March 5, 1996 Capital is the lifeblood of our economy. By guarding the integrity of our capital markets through full and fair disclosure, the federal securities laws protect investors while at the same time ease the ability for companies to raise funds from the public. These laws, however, are not administered without cost. We who regulate our nation's financial markets must continuously strive to strike a balance between the benefits and the burdens posed by the rules we promulgate. For this reason, the SEC periodically reviews areas of its regulatory structure to see how they might be made more efficient and less burdensome. In 1995, we undertook two such reviews. The Advisory Committee on Capital Formation and Regulatory Processes, ably chaired by Commissioner Steve Wallman, is concluding its work at this writing. The Committee is examining ways to improve the process for registering securities that are offered in our public markets, including the concept of registering companies as opposed to transactions or offerings of securities. The second review, and the subject of this Report, was that undertaken by the Task Force on Disclosure Simplification. The Task Force was asked to review rules and forms affecting capital formation, with a view toward streamlining, simplifying, and modernizing the overall regulatory scheme without compromising or diminishing important investor protections. To balance our internal perspective on these matters, I asked Philip Howard, an outspoken advocate of regulatory common sense, to lend a hand. In a seven-month period, the Task Force reviewed most forms and rules relating to capital-raising transactions; periodic reporting pursuant to the Exchange Act; proxy solicitations; as well as tender offers and beneficial ownership reports under the Williams Act. Suggestions were sought from interested organizations and hundreds of recommendations were considered. The resulting report offers a regulatory blueprint for corporation finance in the years ahead. Together with the Commission's continued emphasis on the primacy of investor protection, these common-sense recommendations will help to ensure that ours remain the strongest, most vibrant, transparent, and liquid capital market in the world for many years to come. Arthur Levitt March 5, 1996 The Honorable Arthur Levitt Chairman Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549 Dear Chairman Levitt: Simplifying securities regulation offers unusual challenges because the SEC acts, not just as the regulator of the markets, but as referee. Market participants are keenly aware of the need for the SEC to maintain a level and orderly playing field, and, in making these recommendations, the Task Force was mindful not to tip the balance among the many market interests. Like all agencies, however, the SEC has suffered from the bureaucratic tendency to create ever thicker rule books. Each complication breeds another level of complexity and, over time, the original regulatory goal becomes obscured amid thousands of words of detailed dictates. Some SEC rules, intended to guide market participants in daily decisions, have become a kind of Latin liturgy, comprehensible only to those of us who have devoted our professional lives to abstract regulatory nuances. The Task Force began the process of simplification by combing the rule books for duplication and obsolescence. The resulting recommendations would clean out significant regulatory clutter. The Task Force then tackled several well-known regulatory problems, and has recommended overhaul of, for example, the format for prospectuses and the regulations governing trading during a distribution, as well as liberalizing rules for capital-raising by smaller companies. The Task Force has sought to present an agenda for simplification that is sensible and achievable in a short period. This effort, however, is only the beginning. Changing long- established conventions is never easy; our eyesight has difficulty focusing on changes that in future years may seem natural and obvious. To help focus future reforms, the Task Force has identified anomalies caused by a misfit between statutory precepts born over 60 years ago and the realities of modern global electronic markets. Overall, the Task Force has sought to set out in a new direction, on a path where a regulatory agency sees its job always to monitor its own performance at the same time that it regulates ours. The few months that the Task Force worked on this project demonstrated how ready all participants are for a fresh ==========================================START OF PAGE 3====== look. The SEC staff members who constituted the Task Force took on the challenge of simplification with enthusiasm and creativity. I could not commend them more highly. Many experts and practitioners offered ideas and comments revealing wisdom born of decades of practical experience. I thank my colleagues at Howard, Darby & Levin, particularly Gus Caywood and Ed Reitler, who were resourceful and helpful to me throughout the project. Finally, I thank you for initiating the kind of self- examination that I believe is critical to the effectiveness of this and every government agency. Yours respectfully, Philip K. Howard Acknowledgements The following is a list of the members of the Task Force on Disclosure Simplification responsible for preparing this Report: Office of the Chairman Brian J. Lane, Counselor to the Chairman (Acting Director of Division of Corporation Finance) Division of Corporation Finance Abigail Arms, Associate Director P.J. Himelfarb, Special Counsel Frank G. Zarb, Jr., Special Counsel Douglas G. Tanner, Associate Chief Accountant M. Kathleen Haller, Attorney-Advisor Office of the General Counsel Catherine T. Dixon, Counselor for Legal Policy Elliot B. Staffin, Attorney-Advisor Office of the Chief Accountant John W. Albert, Associate Chief Accountant Division of Investment Management Kenneth J. Berman, Assistant Director Division of Market Regulation Larry E. Bergmann, Associate Director Nancy J. Sanow, Assistant Director K. Susan Grafton, Senior Counsel TABLE OF CONTENTS SUMMARY OF SIGNIFICANT RECOMMENDATIONS . . . . . . . . . . . xii I. ELIMINATION OF RULES AND FORMS . . . . . . . . . . . . . 8 SECURITIES ACT REGULATIONS . . . . . . . . . . . . . . . 8 Eliminate Regulation B (Rules 300-346), and accompanying Schedules A, B, C, and D, and Forms 1-G and 3-G, which provide a limited exemption for certain interests in oil or gas rights, due to its limited use and the availability of more beneficial exemptions. . . . . . . . . . . . . . . 9 Eliminate Regulation E (Rules 601-610) and accompanying Forms 1-E and 2-E, which relate to a limited exemption for certain types of investment companies designed to aid small businesses, or incorporate Regulation E within Regulation A . . . 10 Eliminate Regulation F (Rules 651-656) and accompanying Form 1-F, pertaining to a limited exemption for assessments levied on assessable stock and for resales of forfeited assessable stock, because the adoption of Rule 504 has significantly reduced the Regulation's utility . . 11 OTHER SECURITIES ACT RULES . . . . . . . . . . . . . . . 13 Eliminate Securities Act Rule 148, which sets forth a safe harbor for resales made under the repealed Bankruptcy Act, because the rule has become outdated. . . . . . . . . . . . . . . . . . 13 Combine Rules 152a and 236, both of which relate to fractional shares, and adjust the dollar cap under Rule 236 to account for inflation. . . . . . 13 Eliminate Securities Act Rules 445, 446, and 447, which relate to securities offered through competitive bidding, because these rules have become obsolete. . . . . . . . . . . . . . . . . . 14 Eliminate Rule 494, which relates to newspaper prospectuses of foreign government securities, because the rule has become outdated. . . . . . . . 15 EXCHANGE ACT RULES . . . . . . . . . . . . . . . . . . . 15 Eliminate paragraph (c) of Exchange Act Rule 16b- 1, which pertains to the acquisition of securities resulting from a railroad or other carrier reorganization approved by the Interstate Commerce Commission . . . . . . . . . . . . . . . . . . . . 15 Eliminate Exchange Act Rule 16b-4, which pertains to certain holding company redemption transactions, because the rule is of marginal utility . . . . . . . . . . . . . . . . . . . . . . 16 FORMS . . . . . . . . . . . . . . . . . . . . . . . . . 16 Consider eliminating the Form D filing requirement under Regulation D and Section 4(6) of the Securities Act because the requirement has outlived its usefulness . . . . . . . . . . . . . . 16 Eliminate Form SR and, instead, require the use of proceeds following initial public offerings to be reported on Exchange Act reports . . . . . . . . . 17 Eliminate Exchange Act Form 8-B, regarding registration of securities of successor issuers, because Exchange Act Rule 12g-3 has rendered the form largely superfluous . . . . . . . . . . . . . 18 Eliminate Form 10-C and Rules 13a-17 and 15d-17, which require issuers registered under the Exchange Act and quoted in Nasdaq to report certain corporate events to the Commission and the NASD . . . . . . . . . . . . . . . . . . . . . . . 19 Eliminate the exhibit requirements of Form 11-K that provide little information that is not otherwise available to plan participants. . . . . . 19 Eliminate Items 3(e) and 4(a) of Form F-6, governing the registration of American Depositary Receipts, because the elicited information appears to be rarely used . . . . . . . . . . . . . . . . . 20 II. PRESENTATION OF INFORMATION . . . . . . . . . . . . . . 21 CLEAR AND ACCURATE DISCLOSURE . . . . . . . . . . . . . 21 Develop a "plain English" introduction to the prospectus to enhance its readability by individual investors, by eliminating boilerplate "legalese" and requiring a summary of key information . . . . . . . . . . . . . . . . . . . . 21 Require a "plain English" summary sheet in tender offer statements, which would function as a "road map" by providing shareholders with answers to commonly asked questions about the offer . . . . . 23 ==========================================START OF PAGE ii====== Allow registrants to include earnings releases, which often are written in "plain English," in their quarterly reports, thereby making such reports more readable and easier to prepare . . . . 24 UNEVEN DISCLOSURE . . . . . . . . . . . . . . . . . . . 25 TIMELY DELIVERY OF INFORMATION . . . . . . . . . . . . . 26 ELECTRONIC MEDIA . . . . . . . . . . . . . . . . . . . . 27 III. SECURITIES ACT CONCEPTS . . . . . . . . . . . . . . . . 29 STRAINS IN THE REGULATORY FRAMEWORK . . . . . . . . . . 29 Introduction . . . . . . . . . . . . . . . . . . . 29 Snapshot of the Securities Act Regulatory Scheme . 29 Specific Strains in the Regulatory Framework . . . 32 Difficulties of Regulating Information Flow . 33 What's Being Offered and Sold: Impact of Proliferation of Derivative Securities on the Regulatory Structure . . . . . . . . . . . . . 35 Perceived Over-Regulation of Offers . . . . . 36 Prospectus Delivery . . . . . . . . . . . . . 36 Advisory Committee on the Capital Formation and Regulatory Processes: Company Registration . . . . 36 Other Suggestions . . . . . . . . . . . . . . . . . 39 Regulating the Flow of Information . . . . . . 39 "Pink Herring" Registration of Offers . . . . 40 Quick and Narrow Fixes -- Task Force Recommendations . . . . . . . . . . . . . . . 41 Revise Rule 152 . . . . . . . . . . . . . . . 41 Presumptive "Public Offering" Doctrine . . . . 42 Pending Staff Initiatives . . . . . . . . . . . . . 43 Prospectus Delivery . . . . . . . . . . . . . 43 Offshore Press and Internet Activities . . . . 43 ==========================================START OF PAGE iii====== IV. FACILITATING CAPITAL-RAISING . . . . . . . . . . . . . . 45 DELIVERY OF EXCHANGE ACT PERIODIC REPORTS . . . . . . . 46 Eliminate Forms S-2/F-2, and permit smaller companies reporting on Forms S-1/F-1, and timely reporting for 12 months, to deliver along with their prospectuses periodic reports in lieu of restating information regarding themselves in prospectuses . . . . . . . . . . . . . . . . . . . 46 SHELF OFFERINGS . . . . . . . . . . . . . . . . . . . . 48 Smaller Issuers . . . . . . . . . . . . . . . . . . 48 Allow smaller companies to price the securities on a delayed basis in order to time securities offerings more effectively with opportunities in the marketplace . . . . 48 Seasoned Issuers . . . . . . . . . . . . . . . . . 50 Reconsider restrictions on "at-the-market" shelf offerings registered by seasoned issuers on Forms S-3/F-3 . . . . . . . . . . . 50 Permit companies engaging in shelf offerings to include secondary offerings without identifying the selling security holders until the time of the actual offering . . . . 51 Adopt a "universal registrant" rule, which would enable a parent company to name itself and its majority-owned subsidiaries as possible issuers on a shelf registration statement, and defer the choice of actual issuer until the time of takedown . . . . . . 51 Permit a company to reallocate securities, or register a new class of securities, on a shelf registration statement by post- effective amendment . . . . . . . . . . . . . 52 Permit seasoned issuers to register a dollar amount without specifying the classes of securities being registered . . . . . . . . . 53 Allow seasoned issuers to pay registration fees at the time securities are taken down from the shelf . . . . . . . . . . . . . . . . 54 ==========================================START OF PAGE iv====== FUNDAMENTAL CHANGES . . . . . . . . . . . . . . . . . . 54 Consider clarifying what is a "fundamental change" to provide registrants with certainty regarding when a post-effective amendment is required . . . . 54 BROKER-DEALER RESEARCH REPORTS . . . . . . . . . . . . . 55 Consider streamlining and modernizing the safe harbors provided in Securities Act Rules 137, 138 and 139 relating to the use of broker-dealer research reports . . . . . . . . . . . . . . . . . 55 MARKET-MAKING TRANSACTIONS . . . . . . . . . . . . . . . 55 Eliminate an affiliated broker-dealer's prospectus delivery obligation in connection with "regular way" market making transactions . . . . . . . . . . 55 AFFILIATE STATUS . . . . . . . . . . . . . . . . . . . . 56 Consider revising Rule 144's definition of "affiliate," consistent with Section 2(11) of the Securities Act, to exclude certain persons, such as some outside directors, who are not actually or potentially in a position to control a company's offering activities . . . . . . . . . . . . . . . . 56 TRUST INDENTURE ACT OF 1939 . . . . . . . . . . . . . . 57 Permit a shelf registrant to qualify an indenture by post-effective amendment so that it need not file a new registration statement when adding a new class of debt securities . . . . . . . . . . . 57 Eliminate Forms T-1 and T-2 for determining trustee eligibility and, instead, require an issuer to make an "eligible trustee" representation in the registration statement . . . 58 V. SMALL BUSINESS INITIATIVES . . . . . . . . . . . . . . . 61 LOCAL OFFERING EXEMPTION . . . . . . . . . . . . . . . . 61 Liberalize the local offering exemption by adding a "substantial compliance" provision, expanding the concept of residence for individual and business purchasers, relaxing the triple 80 percent "doing business" test, and shortening the resale holding period under Rule 147 while creating a new limited exemption for certain local offerings that cross state lines . . . . . . . . . 61 ==========================================START OF PAGE v====== REGULATION A . . . . . . . . . . . . . . . . . . . . . . 65 Expand the Regulation A exemption by permitting small businesses to raise five million dollars within six months rather than five million dollars per year . . . . . . . . . . . . . . . . . . . . . 65 REGULATION D . . . . . . . . . . . . . . . . . . . . . . 66 Reduce the regulatory burden on nonreporting companies engaged in exempt offerings under Regulation D by permitting the use of uncertified financial statements when the offering amount is five million dollars or less . . . . . . . . . . . 66 VI. SIGNIFICANT CORPORATE TRANSACTIONS . . . . . . . . . . . 68 WILLIAMS ACT AND PROXY RULES . . . . . . . . . . . . . . 68 Consider the creation of an integrated regulation for mergers, tender offers and other extraordinary transactions . . . . . . . . . . . . . . . . . . . 68 Revise proxy statement disclosure requirements. . . . . . . . . . . . . . . 68 Clarify the treatment of cash mergers. . . . . 69 Combine Schedules 13E-4 and 14D-1. . . . . . . 69 Move substantive disclosure requirements out of rules and into schedules. . . . . . . . . . 69 Reduce the disclosure obligations for an investor with a passive investment purpose, who acquires or holds more than five percent but less than a certain percentage of a company's equity securities, by allowing such an investor to file a short form Schedule 13G rather than a Schedule 13D report . . . . . . . . . . . . . . . . . . . . . . 70 Permit investors with passive investment intent to use Schedule 13G . . . . . . . . . . 70 Codify staff position permitting control persons of institutional investors to file jointly with such institutional investors on Schedule 13G under certain conditions . . . . 71 Exemptive Order For Multinational Tender Offers . . 72 ==========================================START OF PAGE vi====== Consider permitting direct mailing of proxy soliciting materials to non-objecting beneficial owners of voting securities held of record by brokers, banks and other intermediaries . . . . . . 72 Consider eliminating filing of preliminary proxy statements in contested elections of directors . . 73 Study the shareholder proposal process . . . . . . 73 EXCHANGE OFFERS . . . . . . . . . . . . . . . . . . . . 74 Place certain seasoned issuer exchange tender offers on the same footing as cash tender offers by permitting such issuers' registration statements to go effective automatically upon filing . . . . . . . . . . . . . . . . . . . . . . 74 In registration statements relating to exchange offers or other acquisitions involving nonreporting target companies, require only financial information about the target company that the target company has provided to its shareholders . . . . . . . . . . . . . . . . . . . 75 VII. REGISTRATION . . . . . . . . . . . . . . . . . . . . . . 77 INTERNAL REORGANIZATIONS . . . . . . . . . . . . . . . . 77 Exempt certain internal holding company reorganizations from registration so long as the reorganization is the sole purpose of the transaction and fundamental shareholder rights and interests remain substantially unchanged . . . . . 77 Ease financial disclosure requirements for internal holding company reorganizations that are subject to registration . . . . . . . . . 78 SPIN-OFFS . . . . . . . . . . . . . . . . . . . . . . . 79 Codify a rule permitting certain unregistered spin-offs of subsidiaries or divisions by reporting companies . . . . . . . . . . . . . . . . 79 EXCHANGE OFFERINGS . . . . . . . . . . . . . . . . . . . 79 Broaden the circumstances in which the guaranteed convertible securities of a wholly owned subsidiary can be exchanged for those of its parent without the expense and delay of registration . . . . . . . . . . . . . . . . . . . 79 ==========================================START OF PAGE vii====== Codify staff positions permitting certain unregistered issuances of securities pursuant to Securities Act Section 3(a)(10) that have been subject to judicial or administrative review and approval . . . . . . . . . . . . . . . . . . . . . 80 AMERICAN DEPOSITARY RECEIPTS . . . . . . . . . . . . . . 81 Eliminate the requirement to register under Section 12(b) of the Exchange Act American Depositary Receipts registered on Securities Act Form F-6 . . . . . . . . . . . . . . . . . . . . . 81 VIII. REPORTING . . . . . . . . . . . . . . . . . . . . . 82 SUSPENSION AND TERMINATION OF REGISTRATION AND REPORTING OBLIGATIONS . . . . . . . . . . . . . . . . . 82 Expand the circumstances in which companies may terminate registration under Section 12 of the Exchange Act . . . . . . . . . . . . . . . . . . . 82 Similarly revise the rules governing when companies may suspend Section 15(d) reporting obligations . . . . . . . . . . . . . . . . . . . . 83 Promulgate a rule pursuant to Section 12(h) of the Exchange Act permitting the modification of periodic reporting obligations for certain companies in bankruptcy or liquidation . . . . . . 83 Re-examine periodic reporting obligations under Section 15(d) of the Exchange Act to ensure that such obligations are more closely aligned with the period during which securities are actually sold . 84 CONCURRENT EXCHANGE ACT/SECURITIES ACT REGISTRATION . . 85 Permit a company to register concurrently a public offering under the Securities Act and a class of securities under the Exchange Act by filing a single form that would cover both registrations . . 86 SECURITIES ACT FORM ELIGIBILITY . . . . . . . . . . . . 86 Permit a company to switch to a shorter Securities Act form at the time of filing any amendment if it has become eligible to use the shorter form since filing its initial registration statement. . . . . 86 Exclude automatically effective registration statements on Form S-8 from the general rule that =====================================START OF PAGE viii====== filings are deemed to be on the proper form unless objection is raised by the Commission prior to effectiveness . . . . . . . . . . . . . . . . . . . 87 IX. DISCLOSURE GENERALLY . . . . . . . . . . . . . . . . . . 88 ENVIRONMENTAL LEGAL PROCEEDINGS . . . . . . . . . . . . 88 Eliminate the $100,000 "one size fits all" materiality standard for certain environmental legal proceedings and replace it with a general materiality standard to ensure that companies will not be required to disclose non-material information . . . . . . . . . . . . . . . . . . . . 88 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 88 Consider clarifying and streamlining the rules governing when companies must disclose executive compensation information in registration and proxy statements . . . . . . . . . . . . . . . . . . . . 89 OTHER REGULATION S-K MODIFICATIONS . . . . . . . . . . . 89 Streamline Item 101's disclosure requirements relating to the description of the registrant's business by eliminating duplication of quantitative information provided in the financial statements . . . . . . . . . . . . . . . . . . . . 90 Revise Item 102 relating to the description of property to elicit more meaningful and material disclosure . . . . . . . . . . . . . . . . . . . . 90 Limit the scope of Item 507, relating to securities offered for the account of a company's individual security holders, so that a company only would have to disclose information regarding certain of its selling affiliates and significant beneficial owners rather than all of its selling security holders . . . . . . . . . . . . . . . . . 90 Move undertakings in Item 512 into a rule in Regulation C, and clarify when offers and sales may be made when a registrant has an obligation to file a Section 10(a)(3) updating prospectus. . . . 91 Eliminate Item 702's requirement to state the general effect of any arrangement regarding indemnification of a registrant's directors, officers, or control persons, which typically ==========================================START OF PAGE ix====== results in "boilerplate" disclosure of minimal value to investors . . . . . . . . . . . . . . . . 92 Adjust certain dollar thresholds in Regulations S- K and S-X for inflation since the time of their adoption . . . . . . . . . . . . . . . . . . . . . 92 EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . 93 Create a new exhibit form, which would enable a company to file most of its exhibits on one form, thereby making such exhibits easier to locate and update . . . . . . . . . . . . . . . . . . . . . . 93 Permit automatic effectiveness of a post-effective amendment filed solely to add an exhibit . . . . . 94 Eliminate specific exhibits that appear to be rarely used or contain information that is otherwise available . . . . . . . . . . . . . . . . 94 INDUSTRY SPECIFIC DISCLOSURE . . . . . . . . . . . . . . 95 Modernize the existing Industry Guides, consider adopting additional industry-specific disclosure rules, and relocate all such guides and rules within Regulation S-K . . . . . . . . . . . . . . . 95 STAFF LEGAL BULLETINS . . . . . . . . . . . . . . . . . 99 Consider publishing "Staff Legal Bulletins" to announce significant legal interpretations of interest to a wide group of issuers . . . . . . . . 99 EDGAR . . . . . . . . . . . . . . . . . . . . . . . . . 99 As part of the study regarding the EDGAR filing system, consider whether certain EDGAR forms should be eliminated at some future date. . . . . . 99 Enable EDGAR filers to receive certain filing date adjustments without the need for a case-by-case determination by the staff as to whether the request should be granted. . . . . . . . . . . . . 100 Pursue an electronic linkage of EDGAR with the exchanges, Nasdaq and NASAA . . . . . . . . . . . . 100 X. TRADING PRACTICES RULES . . . . . . . . . . . . . . . . 102 DISCUSSION OF THE TRADING PRACTICES RULES . . . . . . . 102 ==========================================START OF PAGE x====== RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . 103 Replace the trading practices rules, which have become unnecessarily complicated and burdensome, with a new, streamlined, more understandable regulation that would restrict a narrower range of activities, persons and issuers . . . . . . . . . . 103 XI. ACCOUNTING DISCLOSURE CHANGES . . . . . . . . . . . . . 106 Permit companies to "income average" when determining the significance of acquisitions and equity method investments, thereby refining the circumstances when the company must provide separate financial statements to those instances where the acquisition or investment is truly significant . . . . . . . . . . . . . . . . . . . . 106 Reduce the effect of the 45-day "black out" period during which many registrants are effectively prevented from undertaking a public offering by narrowing the scope of the accounting rules requiring updated audited financial statements in certain registration statements declared effective 45 days after the registrant's fiscal year end . . 108 Expand the circumstances in which a company may incorporate by reference audited financial statements of significant investees so that such statements need not be reproduced in filings with the Commission. . . . . . . . . . . . . . . . . . . 109 Streamline the complex and often confusing rules requiring separate audited financial statements of affiliates whose stock collateralizes a registrant's securities, and of persons who guarantee a registrant's securities . . . . . . . . 109 ELIMINATION OF ACCOUNTING RULES . . . . . . . . . . . . 111 Streamline accounting and related disclosure requirements by eliminating duplicative rules and those rules that have outlived their usefulness . . 111 XII. TECHNICAL CHANGES . . . . . . . . . . . . . . . . . . . 116 Make technical changes to numerous other rules and forms, which in the aggregate should render the Commission's disclosure requirements easier to understand and follow . . . . . . . . . . . . . . . 116 XIII. OTHER CURRENT COMMISSION INITIATIVES . . . . . . . 124 ==========================================START OF PAGE xi====== Streamlining Disclosure Requirements Relating to Significant Business Acquisitions; Quarterly Reporting of Unregistered Equity Sales . . . . . . 124 Relief from Section 12(g) Registration for Small Issuers . . . . . . . . . . . . . . . . . . . 124 Solicitations of Interest Prior to Initial Public Offerings . . . . . . . . . . . . . . . . . . 124 Rule 144 -- Holding Period; New Trading Strategies . . . . . . . . . . . . . . . . . . 125 Exemption for Certain California Limited Issues . . 125 Problematic Practices Under Regulation S . . . . . 126 Streamlining and Consolidation of Executive and Director Compensation . . . . . . . . . . . . . . . 126 Abbreviated Financial Statements . . . . . . . . . 126 Section 16 - Ownership Reports and Trading by Officers, Directors and Principal Security Holders . . . . . . . . . . . . . . . . . . . . . . 126 Derivatives Disclosure . . . . . . . . . . . . . . 127 Use of Electronic Media . . . . . . . . . . . . . . 127 ==========================================START OF PAGE xii====== SUMMARY OF SIGNIFICANT RECOMMENDATIONS Chairman Arthur Levitt organized the Task Force on Disclosure Simplification in August 1995 to review forms and rules relating to capital-raising transactions, periodic reporting pursuant to the Exchange Act, proxy solicitations, and tender offers and beneficial ownership reports under the Williams Act. The goal was to simplify the disclosure process and, consistent with investor protection, to make regulation of capital formation more efficient. To aid its review, the Task Force met over a seven-month period with issuing companies, investor groups, underwriters, accounting firms, lawyers and others who participate daily in the capital markets. These participants helped the Task Force to identify and formulate reforms that reduce costs and regulatory burdens without impairing the transparency and integrity of our capital markets. None suggested wholesale deregulation, and virtually all emphasized the importance of basic regulatory goals to preserve orderly markets. The recommendations that follow would eliminate or modify many rules and forms, and simplify several key aspects of securities offerings. Certain recommendations reinforce the Commission's other initiatives to improve the disclosure process, and should be viewed as part of those ongoing efforts. The recommendations roughly fall into three categories: (1) Weeding out forms and regulations that are duplicative of other requirements or have outlived their usefulness; (2) Requiring more readable and informative disclosure documents; and (3) Reducing the cost of securities offerings and increasing access of smaller companies to the securities markets. In addition to specific recommendations, the Task Force has sought to identify anomalies of the regulatory structure. The basic structure has served the markets well for over 60 years, but should be rethought in the age of novel financial instruments and virtually instantaneous electronic communication and clearance settlement practices. Re-configuring these regulatory tenets must be done with caution, in order to avoid tipping the balance in favor of certain market participants or jeopardizing investor protection. But the need for modernization is apparent, and the Task Force has identified areas for Commission review. Of course, in considering how the Commission would like to proceed with reviewing any of the matters discussed in the Report, the Commission should thoroughly consider the scope of its authority and other related issues. A summary of the principal recommendations follows. I. Elimination and Streamlining of Rules and Forms The Task Force recommends eliminating or modernizing many rules relating to disclosure and registration procedures to simplify the rule books and reduce the cumulative burden of compliance. By eliminating unnecessary detail, these recommendations also should help focus disclosure on issues of importance to investors. If all of the recommendations are implemented, the Commission would eliminate 81 rules and 22 forms, and modify dozens of others. In total, the recommendations would eliminate or modify approximately 23 percent of the rules and 54 percent of the forms and schedules reviewed by the Task Force. Selected examples of the recommendations are as follows. Streamline Accounting Disclosures Many accounting rules have become outdated or duplicative of the requirements of "generally accepted accounting principles," resulting in unnecessary complication and expense. Upon review, the Task Force recommends eliminating 11 accounting rules and 9 staff accounting bulletins. The Task Force also recommends modifying other accounting rules that appear to be unnecessarily restrictive. For example, some companies awaiting audit of their year-end financial statements have a "black-out" period in which they cannot issue new securities. The Task Force believes this period is unduly restrictive in light of other ongoing disclosure obligations, and recommends retaining the requirement only for initial public offerings. These and other accounting-related recommendations are discussed more fully under "Accounting Disclosure Changes." Eliminate Outdated Regulation Many rules, while well conceived when initially adopted, have become obsolete. For example, Regulation B, adopted in 1963 (and substantially revised in 1972), provides an exemption for certain offerings of "fractional undivided interests" in oil and gas rights. Despite its eight pages in the Code of Federal Regulations, the Regulation has fallen largely into disuse as a result of changes in the energy market and the availability of other exemptions. Another set of obsolete rules was promulgated in the late 1940s to govern securities offerings through ==========================================START OF PAGE 2====== competitive bidding with multiple underwriters. The rules were adopted largely to accommodate other rules which have themselves already been discarded. As explained more fully under "Elimination of Rules and Forms," the Task Force recommends that these and similarly outdated rules be eliminated. Disclosures required of issuers include numerous outdated or ostensibly immaterial categories. The Task Force recommends modifying dozens of requirements in virtually every area of corporate finance, from raising dollar thresholds for disclosure in Regulations S-K and S-X to updating industry-specific disclosure requirements in the Industry Guides. Another outdated standard is the requirement that companies disclose government environmental proceedings that may result in monetary sanctions of $100,000 or more. Depending largely on the size of the company, this requirement can result in disclosure that is not material to a particular company. Therefore, the Task Force proposes that the Commission replace the $100,000 "one size fits all" standard with a more flexible general materiality standard, or raise the threshold to a higher dollar amount. These and other recommendations are discussed more fully under "Disclosure Generally." The Task Force also found unnecessary disclosure burdens in other areas. One example requires issuers making an exchange offer for the securities of a non-reporting company to provide audited financial statements of such company whether or not audited financials have been provided in the past. There is no apparent need for requiring the acquiror to provide more financial information about the target to the target's shareholders than the target's shareholders have been provided in the past. As discussed under "Significant Corporate Transactions," elimination of this requirement would both streamline disclosures in exchange offer registration statements and reduce the cost of preparing such documents. II. Simplify Disclosure Formats A cornerstone of the securities laws is the requirement of full and fair disclosure. The prospectus -- the traditional offering document -- describes the company and its management and financial condition so that market participants can make an informed judgment about a company and its prospects in deciding whether to buy its securities. While prospectuses are indispensable sources of information for market professionals and therefore to the market, the reality is that these and other disclosure documents are often written in a manner that has been described as "turgid," "opaque" and "unreadable." Dense writing, with legal boilerplate and repetitive descriptions of the company, has become the standard convention. ==========================================START OF PAGE 3====== One reason for this convention appears to be stylistic and formatting habits that have become entrenched by years of practice. It is undoubtedly easier to copy from previous disclosures than it is to formulate new and more effective ways to communicate with investors. The Commission's own rules -- for example, requiring certain disclosures to be presented in almost unreadable bold capital letters -- may have contributed to the problem. Fear of liability by companies and underwriters for omissions also may have created a bias towards repetitive and over-inclusive disclosures, with trivial information sometimes receiving as much attention as material information. The Task Force recommends, as a first step, that the Commission adopt a new format for the opening pages of disclosure documents under the Securities Act of 1933 ("Securities Act") and tender offer documents under the Securities Exchange Act of 1934 ("Exchange Act"). The Task Force also urges the Commission to continue its plain-English initiatives and make other modifications to the disclosure rules to encourage disclosure that is both concise and more readable. For prospectuses, the Task Force suggests that the dense and uninformative disclosure on cover pages be replaced with easy-to-read disclosure that would summarize important aspects of the offering. Today, the opening pages of prospectuses are dominated by boilerplate legal disclaimers. Under the Task Force's idea, the first few pages would answer the more common questions asked by investors, such as a description of the securities (including special features), identification of the issuer and underwriter, an explanation of why funds are needed, the offering price, the securities' trading symbol (if any) and any special characteristics of the offering, including risk factors. Two illustrations of possible formats are included in "Presentation of Information." Similar problems of readability occur with documents used in extraordinary business transactions such as tender offer documents. Investors typically receive dense offering and transmittal documents that contain an overwhelming amount of information. The Task Force recommends that a standardized summary sheet be included on the inside cover of each Offer to Purchase. An outline of the information required and a sample summary also are included in "Presentation of Information." III. Reduce the Costs of Securities Offerings Permit Delayed Offerings and Simplify Reporting By Smaller Companies ==========================================START OF PAGE 4====== Over a decade ago, the Commission significantly streamlined the registration process for certain large publicly-traded issuers with three years of reporting history with the Commission. By introducing "shelf registration" for primary offerings of securities by these issuers, the Commission permitted certain relatively large, seasoned companies to sell some or all of the securities under an already effective registration statement at a time of their own choosing. In 1992, the Commission reduced the reporting period and market float requirements of Form S-3 and thereby extended the benefits of shelf registration to a wider variety of issuers. This flexibility allowed such companies to take advantage of perceived "market windows." The Task Force recommends that a modified shelf registration procedure be provided to smaller companies that have filed timely public reports with the Commission for at least 12 months. This would provide approximately 4,800 companies with greater flexibility with respect to the timing of their offerings. The Task Force also recommends permitting these smaller companies to deliver certain prior periodic reports to prospective investors instead of repeating similar information in the prospectus. This delivery method, now used by companies filing on Forms S-2/F-2 and reporting for 36 months, saves printing and other costs and results in a streamlined registration statement more focused on the proposed transaction. The Task Force believes that this delivery method should be expanded to issuers timely reporting for at least 12 months and using Forms S-1/F-1 (which will render Forms S-2/F-2 superfluous). These proposals are discussed in more detail under "Facilitating Capital-Raising." Exempt Certain Small Local Offerings Under Regulation A, small companies may offer publicly up to five million dollars worth of unregistered securities within a 12-month period by way of a short-form offering circular. When it created this exemption, the Commission recognized that the costs of registration may otherwise effectively preclude such smaller offerings. The Task Force recommends that this exemption be liberalized to permit an eligible company to raise five million dollars within each 6-month period, rather than each 12-month period. This exemption would be of particular assistance to a rapidly growing, small company. Another existing exemption that is advantageous for small businesses permits certain unregistered offerings within the borders of a single state. The Task Force recommends relaxing the restrictions in the Commission's safe harbor rule, Rule 147, ==========================================START OF PAGE 5====== to make the exemption more useful to smaller companies. In addition, the Task Force recommends that the Commission adopt a "regional" exemption for offerings up to five million dollars that cross state lines but remain within a prescribed regional area. This exemption would permit offerings in a metropolitan area that is not contained within a single state. A fuller discussion of these proposals is included under "Small Business Initiatives". Some of these recommendations that affect small business will be of interest to state securities regulators; the Commission should follow its normal practice of coordinating such initiatives with the states. Seasoned Issuers The Report includes several recommendations to reduce costs of registration and enhance timing flexibility for larger, more seasoned issuers, such as permitting shelf registrants to register dollar amount of offerings without any description of the securities to be offered and deferring payment of filing fees until the time of the actual offering. These and similar recommendations are described in "Facilitating Capital-Raising." IV. Simplify Other Regulatory Requirements In addition to the reforms designed to reduce costs of registration, the Task Force has sought to identify rules and requirements that may have unnecessarily affected decisions in the capital-raising process or caused unnecessary compliance costs. Overhaul the Rules on Trading During a Securities Distribution Few rules have resulted in more day-to-day effort by securities firms and by Commission staff than the rules regulating purchases by an issuer or underwriter during a securities distribution (Exchange Act Rules 10b-6, 10b-6A, 10b-7, and 10b-8). Few would take issue with their purpose: to protect the integrity of the offering process by precluding interested parties from activities influencing the market price for the offered security. But few, also, would dispute that these "trading practices rules" have become unnecessarily complicated and, in many respects, outdated. The Task Force recommends a wholesale revision of the "trading practices rules" with a new regulation that would be narrower in scope and easier to understand and follow. Among other things, the new rules would establish separate requirements for issuers and other distribution participants, and in the case ==========================================START OF PAGE 6====== of underwriters and broker-dealers, exempt actively-traded securities, permit a greater range of activities by distribution participants, make an exception for de minimis transactions, and substantially reduce the rule's application to debt securities. The new regulation also would broaden the opportunities for permissible passive market-making and provide more flexibility for stabilizing transactions. Finally, the Task Force recommends rescission of Rule 10b-8 entirely, which covers rights offerings. These recommendations are discussed in greater detail under "Trading Practices Rules." Place Exchange Tender Offers on the Same Timetable as Cash Tender Offers Today, a cash tender offer can be commenced immediately upon filing appropriate disclosure documents. A tender offer that includes securities rather than cash, however, must wait until a registration statement relating to the offered securities is filed, possibly reviewed by Commission staff, and declared effective before the offer can be commenced. The Task Force recommends that most registration statements relating to exchange tender offers filed by seasoned issuers eligible to use the short form registration statements, Forms S-3/F-3, be deemed effective automatically upon filing. This recommendation, discussed more fully under "Significant Corporate Transactions," would place such exchange tender offers on the same footing as cash tender offers. Just as with the current practice involving cash tender offers, exchange offer registration statements would remain subject to post-effective review by Commission staff. V. Securities Act Concepts The statutory framework of the Securities Act, which has served the financial markets well for over 60 years, currently is being reexamined in light of the constant evolution of today's capital markets. A number of initiatives have been undertaken by the Commission, Congress, state regulators and the private sector to reassess the continuing effectiveness of the Securities Act registration, prospectus delivery and other requirements. The rapidly evolving world in which we live is placing many strains on the system. Technological developments and globalization, for example, have made securities regulation today quite different from 1933. Many other strains exist as well. A number of approaches to address some or all of the strains currently are being debated. These include the global alternative of "company registration" being considered by the Advisory Committee on the Capital Formation and Regulatory Processes chaired by Commissioner Steven M.H. Wallman, and less ==========================================START OF PAGE 7====== global alternatives, such as narrowing the definition of "offer," which would allow issuers to "test the waters" for interest without the cost of full-blown registration; or permitting a "pink herring" registration, an alternative to the previous approach, that would require companies to file a simplified registration statement in order to "test the waters." Pending further consideration of all of the alternatives, the Task Force recommends a quick fix dealing with "integration" of private and public offerings to avoid unnecessary frictions for issuers in their capital-raising activities as well as other initiatives for seasoned issuers. A discussion of possible alternative approaches, as well as specific recommendations, is included under "Securities Act Concepts." * * * * * * * * These and many other recommendations are discussed in more detail under the following thirteen tabs: Elimination of Rules and Forms; Presentation of Information; Securities Act Concepts; Facilitating Capital-Raising; Small Business Initiatives; Significant Corporate Transactions; Registration; Reporting; Disclosure Generally; Trading Practices Rules; Accounting Disclosure Changes; Technical Changes; and Other Current Commission Initiatives. ==========================================START OF PAGE 8====== I. ELIMINATION OF RULES AND FORMS This section includes Task Force recommendations that focus on ways to streamline the non-financial disclosure rules. In some cases, the Task Force recommends eliminating forms or rules that no longer serve a significant purpose, because more recent regulatory initiatives by the Commission have rendered them outdated and superfluous. In other instances, the Task Force recommends eliminating rules or forms that impose disclosure requirements that are overly burdensome by comparison with the utility of the disclosures elicited. A. SECURITIES ACT REGULATIONS 1. Eliminate Regulation B (Rules 300-346), and accompanying Schedules A, B, C, and D, and Forms 1-G and 3-G, which provide a limited exemption for certain interests in oil or gas rights, due to its limited use and the availability of more beneficial exemptions. Regulation B provides a conditional, limited exemption from Securities Act registration for offerings of "fractional undivided interests" in oil or gas rights of up to $250,000 per offering. The Commission originally enacted Regulation B in 1963 and last revised it substantially in 1972. In order to obtain the Regulation B exemption, an offeror of fractional undivided interests in certain specified oil or gas rights must file an offering sheet with the Commission at least ten days prior to commencing the offering. The offering sheet must contain the information specified by Schedules A, B, C, or D, depending on the distinct type of oil/gas interest, as well as on whether the enterprise is producing or non-producing. These schedules require detailed information concerning the nature and amount of the interests offered; a discussion of the legal rights and obligations created by such interests; a description of the property in question; for producing interests, a history of the oil/gas production activities in the field in question; and, for non-producing interests, a description of plans for the drilling of wells, including the estimated costs and method of financing such drilling. Regulation B does not require any offeror to furnish current or past financial statements. Regulation B also requires an offeror to submit two post- offering reports: Form 1-G and Form 3-G. Form 1-G, which is filed with the Commission, requires disclosure of information pertaining to each sale of the offered securities. Form 3-G, which is sent to each purchaser, as well as filed with the ==========================================START OF PAGE 9====== Commission, must disclose more detailed information pertaining to the offering's results, including the actual cost of drilling and expenses incurred in the selling effort. Between 1966 and 1977, the Commission received 6,904 Regulation B filings. This relatively large number of Regulation B filings corresponded with an increase in oil/gas drilling activity and related financing triggered by the energy crisis of the mid-1970s. In 1975 alone, the Commission received 625 Regulation B offering sheets pertaining to $35.4 million in total sales. However, by 1977 the number of Regulation B offering sheets filed with the Commission had dropped to 96, covering only $7.3 million in aggregate sales of oil/gas securities. Since then, the number of Regulation B offering sheets filed has steadily declined, from 94 such filings in 1980, to 13 in 1985, seven in 1990, four in 1992, and, finally, zero in 1995. Moreover, since enactment of Regulation B's reporting requirements in 1972, the Commission has received only one each of Form 1-G and Form 3-G. The decrease in submissions may be due to a decrease in small scale oil/gas ventures occurring in the United States since the end of the 1970s energy crisis, as well as the availability of other exemptions, such as the limited offering exemptions from registration set forth in Regulation D, or the private placement exemption under Section 4(2) of the Securities Act. Of these exemptions, Rule 504 of Regulation D probably offers the most benefits to the small oil or gas issuer. There are several reasons why such an issuer, which is not an Exchange Act reporting company, would elect to proceed under Rule 504 rather than Regulation B when claiming an exemption for an offering of fractional undivided oil or gas interests. First, under Rule 504, an offeror can claim an exemption for a maximum amount of securities that is four times greater than that allowed under Regulation B ($1,000,000 compared to $250,000). Second, the Rule 504 exemption is not conditioned on specific disclosures other than the notice filing of Form D (which the Task Force proposes to eliminate). Third, while Rule 504 is available for an offering of fractional undivided interests in an oil or gas limited partnership, Regulation B is unavailable for such an offering. Given the current lack of use by small oil/gas financiers of the Regulation B exemption, the availability of a more flexible exemption under Rule 504, and the potential availability of other limited offering exemptions with higher dollar limits, retention of this exemption with its disclosure requirements serves little purpose. Accordingly, the Task Force recommends the elimination of Regulation B in its entirety, along with the elimination of Schedules A, B, C, and D, and Forms 1-G and 3-G. ==========================================START OF PAGE 10====== 2. Eliminate Regulation E (Rules 601-610) and accompanying Forms 1-E and 2-E, which relate to a limited exemption for certain types of investment companies designed to aid small businesses, or incorporate Regulation E within Regulation A. Regulation E provides an exemption from registration under the Securities Act for small offerings of securities issued by two types of investment companies: small business investment companies ("SBICs") and business development companies ("BDCs"). Regulation E was adopted in 1958, shortly after the enactment of the Small Business Investment Act of 1958 ("SBIA"), and was extended to BDCs in 1984. Both types of companies were authorized by Congress in order to stimulate the flow of capital to small businesses. SBICs were authorized pursuant to the SBIA. Their activities are limited to investing in small businesses by purchasing securities and making loans. Such investments are facilitated by the Small Business Administration, which is authorized to license SBICs and to provide or guarantee loans to SBICs at favorable rates. BDCs are investment companies that are regulated under specific provisions under the Investment Company Act of 1940 ("Investment Company Act"). BDCs must make specific types of investments in small businesses, as well as provide significant managerial assistance to the companies in which they invest. Regulation E has been used infrequently. The Commission has received a total of only 40 Form 1-E filings by 14 investment companies, with all but eight of these filings made prior to 1985 and only one since 1990. Furthermore, since Regulation E's inception, the Commission has received only four Form 2-E filings. There may be several reasons for Regulation E's limited use. First, the five million dollar limit on offerings under the Regulation E exemption may tend to discourage its use. Many SBICs and BDCs may prefer instead to conduct private placements or registered public offerings, which are not subject to this limitation. Second, Regulation E is available only to those SBICs that are registered investment companies. Most SBICs, however, elect to avoid registration as investment companies by meeting the exception in Investment Company Act Section 3(c)(1) for any issuer that has fewer than 100 beneficial owners and does not make a public offering. Unregistered SBICs therefore may not avail themselves of Regulation E even if it were available, since such an offering, if made to the public, may result in the loss of the exemption from Investment Company Act registration. ==========================================START OF PAGE 11====== Another reason for the disuse of Regulation E may be that the same form that a SBIC must file to register under the Investment Company Act (Form N-5) can also be used by the SBIC to fulfill its Securities Act registration requirements. Because of the convenience afforded by Form N-5's dual function, a SBIC that intends to register under the Investment Company Act is more likely to register an initial public offering of securities on Form N-5. The Commission's experience with Regulation E suggests that there does not appear to be any need for a small offering exemption for SBICs and BDCs. Consequently, the Task Force recommends eliminating Regulation E and the two forms that are required to be filed with the Commission in connection with its use, Forms 1-E and 2-E. Alternatively, the Task Force recommends that the Commission consider eliminating Regulation E and expanding the Regulation A exemption to include registered SBICs and BDCs. This approach has two advantages. First, the Commission could, at the same time, consider ways to make unregistered small offerings more attractive to SBICs and BDCs by, for example, extending Regulation A's $1,500,000 limit for selling securityholder resales to these issuers. The Task Force's recommendation to amend Regulation A to permit issuers to raise five million dollars during any six month period rather than five million dollars per year also may benefit registered SBICs and BDCs. Second, while Regulation E differs from Regulation A in certain respects that are attributable to special characteristics of SBICs and BDCs, the Task Force believes that amending Regulation A to accommodate registered SBICs and BDCs would be relatively easy to accomplish. 3. Eliminate Regulation F (Rules 651-656) and accompanying Form 1-F, pertaining to a limited exemption for assessments levied on assessable stock and for resales of forfeited assessable stock, because the adoption of Rule 504 has significantly reduced the Regulation's utility. Regulation F provides a conditional limited exemption from Securities Act registration for assessments levied on assessable stock and for resales of forfeited assessable stock. The Commission promulgated Regulation F in 1959 at the same time that it enacted Securities Act Rule 136. Rule 136(c) defines "assessable stock" to mean "stock which is subject to resale by the issuer . . . in the event of a failure of the holder of such stock to pay any assessment levied thereon." Thus, assessable stock is stock the purchase of which triggers an annual obligation to pay an amount, termed an "assessment," to the ==========================================START OF PAGE 12====== issuer in addition to the original offering price. If the buyer fails to pay the levied assessment after receiving a notice of delinquency from the issuer, the issuer can reclaim the original stock and resell it, usually at an auction. Under Rule 136, both the levying of an assessment on assessable stock and the resale of forfeited assessable stock constitute the issuance of securities, which trigger registration requirements under the Securities Act. Regulation F establishes a partial conditional exemption from registration for these transactions. In order to qualify for the exemption, a company must be incorporated or have its principal business operations in the United States. In addition, a company cannot claim more than $300,000 in exempted assessable stock transactions for any one calendar year. A company also must file a Form 1-F with the Commission's regional office closest to its principal business operations at least 10 days prior to levying any claimed exempted assessment or sale of delinquent assessable stock. Form 1-F requires disclosure of pertinent information about the issuer; its 10 percent beneficial stockholders; its directors and officers; its levied assessments, resales of forfeited assessable stock, and other unregistered securities issued during the preceding year; and its current proposed assessments or resales of forfeited assessable stock. Historically, only two types of companies have issued assessable stock: mining companies and water extraction/delivery companies, also known as mutual water companies. Since the promulgation of Regulation F, approximately 40 such companies have filed a total of 234 1-F forms. Most of these filings occurred between 1967 and 1982. Only 32 Form 1-F filings have occurred between 1983 and 1995. Ten companies were responsible for those filings. Since 1992, only three companies have filed a total of 10 1-F forms with the Commission. The primary reason for the recent steady decline of Form 1-F filings appears to be the availability of more beneficial limited offering exemptions, particularly the Rule 504 exemption. Virtually all Regulation F companies have been non-reporting companies eligible to claim a Rule 504 exemption. In 1982, the Commission adopted its first version of Rule 504. Following that year, the annual number of Form 1-F submissions steadily decreased from nine in 1982, to six in 1983, three in 1984, zero in 1985 and 1986, and an average filing rate of two to three for the years 1987 to 1995. There are several reasons why an assessable stock issuer would seek to proceed under Rule 504 rather than Regulation F. First, it would receive a higher annual dollar limit ($1,000,000 compared to $300,000). Second, Rule 504 posits no informational ==========================================START OF PAGE 13====== requirements. Third, the Rule 504 exemption is available for new issues as well as assessments and sales of forfeited assessable stock. Therefore, given the lack of filings under Regulation F and the availability of the broader Rule 504 exemption, the Task Force recommends that the Commission eliminate Regulation F in its entirety, along with its accompanying Form 1-F. B. OTHER SECURITIES ACT RULES 1. Eliminate Securities Act Rule 148, which sets forth a safe harbor for resales made under the repealed Bankruptcy Act, because the rule has become outdated. Rule 148 was originally designed to be a counterpart to Rule 144 and to provide a safe harbor for the resales of certain categories of securities acquired in bankruptcy proceedings, including securities issued under the federal Bankruptcy Act, portfolio securities sold under the Securities Investors Protection Act (SIPA), and where the Federal Deposit Insurance Corporation (FDIC) has been appointed receiver of the debtor's assets. In 1978, the federal Bankruptcy Act was repealed and replaced with the Bankruptcy Code, which provides an exemption from Securities Act registration as well as a safe harbor for the resales of securities received under a plan of reorganization. Through no-action letters, the Commission has taken the position that Rule 148 is applicable only to resales of securities that were issued under the repealed Bankruptcy Act, and not to resales of securities subject to the new Bankruptcy Code. Consequently, Rule 148 appears to be outdated and should be eliminated. 2. Combine Rules 152a and 236, both of which relate to fractional shares, and adjust the dollar cap under Rule 236 to account for inflation. Rules 152a and 236 relate to fractional interests. Rule 152a applies when fractional interests resulting from a stock dividend, stock split, reverse stock split, conversion, merger or similar transaction are combined and sold. The rule clarifies that the offer and sale of the combined fractional interests is deemed to be a transaction by persons other than an issuer, underwriter or dealer under Section 4(1) of the Securities Act, even if the transaction is effected on behalf of the security ==========================================START OF PAGE 14====== holders by the issuer or an affiliate of the issuer or by a bank or other independent agent. Rule 236 relates to situations in which issuers sell stock in order to obtain funds to pay shareholders cash in lieu of fractional interests in connection with a stock dividend, stock split, reverse stock split, conversion, merger or similar transaction. Rule 236 provides that the sale of stock for that purpose is exempt from registration provided certain conditions are met, including that the issuer is a reporting company; that the aggregate gross proceeds from the sale of all shares offered in connection with the transaction for the purpose of providing such funds do not exceed $300,000; and that at least ten days prior to the offering of the shares, the issuer furnishes to the Commission in writing certain information about the transaction. The Task Force recommends that Rule 236 be merged with Rule 152a and that Rule 236 then be eliminated. As a result, companies considering the treatment of fractional interests need only consult one rule. The Task Force also recommends that, in conjunction with merging the rules, the Commission eliminate the reporting requirement in Rule 236 and increase the $300,000 cap to $600,000. The $300,000 cap was established in 1982. That number, converted to current dollars based on the CPI-U Index, would be approximately $560,000 today. 3. Eliminate Securities Act Rules 445, 446, and 447, which relate to securities offered through competitive bidding, because these rules have become obsolete. The Task Force recommends eliminating Rules 445, 446 and 447, which govern registration statements filed in connection with securities to be offered through competitive bidding (e.g., by means of a solicitation of competitive proposals from underwriters). These rules were promulgated in the late 1940s principally to accommodate registered public utility holding companies and their subsidiaries ("registered holding companies"). These companies were subject to Rule 50 under the Public Utility Holding Company Act of 1935 ("PUHCA"), which required that their securities be sold through competitive bids. Rules 445, 446 and 447 appear to be rarely used at present and are unlikely to be used in the future. A review of Commission filings shows that there was only one competitive bid filing in 1994, and no competitive bid filings in 1995. One reason for the lack of filings under these rules may be that, beginning in 1982, the Commission began to relax the rigid bidding requirements of PUHCA Rule 50 in recognition of the fact ==========================================START OF PAGE 15====== that these procedures often precluded registered holding companies from obtaining the benefits of the Securities Act Rule 415 shelf registration procedure, placing them at a disadvantage compared to other issuers in getting access to the capital markets on short notice. In 1994, the Commission determined that competitive bidding was no longer necessary to prevent abuses in the issuance and sale of securities by these companies and rescinded Rule 50. In recommending this course of action, the Task Force does not intend to preclude an issuer from undertaking a competitive bidding process, which will continue to be permissible under other existing rules. 4. Eliminate Rule 494, which relates to newspaper prospectuses of foreign government securities, because the rule has become outdated. Rule 494 was adopted in 1951 to accommodate a then common practice of advertising securities issued by foreign national governments. The rule limits such "newspaper prospectuses" for foreign government securities to advertisements appearing in newspapers, magazines and other periodicals that are distributed by second class mail. However, the practice appears to have fallen into disuse. The Task Force believes that this rule is outdated and should be eliminated. C. EXCHANGE ACT RULES Two exemptions from the short-swing profit recovery provisions of Section 16(b) of the Exchange Act do not appear to serve a useful function. Both were crafted in another era to address very narrow circumstances. While the staff is not able to monitor when these exemptions are used, the available evidence suggests that such use is rare. Thus, the Task Force recommends that these provisions be eliminated. 1. Eliminate paragraph (c) of Exchange Act Rule 16b-1, which pertains to the acquisition of securities resulting from a railroad or other carrier reorganization approved by the Interstate Commerce Commission. Paragraph (c) of Rule 16b-1 exempts from Section 16(b) the acquisition of securities resulting from a reorganization of a railroad or other carrier approved by the Interstate Commerce Commission, an agency that was abolished as of January 1, 1996. ==========================================START OF PAGE 16====== The function of approving such reorganizations has now been transferred to the Surface Transportation Board, an independent agency of the Department of Transportation. The Task Force recommends that the Commission consider eliminating this paragraph since the security to be received in the reorganization is likely to be of a different class than that surrendered, whereas only securities of the same class or securities that are convertible into such class (e.g., equity- based derivatives) are matchable under Section 16(b). These recommendations should be viewed together with other initiatives concerning rules under Section 16(b) which are discussed in "Other Current Commission Initiatives." 2. Eliminate Exchange Act Rule 16b-4, which pertains to certain holding company redemption transactions, because the rule is of marginal utility. It is an unusual situation where a holding company owns securities in only one company and desires to exchange its own shares through a redemption for those of that one company. It is this type of transaction that is protected from Section 16(b) by Rule 16b-4, if the Rules's conditions are met. Like Rule 16b- 1(c), this Rule does not appear to be used. Moreover, it also exempts an exchange of one class of securities, or securities that are convertible into such class (e.g., equity-based derivatives), for another class of securities -- a transaction not likely subject to Section 16(b) in any event. As such, the Task Force recommends that Rule 16b-4 be eliminated. D. FORMS 1. Consider eliminating the Form D filing requirement under Regulation D and Section 4(6) of the Securities Act because the requirement has outlived its usefulness. The Commission currently requires the filing of Form D by an issuer that engages in an unregistered offering of its securities in reliance on an exemption under Regulation D or Section 4(6) of the Securities Act. An issuer also may utilize the form to give notice its reliance on the Uniform Limited Offering Exemption ("ULOE") for its securities offering exemption in those states that have adopted ULOE and Form D. For each claimed exempt offering, an issuer must file a Form D with the Commission no later than 15 days after the offering's first sale of securities. Form D requires the issuer to disclose basic information ==========================================START OF PAGE 17====== concerning the identity of the issuer and the offering, including information regarding the offering price, number of investors, expenses involved, use of proceeds and the exemption claimed. The Task Force recommends that the Commission, in consultation with North American Securities Administrators Association, Inc. ("NASAA"), consider the continued need for a Form D filing requirement with the Commission. The Commission does not require an issuer to file a notice when making offerings under other exemptions from Securities Act registration, such as an intrastate offering under the Rule 147 safe harbor. Furthermore, with the curtailing of Form D's notice requirement in 1986, a current Form D typically provides only minimal information about the filer and the claimed exempt offering. Similar information regarding unregistered sales is currently required by Item 701 of Regulations S-K and S-B, which applies to an issuer registering an initial public offering or other offering of securities on Form S-1, as well as to a foreign private issuer registering an offering of securities on Form F-1. In addition, the Commission recently proposed to require the disclosure of Item 701 information on a quarterly basis concerning the unregistered sales of equity securities, regardless of the exemption claimed. See Release No. 33-7189 (June 27, 1995). If Form D were to be eliminated, Rules 503 and 507 also should be eliminated. Rule 503 sets forth the notice filing requirement for issuers claiming a Regulation D exemption. Rule 507 provides that an issuer is ineligible to claim a Regulation D exemption if it has previously been subject to a court order for failing to comply with Rule 503. 2. Eliminate Form SR and, instead, require the use of proceeds following initial public offerings to be reported on Exchange Act reports. Securities Act Rule 463 requires issuers to report on Form SR the use of proceeds following an initial public offering within ten days of the first three months following the effective date of the registration statement, and every six months thereafter, until the offering has been terminated or all proceeds have been applied. In 1994 and 1995, 2,103 and 1,635 such filings were made, respectively. The Task Force recommends the elimination of Form SR in favor of requiring first-time issuers to report the use of proceeds on their first Exchange Act report after effectiveness and thereafter on their Exchange Act reports (e.g., quarterly reports) through the termination of the offering or application of the proceeds. This consolidation of disclosure requirements ==========================================START OF PAGE 18====== would facilitate reporting by registrants, who would have to comply with fewer forms in satisfying their substantive reporting obligations. Furthermore, these important disclosures regarding the use of proceeds and the progress of the offering would appear within a filing that is more easily monitored by investors. If the proposal to eliminate Form SR is adopted, Rule 463 of Regulation C, which relates to the reporting of use of proceeds, should be revised to reflect the proposed changes. 3. Eliminate Exchange Act Form 8-B, regarding registration of securities of successor issuers, because Exchange Act Rule 12g-3 has rendered the form largely superfluous. The Task Force recommends the elimination of Form 8-B. This form was adopted in 1936 to provide for registration of securities of certain successor issuers under Section 12 of the Exchange Act. An issuer uses Form 8-B to register its securities in the situation where the issuer does not have securities registered under Section 12 of the Exchange Act, but has succeeded to an issuer that had securities registered under Section 12 at the time of the succession. The Commission received only 59 Form 8-B filings in 1994 and 58 such filings in 1995. Form 8-B has been rendered largely superfluous by the application of Exchange Act Rule 12g-3 to successor issuers. In the event of a succession by merger, consolidation, exchange of securities, or acquisition of assets, Rule 12g-3 deems to be registered under Section 12 of the Exchange Act the equity securities of an issuer not previously registered under Section 12 that are issued to the holders of equity securities registered pursuant to that section. Hence, a successor to an issuer with a class of securities registered under Section 12 is deemed to succeed to that registration and need not file a Form 8-B. In order to accommodate the elimination of Form 8-B, the Task Force recommends expanding Rule 12g-3 to include any transactions or securities that are currently covered by Form 8- B, but not Rule 12g-3. In addition, the Task Force suggests clarifying in Rule 12g-3 the staff's position that the rule applies to issuers with securities registered under Section 12(b) of the Exchange Act, as well as to those with securities registered under Section 12(g). Consistent with current staff practice, the successor issuer would be required to file a current report on Form 8-K with respect to the transaction and subsequently comply with all the applicable provisions of the Exchange Act. ==========================================START OF PAGE 19====== 4. Eliminate Form 10-C and Rules 13a-17 and 15d- 17, which require issuers registered under the Exchange Act and quoted in Nasdaq to report certain corporate events to the Commission and the NASD. The Task Force recommends elimination of Rules 13a-17 and 15d-17, as well as related Form 10-C, since the information required to be reported on Form 10-C is already reported on a more detailed basis with the Commission under existing reporting rules. Under Rules 13a-17 and 15d-17, issuers that are registered pursuant to Section 12(g) or subject to Section 15(d) and quoted in Nasdaq are required to file a Form 10-C to report any aggregate increase or decrease in the amount of securities of such class which exceeds five percent of the amount of the class outstanding as last reported, or to report changes in their corporate name. In 1994 and 1995, 1,515 and 1,635 filings were made, respectively. The rules requiring the filing of Form 10-C were adopted in 1971, shortly after the Nasdaq automated system became operational, in order to provide the NASD with more timely notice of certain events to help in its administration of the new Nasdaq system and its publication of daily price indexes. The Task Force believes that Form 10-C has outlived its usefulness as a Commission filing and therefore could be eliminated without any loss of information to the market or harm to investors in Nasdaq quoted companies. In this regard, the Task Force notes that companies whose equity securities are registered under Section 12(g) with the Commission must file all Exchange Act reports with the Commission. 5. Eliminate the exhibit requirements of Form 11-K that provide little information that is not otherwise available to plan participants. Issuers that have registered interests in employee stock purchase, savings and similar plans under the Securities Act are required to file annual reports with respect to such plans on Form 11-K. The Task Force recommends that the Commission eliminate the exhibit requirements of Form 11-K. The exhibits provide little information that is not otherwise available to plan participants, and the Task Force understands that the exhibit requirements are particularly burdensome to registrants. ==========================================START OF PAGE 20====== The Commission alternatively should consider eliminating the Form 11-K requirement for ERISA plans. Much of the information elicited by the form relates rather narrowly to the plan and its management, rather than to the registrant and its financial condition. The key element of Form 11-K, for example, is the plan's audited financial statements. However, plan management is principally a concern of laws other than the securities laws (i.e., ERISA). In considering this recommendation, the Commission should take into account that plan financial statements included in Form 11-K typically are incorporated by reference into a registration statement on Form S-8. The Commission also should consider whether any relief resulting from this recommendation should be extended to plans that are not covered by ERISA. 6. Eliminate Items 3(e) and 4(a) of Form F-6, governing the registration of American Depositary Receipts, because the elicited information appears to be rarely used. Item 3(e) Item 3(e) of Form F-6 requires the registrant to include, as an exhibit, the name of each dealer known to the registrant who has deposited shares against issuance of American Depositary Receipts, proposes to deposit shares or participated in a plan to deposit shares, within the past six months. The Task Force recommends that this item be eliminated because the required information appears to be of little use to the marketplace. In addition, because the base number of outstanding shares is not normally publicly available, the information regarding semi- annual adjustments to that number appears to be of little use. Item 4(a) Under current rules, a registrant on Form F-6 must undertake to provide semi-annual updated information generally concerning dealers depositing shares in the facility and the number of shares issued/cancelled during the covered period. The Task Force recommends elimination of this requirement, embodied in Item 4(a), because the required information appears to be of little use to the marketplace. In addition, because the base number of outstanding shares is not normally publicly available, the information regarding semi-annual adjustments to that number appears to be of little use. ==========================================START OF PAGE 21====== II. PRESENTATION OF INFORMATION From the investor's prospective, disclosure may not be effective unless it is understandable, complete and timely. Fulfillment of each of these goals sometimes may be hindered by current practices in drafting documents. These goals, and suggestions for better achieving them, are discussed more fully below. A. CLEAR AND ACCURATE DISCLOSURE 1. Develop a "plain English" introduction to the prospectus to enhance its readability by individual investors, by eliminating boilerplate "legalese" and requiring a summary of key information. The U.S. securities markets are built upon the foundation of full and fair disclosure. The prospectus, the basic disclosure document used to sell securities in public offerings, contains information about the issuer, including its business, its management and financial condition, enabling market participants to make informed judgments about a company and its prospects. The prospectus also contains information specific to the offering such as risk factors, use of proceeds, the terms of the securities and the underwriting arrangement. Availability of this information has played a significant role in the success of the U.S. capital markets and confidence in their integrity. As a practical matter, however, prospectuses often are far more useful to the professional investor than to most retail investors. While prospectuses contain certain complex material often relating to the description of securities, even basic information about an issuer's business is written in a way that has been described as "turgid," "opaque" and "unreadable." Drafters claim that this dense writing style stems in part from an effort to meet the high standard of diligence under the Securities Act that is imposed on companies, management and underwriters with respect to the adequacy and accuracy of disclosures provided to investors. Issuers, underwriters and their lawyers produce defensively written documents that put a premium on legal jargon and over-inclusive disclosures. Trivial points sometimes receive as much attention as material information, and in the end may bury points significant to an investment decision. In the eyes of many, today's prospectus has become a legal document to shield against liability, rather than a useful and informative disclosure document, as contemplated by the Commission's current "plain English" rule, Rule 421 of Regulation C under the Securities Act and case law. See e.g., McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576 (2d ==========================================START OF PAGE 22====== Cir. 1990), cert. denied, 501 U.S. 1249 (1991); In re Franchard Corp., Release No. 33-4710, [1964-1966 Transfer Binder] Fed. Sec. L. Rep. (CCH) 77,113 (July 31, 1964). This unfortunate result especially is evident with respect to offering documents relating to initial public offerings and complex transactions. As Chairman Levitt recently observed, "our passion for full disclosure has created fact-bloated reports and prospectuses that are more redundant than revealing." The Task Force believes that issuers, management and underwriters should begin drafting and using "plain English" offering materials. As a first step, the Task Force briefly sets forth below its recommendations for presenting information on the front cover, inside cover and first page or back cover of a prospectus. The Task Force also suggests the use of a "plain English" glossary to explain technical terms used in the document. Further, the Task Force recommends that the Commission consider publishing an interpretive release to assist in the preparation of "plain English" disclosure documents by every issuer; a release similar to that published in 1991 with respect to the importance of clear, concise and comprehensible disclosure in offering materials used by limited partnerships and other direct participation investment programs. See Release No. 33- 6900 (June 17, 1991). Prospectus Cover. The Task Force recommends eliminating many of the legal warnings on the cover page. In their current form, these warnings often convey little useful information, and, because they are written in dense capital letters, also are virtually unreadable. Instead, the cover should be more inviting to the reader, and legal warnings that continue to be necessary should be set forth in a more readable style and format. Inside Cover. The Task Force believes that the inside cover should be required to contain a table of contents and summary financial information, either in tabular or graphic form, which the issuer and underwriter believe would be useful to a potential investor. First Page or Back Cover. The Task Force recommends a format that, in addition to basic information about the issuer, would include: (i) a summary paragraph of key points of interest (including a characterization of risk); and (ii) a tabular presentation of features of the offering, such as the exchange where the securities are traded, company dividend policy, etc. The Task Force also recommends that the Commission consider requiring the tabular presentation to include certain items that are not now required, but which may assist investors in understanding the offering, such as the effect of dilution (which is now required only in initial public offerings) and certain significant financial ratios. ==========================================START OF PAGE 23====== Other Presentation Suggestions. The Task Force recommends that the Commission clarify that disclosure regarding the risks of the offering pursuant to Item 503 of Regulation S-K must be set forth in full in the forepart of the prospectus and cannot be incorporated by reference from other filings or portions of the document. Samples. Included at the end of this section are two illustrations of the first few pages of a prospectus in a more plain English format. 2. Require a "plain English" summary sheet in tender offer statements, which would function as a "road map" by providing shareholders with answers to commonly asked questions about the offer. In connection with a tender offer, shareholders are furnished with a disclosure document known as an "Offer to Purchase," which provides information about the bidder, the terms and conditions of the offer and the procedures for tendering shares required by Exchange Act Regulations 14D and 14E or Rule 13E-4. These documents often are quite lengthy and contain technical and legal terms not commonly understood by the reader. The Task Force recommends that the Commission include tender offer materials within its plain English initiatives so as to make these lengthy, complex and legalistic documents more understandable. One suggestion to facilitate shareholder comprehension of the essential terms and provisions of the offer is the use of a glossary to explain technical terms used elsewhere in the tender offer materials. Another idea is a "plain English" summary. This summary, which would begin on the inside cover page of the Offer to Purchase, would provide investors with a ready reference to certain basic information about the offer. The information would be presented as responses to common shareholder questions, such as the following: ù Who is the person offering to buy the securities? ù What are the classes and amounts of securities being sought? ù How much is the bidder paying and what will be the form of payment? ù Is information on the bidder's financial condition relevant to my decision whether to tender? ù How long do I have to decide whether to tender? ==========================================START OF PAGE 24====== ù What are the most significant conditions to the offer? ù How do I tender my shares? ù How may I withdraw my tendered shares? ù If the transaction is a consensual one, what does my board of directors think of this offer? ù Is this the first step in a going private transaction? ù Will this tender offer be followed by a merger if not all of the company's shares are tendered? ù If I decide not to tender, how will the tender offer affect my shares? ù What is the market value (if traded) or the net asset or liquidation value (if not traded) of my shares? ù Who can I talk to if I have questions about the offer? Each of the items briefly described in the summary would reference a more detailed discussion elsewhere in the tender offer materials. Bidders also would provide a statement at the bottom of the summary to the effect that the Offer to Purchase must be reviewed in its entirety for a full understanding of the offer. An example of a sample summary relating to a "plain vanilla" cash tender offer is included at the end of this section. Of course, the exact contents of the summary will depend upon the structure and terms of the particular transaction. For instance, a summary relating to a tender offer for limited partnership interests would have to include summarized risk factor disclosure in bullet point format, as well as highlight conflicts of interests faced by general partners and other affiliates in making the offer. The Task Force also recommends that the Commission consider whether a summary should be required in any solicitation or recommendation by the target company to the holders of the security to accept or reject the tender offer. 3. Allow registrants to include earnings releases, which often are written in "plain English," in their quarterly reports, thereby making such reports more readable and easier to prepare. ==========================================START OF PAGE 25====== The Task Force recommends permitting registrants to use quarterly earnings releases in place of, or in conjunction with, the quarterly report on Form 10-Q. Quarterly earnings releases typically are issued shortly after the end of the quarter, before the Form 10-Q is prepared. In addition to quarterly financial information, earnings releases often include a narrative discussion of other material developments that, unlike the filing on Form 10-Q, is typically in a "plain English" format. The Commission should permit companies to file their earnings releases under cover of a Form 10-Q, provided that such releases and any accompanying disclosures contain all of the information required by the form. Other than requiring that Management's Discussion and Analysis be set forth in a single coherent discussion in accordance with applicable Commission and staff positions, there would be no restrictions on the format or order in which information is presented, so long as the presentation is balanced, informative and easily understood. This recommendation should enhance the readability of quarterly information since earnings releases usually are written in a clear, less legalistic manner than the required Form 10-Q. At the same time, the recommendation may reduce the regulatory burden on registrants, who will be spared the requirement to re- order quarterly information in the format required by Form 10-Q. The Task Force notes that this recommendation is not intended to lessen the quality of disclosure, and recognizes there is a risk that this idea possibly could result in the preparers of earnings releases switching to a more formalistic document -- a result that should be avoided since it would defeat the "plain English" goal. B. UNEVEN DISCLOSURE Apart from the need for plain and simple disclosure, there arises the issue of whether the Commission should attempt to encourage issuers to provide investors with "better" information than is now mandated. In particular, the Commission should consider ways to further encourage the disclosure of so-called "soft information" or voluntary forward-looking information. The value of forward-looking information to investors has been debated for the last 20 years. Until the early 1970s, issuers were prohibited from providing this information to investors because the Commission believed it was inherently speculative and created an opportunity for abuse. With the adoption of a safe harbor in 1979, the disclosure of forward- looking information was not only permitted, it was affirmatively encouraged. This safe harbor was intended to provide protection from liabilities under the Securities Act and the Exchange Act for companies that make projections in good faith and on a ==========================================START OF PAGE 26====== reasonable basis in Commission filings. This was done because the Commission recognized that many investors and analysts found such information extremely useful in assessing the merits of investing in a particular company. Over the years, issuers have provided this information orally to professional analysts and investors, either over the telephone or personally at so-called "road shows" (typically meetings hosted by issuers and underwriters with potential investors). By providing this information orally, issuers have avoided Securities Act Section 11 liability that attaches to a registration statement at the time of effectiveness. Further, it is believed that issuers are less likely to fear unfounded lawsuits by professional investors. As a result, some believe that two separate (but parallel) disclosure systems have developed -- one for retail customers and one for professionals. The Commission itself recognized the existence of concerns in this area in connection with its Safe Harbor Concept Release. See Release No. 33-7101 (Oct. 13, 1994). In that release, the Commission sought comment on a panoply of issues relating to the disclosure of forward-looking information, including whether mandatory disclosure of projections in prospectuses was an appropriate solution to the problem of "road- show" selective disclosure. Early in its inquiry, the Task Force evaluated concerns that have been raised with respect to this perceived disparity of disclosure, with a view toward recommending that the Commission consider requiring a fair summary in the front of the prospectus of any "road show" information (whether communicated orally or in writing). Based on the Commission's historic experience in this area, however, the Task Force was mindful that issuers likely would resist providing such disclosure absent assurances of some additional measure of protection. During the pendency of the Task Force, in December 1995, Congress enacted the Private Securities Litigation Reform Act creating a statutory safe harbor from liabilities from private rights of action arising from the disclosure of specified forward-looking information. As a result, it is uncertain at this early stage whether issuers will feel sufficient comfort to volunteer more forward-looking information in reliance upon the statutory safe harbor. It is important to note, moreover, that the new statutory safe harbor excludes, among other types of transactions, all initial public offerings. Accordingly, the Task Force suggests that the Commission's staff continue to monitor developments in this area. C. TIMELY DELIVERY OF INFORMATION ==========================================START OF PAGE 27====== Regardless of how simple or how complete a prospectus is, it cannot aid an investment decision unless it is received prior to the time the decision is made. As discussed in greater detail in "Securities Act Concepts," however, questions as to the appropriate timing and method of providing disclosure to investors are being widely debated. The Task Force believes that there is no quick fix in this complex area, and that the Commission should give full and careful consideration to these questions and the divergent solutions now being debated. D. ELECTRONIC MEDIA Discussions about the potential promises of electronic technology are not new. Even three decades ago, securities law experts were predicting that developments in communications technology would provide opportunities for improving disclosure, while at the same time reducing the cost of disseminating information to investors. In his 1966 article entitled "Truth in Securities Revisited," which contains proposals that contributed to the development of the integrated disclosure system, Professor Milton H. Cohen called the promises of technological development "the real hope and challenge" of securities regulation. The potential promises in using electronic media as a disclosure medium are developing rapidly with respect to all types of information, including that relating to capital-raising activities and secondary trading in the securities markets. Technological developments are making it possible to deliver documents electronically, such as prospectuses that until recently were delivered in paper format. Just this past October, the Commission issued an interpretive release regarding the use of electronic media to deliver information under the Securities Act, the Exchange Act, and the Investment Company Act. See Release No. 33-7233 (October 6, 1995). Meanwhile, access to most EDGAR documents has been commonplace for some time now for investors and the financial markets. And very recently, the Commission started its own "home page" on the Internet (World Wide Web address http://www.sec.gov), which contains Commission filings, rule proposals, litigation releases, opinions, speeches, testimony and press releases, as well as an electronic copy of this Report. As is often the case, these positive developments are accompanied by some challenges of equal magnitude, some of which are unfolding with equivalent speed. Such disclosure challenges include establishing controls and procedures to ensure that information is presented in a clear, understandable format, that information is adequate and accurate, and that it is subject to the review of effective "gatekeepers." In addition, the Commission will likely be called upon to evaluate the ==========================================START OF PAGE 28====== effectiveness and efficiency of disseminating information through delivery, publication and/or access, and to respond to the ever- increasing pace of information flow. Indeed, the pace of information flow in some respects appears to have already begun to erode some of the assumptions traditionally made by securities regulators, such as the existence of natural "information barriers." Some of these challenges, and possible responses to them, are discussed more fully in "Securities Act Concepts." While resolution of these rapidly developing broad disclosure and legal questions in the electronic world is not within the scope or capability of the Task Force given the time- frame established for its work, the Task Force has included in this Report a few incremental recommendations designed to make the EDGAR system more user-friendly. ==========================================START OF PAGE 29====== III. SECURITIES ACT CONCEPTS A. STRAINS IN THE REGULATORY FRAMEWORK 1. Introduction In connection with the Task Force's review of existing rules, regulations and forms, questions have been raised with respect to several premises of, and concepts underlying, the Securities Act regulatory framework. Many of these questions currently are the subject of considerable debate, both within and outside the Commission. First instituted in the 1930s and revised over the years by Congress and the Commission, the intricate web of Securities Act provisions and rules governing the capital formation process have been criticized by some as excessively restrictive in light of present market conditions and, by others, as unduly lax in protecting investors. While none of the various participants in this debate seriously questions the fundamental importance of and need for full, fair and timely disclosure of information to investors, there is substantial disagreement as to how that goal best can be accomplished given the constant evolution of today's capital markets. A number of initiatives thus have been undertaken by the Commission, Congress, state regulators and the private sector, in an effort to reassess the continuing effectiveness of the Securities Act registration, prospectus delivery and other requirements. Among these initiatives are the Commission's formation in early 1995 of the Advisory Committee on the Capital Formation and Regulatory Processes ("Advisory Committee"), which is chaired by Commissioner Wallman, and the Commission's publication for comment in mid-1995 of still-pending proposals to permit "testing the waters" in advance of an initial public offering (Release No. 33-7188 (June 27, 1995)); to re-consider the prohibition on general solicitation and advertising for private placements (Release No. 33-7185 (June 27, 1995)); and to craft appropriate rule revisions to keep pace with transfers of economic or other interests in securities through equity swaps, forwards and other arrangements -- commonly known as "derivatives" -- without any accompanying transfer of legal title to the underlying "physical" instrument (Release No. 33-7187 (June 27, 1995); Release No. 33- 7190 (June 27, 1995)). Other initiatives include legislation introduced by Congressman Fields (Capital Markets Deregulation and Liberalization Act of 1995, 104th Cong., 1st Sess. (1995)), and a blue-ribbon panel formed this past October by NASAA, of which Commissioner Wallman is a member. The following discussion distills some of the ongoing debate regarding the need to adapt existing Securities Act ==========================================START OF PAGE 30====== requirements and related concepts to current market conditions, by outlining certain perceived strains in the system, the resultant problems for raising capital and timely dissemination of full and fair disclosure to investors, and a comprehensive solution and several narrow proposals that address certain of the perceived strains. The Task Force also is recommending a "quick fix" that, if adopted by the Commission, could resolve one issue without preempting the Commission's ability to evaluate the merits of any proposed broader initiatives. Recognizing therefore that these issues should be and are being fully and publicly deliberated in such diverse fora as the Advisory Committee, Commission rulemaking proceedings and the Congress, the Task Force believes that Commission implementation of the specific "quick fix" discussed below, as well as the concepts discussed under "Facilitating Capital-Raising," could serve to reduce unnecessary costs of corporate capital formation consistent with the disclosure objectives of the Securities Act. 2. Snapshot of the Securities Act Regulatory Scheme The Securities Act has served the U.S. financial markets well over the past 60-plus years. The volume of securities trading on the exchanges has doubled since 1935, increasing from $176 billion to $3.5 trillion. In 1934, businesses raised $641 million in our capital markets; in 1984, $126.8 billion; and last year, that figure broke a trillion dollars. As adopted in 1933 and later amended by Congress, the Securities Act is intended to ensure that investors receive full and fair disclosure with respect to securities offerings by issuers and their affiliates. To this end, the Securities Act requires registration of every offer or sale of a security and delivery of a prescribed prospectus to investors unless the securities transaction complies with one of the enumerated statutory exemptions contained in Sections 3 and 4 of the Securities Act. In general, these exemptions reflect legislative judgments that certain types of investors or securities in certain types of offerings do not necessarily require the protections afforded by the Securities Act. One exemption of particular importance in the U.S. capital markets is the private offering exemption allowing issuers to offer and sell unregistered securities to financially sophisticated investors able to "fend for themselves." In short, the statutory framework of the Securities Act provides that, absent an exemption: ==========================================START OF PAGE 31====== ù No security may be offered for sale until a registration statement containing prescribed information is filed with the Commission; ù After a registration statement is filed, oral and written offers are permitted. Written offers must be made by means of a statutory prospectus; use of sales literature or other writings are prohibited during this "waiting" period; ù After a registration statement becomes effective, either by lapse of time or more typically by Commission action, the confirmation of sale and other offering materials such as sales literature may be distributed to investors so long as the confirmation of sale and sales literature are accompanied or preceded by the final statutory prospectus; and ù After a registration statement becomes effective, securities may be delivered for sale so long as they are accompanied or preceded by the final statutory prospectus. Moreover, securities sold other than pursuant to a public offering may be subject to strict limitations on resale, rules regarding how they can be offered and sold, etc. In interpreting and administering the statutory scheme, the courts and Commission early on developed several Securities Act concepts, including: ù "general solicitation" -- broadly construed to mean identifying persons interested in acquiring securities in a private offering through advertisements or soliciting activities beyond persons having a pre-existing relationship with the issuer or placement agent; ù "gun jumping" or "conditioning the market" -- broadly construed to mean impermissible soliciting activities both prior to the filing of a registration statement and during the "waiting period" between such filing and the effective date; and ù "integration" -- generally the combination of either two or more ostensibly separate exempt offerings, or an exempt offering and registered offering, to assess compliance with the ==========================================START OF PAGE 32====== registration and prospectus delivery requirements of the claimed exempt offering. Over the years, the Commission or its staff has modified these concepts to accommodate changes in the securities markets, including the rapid globalization of those markets, the growth in institutional ownership of corporate equity and debt securities, the continuing development of new corporate financing techniques, and technological advances in communication. To illustrate, the Commission recognized early in its history that the integration concept might operate to impede unnecessarily legitimate capital raising transactions. Accordingly, the Commission in 1935 adopted Rule 152 providing for a limited exception from application of this concept to integrate legitimate private offerings with subsequent public offerings. Beginning with a 1986 interpretive letter (Verticom (avail. February 12, 1986)), the Commission staff has given issuers some comfort that an otherwise valid private placement would not be integrated with a subsequent public offering despite the fact that the public offering was contemplated at the time of the private placement. Previously, Rule 152 had been construed by many to mean that the public offering could not have been contemplated at the time of the prior private offering. Further, the Commission has adopted safe harbors to guide issuers seeking to conduct legitimate unregistered offerings (Regulation D and Regulation S), and investors in reselling privately (Rule 144A), based on the fundamental principle that registration should be required only for those offerings made in the U.S. markets to persons who require the full panoply of safeguards afforded by the Securities Act. One such safe harbor created a "bright-line" integration test assuring companies that any offers or sales of securities they might make more than six months after completion of a private placement or other exempt offering under Regulation D would not be considered part of the previous offering. A later refinement of the integration concept was made in a staff no-action and interpretive letter (Black Box Inc. (avail. June 26, 1990)), which permits an otherwise valid private offering to a limited number of qualified buyers to be conducted concurrently with a registered public offering on the policy ground that such buyers possess the requisite level of sophistication to request the information they deem necessary to informed investment decision making through means other than a registration statement, and that investors in the registered offering are not adversely affected. 3. Specific Strains in the Regulatory Framework While the success of Commission and staff initiatives in this area is evidenced daily by the efficient operation of the ==========================================START OF PAGE 33====== public and private markets, strains in the current regulatory system are appearing in connection with various categories of securities offerings. In some cases, more and more people are asking whether the Securities Act's framework, at least as currently interpreted and administered, is working to frustrate, rather than to facilitate, the dissemination of information required, or in some instances demanded, by investors and other market participants. Five developments have been identified for the Task Force as eroding the Securities Act's effectiveness: ù Technological developments in the field of electronic communications; ù Erosion of traditional distinctions between public and private offerings; ù Globalization of the capital markets and concomitant erosion of "country walls" between such markets; ù Novel financing instruments, methods of raising capital and risk management initiatives; and ù Regulatory initiatives designed to reduce other market risks, such as those relating to the clearance and settlement system, which are compressing the time frame for many offerings. The list is not intended to be all inclusive. Many other concerns have been raised. For example, delays in accessing the capital markets due to the need to file a registration statement for each offering may frustrate the issuer community. When issuers take advantage of the current shelf procedure, frustrations still may develop due to the need to register securities in advance, e.g., market overhang concerns. Moreover, distinctions and rules regulating "restricted securities" and securities sold offshore that flow back to the United States without any investor protections are also issues and concerns. The Advisory Committee has been studying and evaluating these and other strains and issues for the past year and the system it currently is reviewing intends to address these and other problems within the statutory framework while enhancing investor protection. a. Difficulties of Regulating Information Flow Regulatory requirements that result in the imposition of artificial barriers to the flow of accurate information generally are not effective, in some cases not possible, and are viewed by some as not ultimately in the best interests of investors and the markets. Whether for better or worse, market ==========================================START OF PAGE 34====== dynamics with respect to various securities transactions are starting to outstrip or have outstripped the current regulations. For example: ù Dramatic advances in electronic communications have made corporate communications, financial, business and marketing information, analyst research reports and other information more widely and instantaneously accessible through the Internet, Bloomberg's and other computer-based information service providers. As a consequence, in some offerings information outside of the mandated disclosure package -- the registration statement and the traditional prospectus that is part of the registration statement -- is readily available to and accessible by computer-literate investors acquiring securities in public offerings and secondary trading transactions. Because of the Securities Act's broad coverage of offers as interpreted by the Commission, legal uncertainties exist as to whether dissemination of this information may give rise to impermissible offers. ù Information relating to the private securities markets, such as secondary price data and securities ratings, is accessible to sophisticated and unsophisticated investors alike. Similarly, information disseminated by a foreign company that is directed to persons outside the United States often is accessible to U.S. as well as foreign investors through the company's Website on the Internet, Bloomberg's, the press and other information service providers. Again, the Securities Act's broad coverage of offers as interpreted by the Commission raises legal uncertainties as to whether dissemination of this information may give rise to impermissible offers. Compliance with required prospectus delivery obligations has become more and more difficult, and in some cases not possible. Questions frequently are raised about how to provide investors with disclosure that is received in sufficient time to be useful in making investment decisions. For example: ù Tensions have arisen between the prospectus delivery scheme of the Securities Act and private and public initiatives to minimize risk exposure by reducing clearance and settlement periods. Compliance with physical delivery of a final statutory prospectus before or concurrently with ==========================================START OF PAGE 35====== the confirmation of sale is becoming more and more difficult within today's "T+3" clearance and settlement period. This delivery problem likely will be exacerbated, unless more flexible means are used or permitted for communication, such as electronic delivery of information (see Release No. 33-7233 (Oct. 6, 1995)) and incorporation by reference if the financial markets generally were to move to a "T+1" clearance and settlement period, notwithstanding the Commission's recent adaptation of its prospectus delivery rules to accommodate T+3. b. What's Being Offered and Sold: Impact of Proliferation of Derivative Securities on the Regulatory Structure Today's regulatory structure focuses on offers, sales or transfers of legal title to a security evidencing a bundle of rights and obligations. However, securities transactions more and more frequently are premised on the concept of buying, selling or transferring financial, economic or investment risks and/or interests through swap agreements, forward contracts, options, option-like products and other derivative instruments. It is not unusual now for a company contemplating future sales of additional shares of stock to enter into "hedging" transactions for the purpose of minimizing its exposure to downward market price movements in its stock. The counterparty to the transaction, such as an investment banking firm, may manage its risk exposure by engaging in short selling activities in the trading markets. (Generally speaking, short selling occurs when a person sells securities he or she does not own and subsequently settles the trade by either borrowing securities from another investor or buying the securities in the market.) Nor is it unusual for an investment banking firm bidding to underwrite an offering of new debt securities to hedge its exposure to movements in market rates of interest by entering into an interest swap agreement with a third party. Risk management activities effected through instruments that attempt to shift some or all of the economic risk to the public markets are becoming a regular way of doing business. While the Commission has sought through the rulemaking process to identify needed adjustments of existing rules to track economic risk-shifting and other unique or novel features of these transactions (e.g., Release No. 33-7250 (Dec. 28, 1995) (proposed Regulation S-K 305 relating to disclosure of derivatives); Release No. 33-7190 (June 27, 1995) (Regulation S release); Release No. 33-7187 (June 27, 1995) (proposed Rule 144 and Section 16(a) rule revisions)), much more must be learned before a comprehensive solution to these developments can be formulated. ==========================================START OF PAGE 36====== c. Perceived Over-Regulation of Offers A further regulatory dilemma stems from applications of the gun-jumping and integration doctrines to prevent use of certain financing techniques in circumstances where investor prot