SEC Issues Final Rules on Securities Offering Reform

In light of the length and complexity of the rules, this memorandum only summarizes certain of the key elements of the rules.

Broadly speaking, the new rules implement major modifications in the following areas: (1) categories of issuers; (2) communication guidelines; (3) shelf offering process; (4) final prospectus delivery method; and (5) additional disclosures under the Securities Exchange Act of 1934 (the "Exchange Act").  The following is a brief discussion of each of these major modifications.

1. Categories of Issuers

For the purpose of this reform, the SEC defines an issuer as either: 

• Non-reporting Issuer.  An issuer that is not required to file Exchange Act reports and is not voluntarily filing such reports (e.g. issuers conducting an IPO).
• Unseasoned Issuer.  Any issuer that is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but not yet eligible to conduct a primary offering on Form S-3 or F-3.   This category also includes issuers who voluntarily file Exchange Act reports.
• Seasoned Issuer.  An issuer that is eligible to use Form S-3 or F-3 to register a primary offering of securities or to register securities in reliance on certain other provisions of Form S-3. 
• Well-known seasoned issuer ("WKSI").   An issuer that, in addition to being eligible to use Form S-3 or F-3 to register a primary offering, has either: (a) $700 million or (b) more of unaffiliated common equity float (on a worldwide basis); or at least $1.0 billion in aggregate principal amount of non-convertible securities, other than common equity, and issued for cash, not exchanged, in the preceding three years. 

The rules also provide that majority-owned subsidiaries of WKSIs may be treated as WKSIs in certain cases.

Ineligible issuers include, among others, blank check companies, shell companies, penny stock issuers, and any issuer that was in bankruptcy or insolvent during the previous three years or has been found to have violated the federal securities laws.  Ineligible issuers do not receive certain benefits of the new rules. 

2. Communication Guidelines

The new rules significantly relax restrictions on the communication guidelines. 

a. Gun-Jumping:  30-Day Bright-Line Safe Harbor

Under the new rules, all eligible issuers benefit from a new, "bright-line" safe harbor created by Rule 163A of the Securities Act.  The safe harbor allows an issuer to communicate, at any time prior to the 30-days before filing a registration statement, without risk of violating the "gun jumping" provisions , provided that the communication is made by or on behalf of the issuer and does not references a securities offering and the issuer takes reasonable steps to prevent distribution or publication during the 30-day period prior to filing of the registration statement.  In addition, a WKSI can engage in unrestricted oral or written offers before a registration statement is filed without gun-jumping under the safe harbor created by Rule 163 of the Securities Act. 

b. On-Going Communications throughout the Offering Process

The new rules create two safe harbors for non-offering related communications made throughout the offering process. 

• The first safe harbor is Rule 168 of the Securities Act, which permits reporting issuers to disseminate regularly released factual business and forward-looking information at any time, including around the time of a registered offering. 
• The second safe harbor is Rule 169 of the Securities Act, which permits non-reporting issuers to disseminate factual business information, but not forward-looking information, that has been regularly released to persons other than in their capacity as investors or potential investors, such as customers and suppliers. 

c. Free Writing Prospectus

The new rules permit an issuer the use of written communications, which generally includes electronic communication, throughout the offering process.  All issuers and offering participants will be permitted to use a "free writing prospectus" during the waiting period, provided that certain conditions are met.  Free writing prospectuses may take on any form and are not required to meet the informational requirements otherwise applicable to prospectuses.  The conditions required of an issuer vary depending on the category of the issuer.  For example, a WKSI may provide a free writing prospectus at any time, regardless of whether a registration statement is filed, although other conditions may have to be met.   However, non-WKSI issuers and other offering participants are permitted to use a free writing prospectus once a registration statement has been filed with the SEC.  Regardless of the issuer type, the information within the free writing prospectus may not conflict with any information within the statutory prospectus. 

d. Electronic and Media Communications

The new rules clarify that graphic communications are a form of written communications, with the exception of "live" communications delivered by graphic means such as a webcast of live roadshow.  Roadshows are an example of the new rules ' impact.  The traditional roadshow is conducted live to a limited institutional audience and, therefore, considered an oral communication not required to be filed with the SEC.  However, roadshows that are not presented to a live audience but are graphically transmitted are considered graphic (therefore written) and considered a free writing prospectus.  Accordingly, this type of roadshow is permitted if the conditions for a free writing prospectus are satisfied. These new definitions will impact other electronic communications, which include an issuer's website and information provided to a media publication. 

e. Use of Research Reports

Rules 137, 138 and 139 of the Securities Act revise the circumstances in which a broker or dealer may publish research reports around the time of a registered offering without violating Section 5 of the Securities Act.  The new rules expand the circumstances in which offering and non-offering parties may disseminate research reports.  The adopted rules indicate that providing research reports will not constitute an offer, general solicitation or advertisement in connection with an offering.

3. Shelf Offering Process

a. Procedural Changes to the Shelf Registration Process

The new rules contain certain procedural changes to modernize the shelf registration process for all eligible issuers. These changes will make shelf registration significantly more attractive for all issuers because of the elimination of previous obstacles to use the shelf program.  The changes available to all issuers include:

• Codification of existing practice concerning which information may be excluded from a base prospectus in a shelf registration statement;
• Eligible issuers who use Form S-3 or F-3 may keep a shelf registration in place for three years;
• Immediate takedowns are now permitted for shelf registration statements;
• "At-the-market" offering restrictions have been eliminated.  Therefore, issuers are able to conduct these offerings without identifying the underwriters in the registration statement and without any volume limitations; and
• Issuers may now make "fundamental change" disclosures through a post-effective supplement, rather than filing a post-effective amendment.  In addition, issuers eligible for a primary offering on Form S-3 or F-3 may use the prospectus supplement to make material changes to the plan of distribution or identify new selling security holdings, assuming the securities being sold were outstanding when the registration statement was filed.  

b. Automatic Shelf Registration for WKSIs

In addition to the aforementioned changes, the new rules create a highly flexible and streamlined "automatic shelf" registration procedure on Form F-3 available to WKSIs.  Some key characteristics of the "automatic shelf" registration procedure include:

• The shelf registration statement and any post-effective amendments becomes effective automatically upon filing, without SEC review;
• Unspecified amounts of different specific types of securities may be registered;
• Additional classes of securities and additional majority-owned subsidiaries as registrants may be added after effectiveness;
• Less information will be required in the "automatic shelf" registration than that of a regular base prospectus; and
• Filing fees may be paid on a "pay-as-you-go" basis.

Although it may appear that WKSIs are completely released from the traditional SEC review process for securities offerings, WKSIs, like all reporting issuers, are still subject to SEC review of their Exchange Act filings at least once every three years. 

4. Final Prospectus Delivery Method

The new rules adopted an "access equals delivery" model for final prospectuses delivery.  Therefore, issuers, brokers and dealers can satisfy their final prospectus delivery obligations if the final prospectus is or will be on file with the SEC within the required timeframe under Rule 424 of the Securities Act.  In addition, this rule applies to aftermarket prospectus delivery obligations.  

5. Additional Exchange Act Disclosures

The newly adopted rules also require additional disclosures in Exchange Act reports including:

• Risk Factor Disclosure.  Risk factors are required to be part of the annual report on Form 10-K, Exchange Act registration statement on Form 10 and quarterly updates to the risk factors in quarterly reports on Form 10-Q.  The risk factor discussion must be in accordance with the "plain English" requirements of Rule 421 of the Securities Act. 
• Unresolved Staff Comments.  Accelerated filers and WKSIs must disclose in their annual reports on Form 10-K, any written material comments by the SEC staff that remain unresolved as of the filing of the annual report.
• Voluntary Filer:  Voluntary filers under the Exchange Act must check a box on the cover page of Forms 10-K, 10-KSB and 20-F disclosing their status as such, indicating that they may cease to file Exchange Act reports "at any time and for any reason without notice."

For further information regarding this topic or other securities issues, please contact one of our securities attorneys.