Under Proposed Amendments, Underwriters Could Make Pre-Filing Communications for WKSIs

The Securities and Exchange Commission recently proposed amendments that would allow a well-known seasoned issuer (WKSI) to authorize an underwriter or dealer to act as its agent in communicating about offerings of the WKSI's securities prior to filing a registration statement.

Overview of Current Rule

Rule 163 under the Securities Act currently permits WKSIs to make offers (as broadly defined and interpreted) to sell securities prior to filing a registration statement without violating the Securities Act's "gun-jumping" restrictions. The rule's exemption applies to offers made "by or on behalf of" of a WKSI and requires certain conditions to be satisfied. A communication is deemed to be "by or on behalf of" a WKSI if the WKSI or its agent or representative authorizes or approves the communication before it is made. However, the current rule does not permit an offering participant who is an underwriter or dealer to make offers on behalf of a WKSI prior to the filing of a registration statement.

Reasons for Proposed Changes

The SEC is proposing to liberalize Rule 163 to make it easier for WKSIs to gauge interest in a possible offering prior to filing a registration statement by allowing them to contact potential investors through underwriters and dealers.

Although WKSIs are currently permitted to contact potential investors directly without filing a registration statement, WKSIs may not have sufficient knowledge of potential investors to effectively gauge interest in a possible offering. WKSIs also may not want to contact potential investors directly because the contact could constitute material, non-public information about capital-raising plans that could require public disclosure under Regulation FD.

The SEC's proposing release notes that WKSIs' desire to communicate with potential investors prior to filing a registration statement may be significant because many WKSIs have not filed automatic shelf registration statements due to concerns such as potential overhang, and WKSIs may have filed a shelf registration statement that does not cover a security the issuer wants to offer.

Proposed Amendments

The proposed amendments would allow an underwriter or dealer to act as an agent or representative of a WKSI for purposes of making pre-filing communications in reliance on the Rule 163 exemption if:

• The underwriter or dealer receives written authorization from the issuer to act as its agent or representative prior to making any communication in reliance on the exemption
• The issuer authorizes or approves any written or oral communication before it is made by the underwriter or dealer authorized pursuant to the amended rule
• Any underwriter or dealer so authorized that has made any communication authorized pursuant to the amended rule is identified in the prospectus contained in any registration statement or amendment filed for the offering related to the communication

The proposed amendments would not allow an authorized underwriter or dealer to approve a communication made by any other person on behalf of an issuer in reliance on Rule 163. The other current provisions of Rule 163 also would continue to apply to pre-filing communications made by an authorized underwriter or dealer, including:

• All communications would be subject to Regulation FD. Authorized underwriters or dealers therefore would need to obtain a confidentiality agreement from the persons specified by Regulation FD prior to making communications authorized by the issuer if the issuer does not have a confidentiality agreement with the person and seeks to avoid public disclosure of the communications.
• Every written offer made in reliance on Rule 163 would need to contain the legend specified by the current rule, subject to the rule's cure provision.
• Every written offer made in reliance on Rule 163 would need to be filed as a free writing prospectus when any registration statement or amendment is filed covering the securities that are the subject of the offer, subject to the rule's cure provision.

Potential Implications for the Offering Process

The comment period for the proposed amendments will run through January 27, 2010. The SEC is soliciting comments on all conditions of the proposed amendments.

If adopted as proposed, the amendments would provide WKSIs with additional flexibility to gauge interest in potential offerings as desired by the SEC. Issuers, underwriters and dealers wanting to take advantage of the amendments would need to ensure that the authorization provided by a WKSI is sufficiently broad to cover all communications the underwriter or dealer would make—and that the authorization would be given prior to the underwriter or dealer making any communication in reliance on the amended rule.

As is currently the case, issuers, underwriters and dealers would want to consider making communications strictly on an oral basis to avoid the need to file a free writing prospectus if a registration statement or amendment for the offering is eventually filed. The proposed amendment requiring the registration statement or amendment for the offering to identify any authorized underwriter or dealer making communications in reliance on the amended rule does not specify any greater level of disclosure and therefore would likely result in insignificant additional prospectus language.