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Securities Offering Reform: Greasing the Gears of Public Offerings

    Client Alerts
  • November 28, 2005

The Securities and Exchange Commission recently made significant reforms to the federal securities offering process. The new rules, which take effect on December 1, 2005, “grease the gears” of the offering process by modernizing permitted offering communications and streamlining securities registration processes for certain classes of issuers.

The new rules also require significant changes to risk factor disclosures in the Annual Report on Form 10-K, effective for Form 10-Ks filed for fiscal years ending on or after December 1, 2005.

New Categories of Issuers

The new rules create four new categories of securities issuers:

Well-known seasoned issuers (“WKSIs”) are issuers that:

  • are required to file periodic reports under the Securities Exchange Act of 1934, i.e., cannot be a “voluntary” filer;
  • are eligible to use Form S-3;
  • either (i) have a market value of outstanding voting and non-voting common equity held by non-affiliates of at least $700 million; or (ii) have issued, over the prior three years, at least $1 billion in aggregate amount of non-convertible securities (other than common equity) in registered primary offerings (not exchanges) for cash; and
  • are not an ineligible issuer, as defined in Rule 405 (for example, issuers that have not timely filed their periodic reports, shell companies, issuers convicted of certain securities law violations, and recently bankrupt issuers).

A Seasoned Issuer is eligible to use Form S-3 to register primary offerings of securities.

A Non-seasoned Issuer files periodic reports under the Exchange Act, but is not eligible to use Form S-3.

A Non-reporting Issuer is not required to file periodic reports under the Exchange Act, regardless of whether it is filing such reports voluntarily.

Enhanced Offering Communication

Depending on the category of issuer, the new rules dramatically enhance an issuer’s ability to communicate with potential investors throughout the offering process.

Gun Jumping Safe Harbors. The new rules provide certain safe harbors from “gun jumping” violations of Section 5 of the Securities Act of 1933. These safe harbors include protections for, among other things,

  • independent media communications;
  • factual business information about an issuer; and
  • issuer communications within 30 days prior to filing a registration statement.

Use of a Free Writing Prospectus. A “free writing prospectus” is any written communication about a securities offering, whether before, during or after the offering, that varies in any way from a full statutory prospectus that complies with Section 10(a) of the Securities Act. While all issuers may communicate with prospective investors about an offering through the use of a free writing prospectus after a registration statement is filed, the new rules permit a WKSI to do so without a registration statement on file with the SEC.

The new rules impose certain timing, legend, retention and (in some cases) filing requirements for free writing prospectuses. However, they proscribe very little in the way of form and content. Therefore, all issuers may utilize a wide variety of communications that were not permitted prior to the new rules, including, for example, “electronic road shows,” which are real time communications to a live audience that are recorded and then archived by the issuer.

Streamlined Registration Process

Automatic Shelf Registration Statements for WKSIs. The new rules streamline the registration process for WKSIs by creating a new automatic shelf registration statement. The automatic shelf:

  • may omit from the base prospectus certain disclosure information required under existing rules;
  • may register an “unallocated” amount of securities;
  • provides for pay-as-you-go registration fees; and
  • most importantly, is declared effective immediately upon filing, i.e., there is no SEC review.

Changes for WKSIs and Seasoned Issuers. WKSIs and seasoned issuers may provide selling shareholder information in a prospectus supplement, rather than a post-effective amendment. The new rules generally eliminate the “sell within two years” requirement under Rule 415 for offerings on Form S-3. Although the new rules require that both the automatic shelf and regular shelf registration statements not be more than three years old, seasoned issuers are given a six-month grace period if their filings are reviewed by the SEC. This permits seasoned issuers to sell securities under the old shelf while putting a new shelf in place during the review and comment process.

Changes for All Issuers. Form S-1 is amended to permit certain eligible issuers to incorporate by reference information from previously filed (but not future) Exchange Act reports. Form S-2 has been eliminated.

Economizing the Prospectus Delivery Process

Amendments to the prospectus delivery requirements of the Securities Act are among the most sweeping changes contained in the new rules. Under the new concept of “access equals delivery,” issuers no longer must deliver a hard copy of the final prospectus to investors after “pricing” and before the closing of an offering. Rather, issuers need only file a final copy of the prospectus through EDGAR within the timeframe required under Rule 424(b). These new delivery rules do not apply to business combinations or exchange offers.

Enhanced Risk Factor Disclosure

The new rules impose a number of changes designed to better integrate what previously were different disclosure standards for risk factors under the Securities Act and the Exchange Act. Under the new rules, the same risk factor disclosure required by Item 503(c) of the Securities Act (other than information about a specific securities offering) now must be included in Annual Reports on Form 10-K and in Exchange Act registration statements on Form 10. In addition, issuers now must update material changes to their risk factors on a quarterly basis in their Form 10-Qs.

Recommended Immediate Action Steps

In light of these significant changes in the securities laws, we recommend that our clients take the following steps:

1. Determine which of the four issuer categories applies to your company.

2. If you are a WKSI, determine whether it makes sense to file an automatic shelf registration statement. (Most WKSIs will likely do so.) If so,

  • document your WKSI status;
  • adopt board resolutions authorizing the filing of an automatic shelf;
  • prepare a “form” base prospectus to be used in the automatic shelf and coordinate its content with the underwriters;
  • have your outside auditors review, in advance, the base prospectus to facilitate more timely delivery of the required auditor consents;
  • coordinate updated “due diligence” procedures with your creditors and underwriters;
  • negotiate a form shelf underwriting agreement;
  • adopt a free writing prospectus retention policy; and
  • adopt a final prospectus filing policy.

3. Determine whether changes in your communications policies and procedures are advisable in light of the enhanced communication rules.

4. Revise your Form 10-K now to comply with the new risk factor disclosure requirement. Update the substance of your risk factors in accordance with recent SEC guidance regarding appropriate content and presentation. The normal Form 10-K preparation schedule will not provide enough time to make these changes, particularly for accelerated filers.

This Client Alert is intended to inform readers of recent developments in the field of securities and corporate finance law. It should not be considered as providing conclusive answers to specific legal problems.