Securities Offering Reform and Other Developments

Other Issuers Will Also Benefit

The reform rule will benefit other types of issuers. "Seasoned issuers" (companies that are eligible to register a primary offering of securities on Form S–3) will be able to identify selling stockholders in prospectus supplements rather than in the registration statement or a post–effective amendment. Immediate take downs from shelf registration statements will also be permitted - eliminating the "convenience shelf" doctrine that required companies to wait before taking down securities from the shelf.

Form S–1 has been amended to allow issuers that have filed at least one Form 10–K and are current in their reporting obligations to incorporate by reference, any information in previously filed Exchange Act reports, which should significantly simplify most follow-on offerings. Also, the little–used Form S–2 has been eliminated.

Changes to Communication Process

Although less dramatic, the reforms will have a pervasive impact on communications in securities offerings. These include a liberalization of the rules that restrict public communications during an offering. WKSIs will largely be freed of concerns that such communications might constitute "gun–jumping" or prevent an offering.

For purposes of Section12(a)(2) of the Securities Act, the rule codifies an SEC interpretation that information given after a "sale" will not be considered in determining disclosure liability. However, information that is "reasonably available" to an investor - including information the issuer has disclosed on EDGAR - will be considered. This should prevent upset investors from arguing that issuers should have their liability based only on what the investors "truly knew." The reforms will also permit the use of a "free writing prospectus"- a document that will be subject to liability and Section12(a)(2) but which has no "line–item" disclosure requirements other than a required legend. WKSIs can use a free writing before filing a registration statement. WKSIs and other "seasoned issuers" will be able to use a free writing prospectus to sell securities without the need to deliver physically a preliminary prospectus.

Changes to Exchange Act Reporting

All issuers will be required to include a "risk factors" section in their annual reports on Form10–K. Although a number of companies have been doing this voluntarily, it is only required in a Securities Act registration statement at present. The disclosure will have to be written using the SEC's "plain English" concepts. Any material changes to the risks identified in the Form 10–K will have to be reported in subsequent Form10–Qs. Form10–K has also been amended to require any issuers that are filing periodic reports under the Exchange Act on a voluntary basis to identify themselves as voluntary filers. Finally, all "accelerated filers" and WKSIs will have to disclose in their Form 10–Ks any unresolved written comments from the SEC staff in reviewing the issuers' periodic reports. The comments must be "material" in the issuer's belief and must have been issued more than 180 days prior to the issuer's fiscal year–end.

Interpretation of FAS 123(R) May Require Companies to Change the Way They Make Stock Awards

The FASB has recently taken the position that the "grant date" of a stock–based compensation award will be the date when the terms of an award are communicated to the affected employee. This is a significant change from prior practice which used the date that a board of directors or committee made the award, as long as such action was communicated to the recipients within a reasonable time. This means that companies should re–examine the processes they use to document and communicate awards before FAS123(R) goes into effect. This may present logistical challenges for larger companies or companies which make stock–based awards on a widespread basis. Some suggestions for dealing with this issue include: (1)preparing option agreements far enough in advance so that they can be delivered or transmitted electronically on the date the award is made; (2)making awards on Fridays or days before holidays so that the necessary documents can be delivered or transmitted before the next trading day; and (3)communicating all material terms in advance to employees, e.g. vesting requirements and number of shares subject to options, so that all that is left to communicate is the strike price.

Change in Indiana Law Will Reduce Proxy Mailing Costs

Effective July 1 of this year, the Indiana Business Corporation Law ("IBCL") provisions regarding the sending of notices of shareholder meetings changed. Previously, all Indiana corporations were required to send notices of shareholder meetings by first class mail. This was true even though the other two typical documents sent to shareholders each year (the proxy statement and the annual report to shareholders) could have been sent at bulk mail rates. The IBCL now allows public Indiana corporations to send notice of meetings by any class or form of mail if the corporation makes the proxy statement available to the public by posting it to its website at least 30 days in advance of the meeting date. Affected companies should reexamine their mailing practices to determine whether they can take advantage of the significant difference in mailing costs.