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SEC Reforms the Rules for Registered Public
Offerings
By Michael
Phillips and Jacob
Heth
[August 2005]
On July 19, 2005, the Securities and Exchange
Commission (the “Commission”) adopted new rules
that significantly impact the registration, communication, and
offering processes under the Securities Act of 1933 (the “Securities
Act”). Among other things, the new rules:
- facilitate increased availability of information before
and during a proposed public offering;
- streamline the registration process; and
- enable issuers and underwriters to make better use of electronic
delivery of prospectuses.
The rules also codify the Commission’s position
on issuer and underwriter liabilities in public offerings, and
provide guidance to market participants regarding the Commissions’
interpretation of the liability provisions of Securities Act.
This Advisory Bulletin is intended to be an overview
of some of the more important aspects of the new rules. We will
provide further information and analysis in subsequent advisory
bulletins.
New Rules Motivated By Technology Advances and Enhanced
Protection
Technological advances have increased both the
market’s demand for more timely corporate disclosure and
the ability of issuers to capture, process, and disseminate
information regarding the issuer and to notify the public of
changes relating to the issuer and its condition. Additionally,
the enactment of the Sarbanes-Oxley Act of 2002 and subsequent
Commission rules have enhanced the disclosure required in issuer
filings and accelerated the filing deadlines for many issuers
under the Securities Exchange Act of 1934 (the “Exchange
Act”). As a result, the Commission recognized the opportunity
to modernize the securities offering and communication processes
while maintaining reasonable protection of investors.
Well-Known Seasoned Issuers: A New Class of Issuers
The new rules introduce a new class of issuers,
referred to as "well-known seasoned issuers" or "WKSIs".
The new rules give WKSIs the greatest latitude to communicate
during and in connection with an offering, and the most flexible
registration procedures. WKSIs include issuers that have timely
filed their Exchange Act reports for one year and have either
(i) $700 million of worldwide public float, or (ii) issued $1
billion in non-convertible securities, other than common equity,
in registered offerings for cash in the preceding three years.
In addition, a company that is a subsidiary of a WKSI may be
considered a WKSI in certain circumstances. The Commission selected
these thresholds because larger companies are more likely to
have substantial analyst and media coverage and institutional
holdings, thereby providing checks and balances on their communications
and other activities. The Commission intends to consider lowering
these thresholds in the future.
Offering Process Reforms: Simplification and Modernization
The new rules substantially modify the offering
process for WKSIs by simplifying the registration statement
procedure. Now, WKSIs may file registration statements that
will automatically become effective upon filing without staff
review, and may register securities on a pay-as-you-go basis
for new offerings. The Commission also modified the offering
process for unseasoned issuers by eliminating the limit on the
amount of securities that can be included in shelf registrations,
adding more flexible rules for the content of shelf registration
statements, and allowing greater use of incorporation by reference.
Communication Reforms: Expansion and Relaxation of Rules
The Commission’s adoption of the new
rules marks the end of the traditional quiet period rules, and
significantly expands permitted communications during a public
offering. The former rules restricted the communication of offers
before the filing of a registration statement, restricted written
communications during the period between the filing of a registration
statement and its effectiveness, and prohibited certain post-offering
communications regardless of the accuracy of the information
provided.
Under the new rules, communication restrictions
are relaxed to varying degrees for different classes of issuers.
The relaxation of communication rules relate to:
- regularly released factual business information;
- regularly released forward-looking information;
- communications made more than 30 days
before filing a registration statement;
- communications made during the 30 days
before filing;
- registration statements;
- written communications made in accordance
with the safe harbor in Securities Act Rule 134; and
- written communications (other than a
statutory prospectus) by any eligible issuer after filing
a registration statement.
The Commission also introduced the “free-writing
prospectus” concept. In general, this eases restrictions
on the form and content of offering documents and communications
in the case of a registered offering.
Prospectus Delivery Reforms: Elimination of Physical
Delivery
The new rules incorporate an "access
equals delivery" model for prospectus delivery, eliminating
the requirement for physical delivery of a new prospectus if
investors have access (including electronic access) to a new
prospectus properly filed with the Commission. Likewise, neither
issuers nor underwriters and dealers are required to physically
deliver a new prospectus before written confirmations or allocations
are sent to investors or in connection with aftermarket trading,
provided that the registration statement relating to the prospectus
is effective and is filed with the Commission within the prescribed
time frame.
Liability Reforms: Establishment of Formal Liability
The new rules formally establish liability
for misstatements and omissions based on the information conveyed
to investors at the time the contract for the sale of the security
is completed. In addition, information conveyed to a purchaser
of securities only after the time of sale will not be taken
into account for purposes of establishing such liability. The
Commission indicated that it will provide additional guidance
on liability issues in subsequent releases, including possible
methods for revising the sale contract and sale date in the
event new material information becomes available after the initial
contract date.
Limited Scope of Reforms: Inapplicability to Certain
Issuers
Certain issuers, such as penny stock, blank
check companies, shell companies, certain limited partnerships,
and issuers who have filed for bankruptcy in the past three
years are prohibited from taking advantage of the new rules.
The communication rules are also inapplicable to investment
companies, business development companies, and M&A transactions
as communications relating to those entities and transactions
are regulated separately.
For more information, please contact:
The authors gratefully acknowledge the assistance
of Ken Mitchell-Phillips,
a summer associate at Davis Wright Tremaine.
This Corporate Finance Law Advisory
is a publication of the Business Transactions/Corporate Finance
Group of Davis Wright Tremaine LLP. Our purpose in publishing
this Advisory is to inform our clients and friends of developments
in business, corporate finance and securities laws. It is not
intended, nor should it be used, as a substitute for specific
legal advice as legal counsel may only be given in response
to inquiries regarding particular situations.
Copyright
© 2005, Davis Wright Tremaine LLP.
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