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SEC Adopts Offering Reform Rules
Corporate Client Memo Alert
October 20, 2005

SEC Adopts Offering Reform Rules



At an opening meeting held June 29, 2005, the United States Securities and Exchange Commission ("SEC") voted unanimously to adopt final rules modifying the registration, communication, and offering processes under the Securities Act of 1933 ("Securities Act").  The final rules go into effect on December 1, 2005.  In addition, on September 13, 2005, the SEC issued interpretive guidance on the transition to compliance with the new rules.  The following is a summary of the final rules and the interpretive guidance.   


The adopted rules address three main areas:


  • communication related to registered securities offerings;


  • registration and other procedures in the registered offering process; and


  • delivery of information to investors in a timely manner.


The adopted rules will:


  • facilitate greater availability of information to investors and the market;


  • reduce barriers to open communications;


  • reflect the importance of electronic dissemination of information; and


  • improve the capital formation process.


Modifications to Communication Procedures


The reform will allow more information to reach investors by revising the "gun-jumping" provisions under the Securities Act.  Historically, communications prior to filing a registration statement have been at risk of being treated as prohibited offers, and written communications during the period between the filing of a registration statement and its effectiveness have been at risk of being treated as nonconforming prospectuses.  The adopted rules will reduce such restrictions and allow for more flexibility. 


A significant factor in reducing restrictions on communication and allowing for more flexibility involves the categorization of issuers.  Registrants will be divided into five categories.  Such categories will establish a registrant's eligibility under the new communication provisions.  The most dramatic change in the securities offering process will apply to well-known seasoned issuers, described below.


The reform divides issuers into the following five categories:


  • Well-known seasoned issuer - a new class of issuer that is required to file reports pursuant to Section 13(a) or Section 15(d) of the Exchange Act and satisfies the following requirements:


·        the issuer satisfies the requirements of Form S-3 or Form F-3, which includes being current and timely in all Exchange Act reporting requirements for the preceding 12 calendar months,


·        as of a date within 60 days of its eligibility determination date, the issuer either:


·        has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or


·        has issued in the last three years, at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash not exchange, registered under the Securities Act (exchange offers for securities that previously had been issued in Rule 144A offerings are excluded from the $1 billion calculation); and


·        the issuer is not an ineligible issuer, as described below;


  • Seasoned issuer – an issuer eligible to use Form S-3 or Form F-3 to register primary offerings of securities;


  • Unseasoned issuer - an issuer required to file reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"), but cannot use Form S-3 or F-3 for a primary offering of its securities; and


  • Non-reporting issuer – an issuer not required to file reports pursuant to Section 13 of 15(d) or the Exchange Act, regardless of whether it is filing such reports voluntarily.  This category includes high yield debt issuers that file Exchange Act reports after the year in which the registration statement became effective only because they are contractually obligated to do so by the terms of an indenture.


  • Ineligible issuers are:


·        reporting issuers who are not current in their Exchange Act reports and other materials required to be filed during the prior 12 months;


·        issuers who are, or during the prior three years were, blank check companies, shell companies or issuers for an offering of penny stock;


·        issuers who are limited partnerships offering and selling their securities other than through a firm commitment underwriting;


·        issuers who have filed for bankruptcy or insolvency during the past three years;


·        issuers who are, or have been during the past three years, the subject of a refusal or stop order under the Securities Act, or are the subject of a pending proceeding under the Securities Act; or


·        issuers who have been, or whose subsidiaries at the time they were subsidiaries of the issuer were, convicted of any felony or misdemeanor described in certain provisions of the Exchange Act, found to have violated the anti-fraud provisions of the federal securities laws, or made the subject of a judicial or administrative decree or order (including a settled claim or order) prohibiting certain conduct or activities regarding the anti-fraud provisions of the federal securities laws during the past three years.


The adopted rules will modify communication procedures to have the following effects:


·        Communications by issuers more than 30 days before filing a registration statement will be allowed so long as they do not reference a securities offering;


·        Reporting issuers will be able to publish or disseminate, at any time, regularly released factual business information and forward-looking information.  Factual business information is defined as:


·        factual information about the issuer, its business or financial developments, or some aspect of its business;


·        advertisements of, or other information about, the issuer's products or services;


·        dividend notices; and


·        factual information set forth in the issuer's Exchange Act reports.


Forward-looking information is defined as:


·        projections of the issuer's revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure and other financial items;


·        statements about management's plans and objectives for future operations, including plans and objectives relating to the products or services of the issuer;


·        statements about the issuer's future economic performance; and


·        assumptions underlying or relating to any of the foregoing.


To qualify for the safe harbor, factual business information or forward-looking information must not include information about the registered offering or information released or disseminated as part of the offering activities in the registered offering.  In addition, the safe harbor will be available only when:


·        the issuer has previously released or disseminated the same type of information in the ordinary course of its business; and


·        the timing, manner and form in which the information is released or disseminated is materially consistent with similar past disclosures. 


Issuers must have a track record of releasing the particular type of information and issuers must consider the frequency and regularity with which they have released the same type of information in assessing the availability of the safe harbor. 


·        Non-reporting issuers will be able to publish or disseminate, at any time, factual business information (but not forward-looking information) that is regularly released and intended for use by persons other than in their capacity as investors or potential investors.  Factual business information is defined as:


·        factual information about the issuer, its business or financial developments, or some aspect of its business; and


·        advertisements of, or other information about, the issuer's products or services.


·        Well-known seasoned issuers will be able to engage, at any time, in oral and written communications, including the use of a "free writing prospectus," defined as any written communication, including an electronic communication, constituting an offer to sell or a solicitation of an offer to buy securities, that is not a statutory prospectus, subject to enumerated conditions;


·        The safe harbor in Rule 134, which permits limited public notices about an offering after an issuer files its registration statement, has been expanded to:


·        permit increased additional information about the issuer and its business;


·        permit more information about the terms of the securities being offered; and


·        expand the scope of permissible factual information about the offering itself, including underwriter information, more details about the mechanics of and procedures for transactions in connection with the offering process, the anticipated schedule of the offering and a description of marketing events; and


·        The restraints placed on research reports have been decreased.  The adopted rules modify the definition of "research report" to include written communications that contain information, opinions or recommendations, even if the communication does not present sufficient information upon which to base an investment decision.  Also, the adopted rules have expanded the situations in which participants may disseminate research reports during a registered offering.       


As defined above, a "free writing prospectus" is any written communication, including an electronic communication, constituting an offer to sell or a solicitation of an offer to buy securities, that is not:


·        a prospectus satisfying the requirements of Securities Act Section 10(a) or SEC rules permitting preliminary or summary prospectuses or prospectuses subject to completion;


·        a communication made in reliance on special rules for asset-backed issuers; or


·        a communication given together with or after delivery of a final statutory prospectus. 


In offerings by non-reporting issuers (such as IPOs) and offerings by unseasoned issuers, the SEC conditions the use of a free writing prospectus on prior filing of a registration statement and, in most cases, delivery of the free writing prospectus to the offeree being preceded or accompanied by the most recent statutory prospectus.  (If the free writing prospectus is in electronic form, an active hyper-link from it to the statutory prospectus can satisfy this requirement.)  Seasoned issuers and well-known seasoned issuers are not subject to the requirement to deliver a statutory prospectus concurrently with or prior to the delivery of a free writing prospectus.  Seasoned issuers, however, must file the corresponding registration statement prior to using the free writing prospectus.  Well-known seasoned issuers may use a free writing prospectus at any time.   An ineligible issuer, as discussed above, cannot use a free writing prospectus. 


To meet the definition of "free writing prospectuses" the communications must: (i) not be materially misleading, (ii) be consistent with the statutory prospectus, (iii) contain a legend regarding the statutory prospectus, (iv) be retained for at least three years, and (v) be filed with the SEC in most instances (preliminary term sheets do not need to be filed with the SEC).


Road shows that do not originate live, in real-time to a live audience and are graphically transmitted ("electronic road shows") are written communications and, therefore, are free writing prospectuses.  Notwithstanding the requirement to file free writing prospectuses, electronic road shows will not need to be filed with the SEC unless:


·        the road show relates to an initial public offering of common or convertible equity securities; and


·        the issuer does not make at least one version of the bona fide electronic road show used in the initial public offering readily available on an unrestricted basis to all investors beginning no later than the time of transmission of any version of such electronic road show. 


A live road show (including a live road show that is transmitted graphically in real-time) will continue to be considered an oral communication and, as such, will not constitute a free writing prospectus.  Slides or other visual aids used as part of a live road show and not made available separately will be deemed to be part of the live road show and will not be deemed to be a written communication.


Also, the new communication provisions state that an offer of an issuer's securities, either on the issuer's website or on another person's website hyperlinked to the issuer's website, will be considered a "free writing prospectus."  Historical information will not be considered a current offer of the issuer's securities and, therefore, will not be a free writing prospectus if the historical information is separately identified as such and located in a separate section of the issuer's web site containing historical information.


Modifications to Registration Procedures


Historically, issuers register debt and equity securities to be "taken off the shelf" and offered to the public on a delayed or continuous basis for two years following registration.  The process of registering securities and taking them off the shelf to offer them to the public usually consists of the following documents (i) a base prospectus which contains information pertaining to all offerings under the shelf registration statement and (ii) prospectus supplements which contain specific information pertaining to securities taken down from the shelf to be offered to the public.  Instead of having issuers register securities they intend to offer within two years, the adopted rules allow issuers to file a new registration statement every three years.  Also, the adopted rules allow well-known seasoned issuers to use an automatic shelf registration.


Well-known seasoned issuers will be able to use a new shelf registration procedure called an "automatic shelf registration."  This method will permit automatic effectiveness, "pay as you go" registration fees, and the ability to exclude additional information from base prospectuses.  The adopted rules will allow well-known seasoned issuers to:


  • register an unspecified amount of securities on a Form S-3 or F-3, without SEC staff review, that will become effective automatically;


  • add additional classes of securities to an effective shelf registration;


  • add additional majority owned subsidiaries as issuers to an already effective shelf registration;


  • exclude from the base prospectus a plan of distribution which can be included in a prospectus supplement; and


  • use "pay as you go" registration fees.


The adopted rules will also revise other restrictions of shelf registration provisions.  The revisions will:


  • codify in one rule the information that may be excluded from a base prospectus in a shelf registration statement at effectiveness and included later;


  • require issuers to file a new registration statement every three years, subject to a limited extension, instead of having issuers register only securities they intend to offer within two years;


  • eliminate restrictions on "at-the-market" equity offerings for seasoned issuers;


  • allow immediate takedowns of securities off shelf registration statements; and


  • allow issuers to use prospectus supplements to make material changes to the plan of distribution found in the base prospectus.


The adopted rules will expand the use of incorporation by reference.  The adopted

rules will allow issuers using Form S-1 or F-1 to incorporate by reference information from their own reports and documents filed under the Exchange Act if they:


·        have filed at least one annual report under the Exchange Act;


·        are current under their reporting obligations; and


·        make accessible on their website their Exchange Act reports being incorporated by reference into their Form S-1 or F-1. 


Incorporation by reference on Forms S-1 and F-1 is not permitted for information filed after the registration statement is effective, however.


Also, the adopted rules will eliminate Forms S-2 and F-2 and expand the availability of Form S-3 and F-3.  This reform will allow Form S-3 and F-3 to be used by well known seasoned issuers to register offerings of guarantees by majority owned subsidiaries of non-convertible securities of other majority-owned subsidiaries or of the parent. 


Modifications to Prospectus Delivery


The reform has created an "access equals delivery" model for final prospectuses.  The adopted rules assume investors have internet access.  The reform allows issuers subject to a prospectus delivery requirement to satisfy delivery obligations by timely filing the final prospectus with the SEC, rather than by delivery of copies to investors, so long as investors are sent a notice (which could be part of a written confirmation of sale) informing them that sales were made pursuant to a registration statement or in a transaction otherwise subject to the prospectus delivery requirements.  Under this model, offerings may be conducted without printing or delivering a final prospectus. 



Modifications to Liability Provisions


"Free writing prospectuses" will be subject to antifraud provisions.  The timing of liability has been modified under the antifraud provisions with respect to statements by a seller to an investor.  Under the adopted rules, liability will be measured as of the date the investor enters into a contract to buy the securities, instead of the date the final prospectus is filed.  Although the "free writing prospectuses" will be subject to antifraud provisions, "free writing prospectuses" will not be considered part of the registration statement to which they relate.  However, under the adopted rules, prospectus supplements used in connection with shelf takedowns will be considered to be part of a registration statement to which they relate.        


Other Disclosure Modifications


The reform has expanded the periodic reporting disclosure requirements under the Exchange Act to require the following: 


  • Disclosure of risk factors in annual reports on Form 10-K, 10-K and registration statements on Form 10, and disclosure in Form 10-Q of any material changes from the risks described in prior annual or quarterly reports.  Risk factor disclosure is not required in Form 10-KSB or Form 10-SB;


  • Disclosure of "voluntary" filer status on Exchange Act reports so that investors are aware that an issuer that voluntarily files its Exchange Act reports is entitled to cease filing at any time and for any reason without notice; and


  • "Accelerated filers" and well-known seasoned issuers must disclose in their annual reports on Form 10-K or 20-F the substance of any material and unresolved comments regarding their periodic reports received from the SEC staff more than 180 days before the end of their fiscal year on Form 10-K or 20-F.


Transition Issues


The following is a summary of the SEC's interpretive guidance on the transition to compliance with the new rules:


·        An issuer can rely on the new communications rules, such as using a free writing prospectus or issuing factual business information, for communications that occur on or after December 1, 2005, even if the offering commenced before December 1, 2005; 


·        The new undertakings required in registration statements must be included in all registration statements or amendments filed on or after December 1, 2005.  An issuer is not required to file an amendment solely to include the new undertakings if not otherwise filing an amendment, even with respect to a registration statement that is not yet effective as of December 1, 2005;


·        A well-known seasoned issuer with an existing shelf registration statement on Form S-3 or F-3 cannot amend that shelf registration statement to make it an automatic shelf registration statement.  Instead, it must file a new registration statement on Form S-3 or F-3 which is designated as an automatic shelf registration statement;


·        An issuer can use a prospectus supplement to make material amendments to the plan of distribution or to add or replace selling security holders to an existing resale registration statement on Form S-3 or Form F-3, if the prospectus supplement is filed after December 1, 2005;


·        The three-year duration for shelf registration statements begins on the later of December 1, 2005 or the date of effectiveness.  Therefore, if a shelf registration statement is effective before December 1, 2005, the three-year period will begin on December 1, 2005, regardless of the amount of time the registration statement has been effective prior to that date;


·        Disclosure of risk factors and unresolved SEC comments must first be included in the Form 10-K, Form 10 and Form 20-F for any fiscal year ending on or after December 1, 2005, even if the annual report will be filed after December 1, 2005.  The risk factor disclosure required in Form 10-Q must be included only after the issuer is first required to include risk factor disclosure in its Form 10-K; and


·        An issuer does not need to amend its existing shelf registration statement that discloses that it may be used for at the market offerings.  If the shelf registration statement does not disclose that it may be used for at the market offerings, an issuer may file a prospectus supplement on or after December 1, 2005 to amend the plan of distribution section to provide for at the market offerings and then immediately commence such an offering.


The SEC adopting release may be obtained from the SEC web site at:  The transition questions and answers may be obtained from the SEC web site at  We would be happy to discuss this reform and its implications on your company.  For further information, please contact our corporate shareholder who regularly works with you.




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