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September 13, 2005

SEC Adopts Significant Securities Offering Reforms Affecting Investment Banks

In late June, the SEC adopted major reforms to its rules under the Securities Act of 1933 regarding the registration process, communications surrounding a registered public offering, and the liability of offering participants. The SEC also modified the rules under the Securities Exchange Act of 1934 in certain minor respects. The SEC published the new rules on July 19, 2005, and the rules will become effective on December 1, 2005. These rules are likely to result in changes to some customary underwriting practices and how they are reflected in underwriting agreements and possibly the agreement among underwriters.

The focus of the new rules is on liberalizing permitted communications around the time of registration and making the securities offering process more flexible. The rules revise the "gun-jumping" provisions of the Securities Act of 1933, allowing more information to reach investors. The SEC rules create a new class of written offer, the "free writing prospectus," that will permit issuers to make relatively unrestricted disclosure outside of the required statutory prospectus. The rules also create a new class of "well-known seasoned issuers," or "WKSIs," which benefits the most from the liberalized rules. The rules modernize the shelf registration process and create a more flexible automatic shelf registration process for WKSIs. The new rules also modernize prospectus delivery procedures. The SEC also used the new rules as an opportunity to clarify its views on the liability of issuers and other offering participants in certain important respects.

For investment banks, there are several areas of reform that will engender consideration of possible changes in customary practice. Some of these include:

  • Use of Free Writing Prospectus. Under the new rules, issuers, underwriters and other offering participants may use for the first time a form of written offer, separate from the statutory prospectus, dubbed a "free writing prospectus." Some possible uses of a free writing prospectus might be term sheets, updates of information for investors, information summaries or sales points for investors and logistics communications. A free writing prospectus is subject to liability under various antifraud provisions, including Section 12(a)(2) of the Securities Act and, in most cases, filing with the SEC. Accordingly, creation, approval and use of a free writing prospectus will raise significant disclosure and liability issues for participants in the offering. Changes to form underwriting agreements, counsel opinions and comfort letters may be necessary.
  • Prospectus Liability is Based on Information Conveyed at Time of Sale. A new rule sets forth the SEC's view that prospectus liability under Section 12(a)(2) is measured at the "time of sale," and is based on information "conveyed" to the purchaser at that time. While this may have been everyone's understanding of disclosure best practice, it was not observed nor documented with the precision the rule now seems to command. Among other things, there may be greater emphasis on getting things done before pricing so there is no new disclosure in the final prospectus, including due diligence and investor disclosure, and more attention to the manner and timing of disclosure relating to pricing and issuer developments. As with free writing prospectuses, this may lead to changes in underwriting agreements and related deliveries.
  • Automatic Shelf Registration for WKSI's and other Shelf Registration Changes. The new rules include significant new reforms in shelf practice that permit well known seasoned issuers to go to market immediately and reduce many limitations previously imposed on other S-3 eligible issuers. However, the new reforms include a rule expressly providing, for the first time, Section 11 liability for misstatements or omissions made in a prospectus supplement. As a result, underwriters lose the benefit of the more lenient liability standards understood to apply to a prospectus under Section 12(a)(2) and will be subject to liability for documents incorporated by reference since the most recently filed Form 10-K. These developments collectively will only exacerbate the due diligence challenges confronting underwriters before and after the recent WorldCom decision. The SEC took no steps to alter prevailing due diligence rules. Due diligence practices will need to be evaluated in light of these developments.
  • Liberalized Research Report Rules. While the changes are not major, the SEC made some helpful modifications to Rules 137 to 139 to facilitate the continued publication of research around the time of an offering. For example, issuer-specific research is now permitted to be initiated on a new class of a seasoned issuer's securities being offered. For industry research, there is no longer a limitation upon upgrading an analyst's recommendation or prospectus. Although the reforms generally don't address private placements or other exempt offerings, the rules make clear that permitted research will not be treated as a general solicitation for private offerings made in reliance on Rule 144A or directed selling efforts for purposes of Regulation S. Investment banks should review their research no-write and monitoring policies to take advantage of these revisions.
  • Expanded Rule 134. Rule 134 is a safe harbor that permits limited information to be conveyed in writing after a registration statement is on file without it being deemed a prospectus. Many offerings include a directed share program for friends, family and employees. Communicating with these persons raises a host of challenging issues when they may be potential offerees. Rule 134 has been liberalized to, among other things, permit communication of information concerning procedures for account opening and for submitting indications of interest—but not the actual solicitation of an offer to buy—even if the preliminary prospectus on file does not contain a price range. Other information now permitted to be furnished includes the mechanics and anticipated schedule of the offering, descriptions of marketing events, and greater detail about the date, time, location and procedures for attending or accessing these events.
  • Road Shows. The rules for in-person live road shows are unchanged. However, the rules now make clear that a real-time transmission of the live road show will be treated the same as the live road show itself. The SEC has jettisoned its electronic road show no-action precedents. Instead, electronic road shows will be treated as free writing prospectuses under the new rules and must contain specified legends. However, generally they are not required to be filed with the SEC. Underwriters will want to review their road show practices, especially where electronic media are used.
  • Paper Copy of Final Prospectus need not Accompany Confirmation. The rules adopt a so-called "access equals delivery" regime so that the required confirmation of sale need not be accompanied by a paper copy of the final prospectus. Investors must be notified that they have the right to request physical delivery of a final prospectus. Underwriters may choose to include this notice in the confirmation. Similarly, the 25-day prospectus delivery obligation for sales by dealers following an IPO may be satisfied through the same means.
  • Liberalized Communication Rules. The new rules offer for the first time safe harbors for specified communications surrounding public offerings. While these don't appear to dramatically alter the existing regime, they do have the potential to make reporting issuers more comfortable in communicating publicly before and during an offering, including at underwriter-sponsored events.

Following is a brief summary of the new rules.

Effectiveness of New Rules:

Adopted: June 29, 2005

Effective: December 1, 2005

Definition of Issuers:

WKSI: Well Known Seasoned Issuer (has been public and timely filed for at least one year; and $700 million public float of common equity worldwide or has issued an aggregate of $1 billion in non-convertible debt during the past three years)

Reporting Issuers: Includes "Seasoned Issuers" – those eligible to use Form S-3 (includes WKSIs) , and "Unseasoned Issuers" – those not eligible to use Form S 3

Non-Reporting Issuers: Pre-public companies and "voluntary filers"

Ineligible Issuers: Shell companies, blank-check companies, penny stock companies, companies that have violated anti-fraud rules, companies that have petitioned for bankruptcy

Quiet Period/Gun Jumping:


  • Allowed to engage in oral and written communications at any time regardless of offering status, subject, in the case of written communications, to compliance with free writing prospectus rules

Reporting Issuers:

  • Permitted to continue publishing regularly released factual business information and forward-looking information, regardless of offering status Expanded exemption for research reports

Non-Reporting Issuers:

  • Permitted to continue publishing factual business information that is regularly released to persons other than in their capacity as investors or potential investors, regardless of offering status

All Issuers:

  • Communications more than 30 days prior to filing registration statement will not be deemed prohibited offers so long as they do not reference a securities offering
  • Communications more than 30 days prior to filing registration statement will not be deemed prohibited offers so long as they do not reference a securities offering

Regulation FD: Safe harbor under Reg FD for certain communications during an offering is modified to include specific enumerated communications only

Free Writing Prospectuses:

Defined: A written communication that constitutes an offer and is made by means other than a statutory prospectus

Flexibility: Provides for flexibility in communicating in writing with investing public; however, what constitutes a "written communication," and therefore a "prospectus," was clarified to include electronic and all other non-oral forms of communication

WKSIs: Most flexibility for use of free writing prospectuses; can use at any time

Seasoned Issuers: Can use free writing prospectus as long as preliminary prospectus meeting certain statutory requirements is on file. Prospectus need only be available and need not be delivered

Unseasoned and Non-Reporting Companies: Can use free writing prospectus as long as preliminary prospectus meeting certain statutory requirements (including price range in the case of a non-reporting issuer) is on file and, subject to certain exceptions, the statutory prospectus accompanies or precedes the free writing prospectus

Legend and Filing: Free writing prospectus must contain a prescribed legend and, in some cases, be filed with the SEC

Electronic Roadshows: Constitute free writing prospectuses; electronic roadshows in connection with an IPO will generally be required to be filed, unless the issuer makes at least one version available in electronic form to an unrestricted audience ("live" roadshows will be deemed oral communications not subject to the prospectus rules)

Media Publications: Media publications which constitute an offer will generally also constitute free writing prospectuses if the issuer or another offering participant provided, authorized or approved the information

Website Postings:

  • Information on the issuer's website or the website of another offering participant, or a site accessible through a hyperlink from those websites, that is an offer to sell will constitute a free writing prospectus
  • Historical information on the issuer's website that is not an offer, such as regularly released business information or forward-looking statements, will generally not constitute a free writing prospectus unless it is updated or referred to in connection with a securities offering

Shelf Registration Flexibility:

Seasoned Issuers:

  • Permits immediate takedowns (no 48 hour waiting period)
  • Codifies rules on what information can be excluded from base prospectus at effectiveness and included in later filings
  • Replaces requirement that issuer register an amount of securities it expects to offer within 2 years with a requirement that a new registration statement be filed every 3 years
  • Pro supps can contain material changes to plan of distribution section from base prospectus; accelerated filers can identify selling shareholders in a pro supp when securities to be sold are outstanding when the registration statement is filed


  • Automatic effectiveness of shelf registration statements upon filing
  • Pay-as-you-go filing fees
  • Don't need to specify amounts of different securities; can add classes of securities after effectiveness
  • More information can be excluded in base prospectus than currently allowed

Prospectus Delivery: Access Equals Delivery: Issuers relieved of delivering in paper form a final prospectus so long as it is timely filed with SEC

Incorporation by Reference:

Form S-1: Unseasoned issuers that are current in filings can incorporate by reference into Form S-1 from Securities Exchange Act reports that have already been filed; forward incorporation by reference is not permitted (Form S-2 will be rescinded as no longer necessary)

Liability Considerations:

Liability Generally: Communications constituting offers which are outside the statutory prospectus and permitted before and during offering period, such as a free writing prospectus, will be subject to Section 12(a)(2) liability and anti-fraud liability, but not Section 11 liability

Liability Timing: Only information "conveyed" to an investor at or before the time of the investment decision will be considered when determining whether liability exists; pro supps will be deemed part of registration statement for takedowns at time of pro supp filing and will have Section 11 liability, but will only establish Section 11 liability at that time for the issuer and underwriters, not for directors, executives or auditors

New Exchange Act Disclosure Requirements:

Risk Factors: Public companies (other than SB issuers) will be required to include risk factors in Annual Reports on Form 10-K

Voluntary Filers: Must check a box indicating that they are voluntary filers

SEC Comments: Accelerated filers must disclose in Form 10-K any SEC comments that were issued more than 180 days before end of year that remain unresolved and the issuer believes are materials

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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