compensation for the last fiscal year."

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