September 14, 1999
|Jonathan G. Katz, Secretary|
|Securities and Exchange Commission|
|450 Fifth Street, N.W., Stop 6-9|
|Washington, D.C. 20549|
|Re: The Regulation of Securities Offerings|
|File No. S7-30-98|
Dear Mr. Katz:
The lawyers listed below believe that the attached outline represents an appropriate starting point for a discussion of how public and private offerings should be regulated in the next century. Needless to say, everyone does not agree with every aspect of the outline.
|Gerald S. Backman||Joseph McLaughlin|
|Alan L. Beller||Ricardo A. Mestres, Jr.|
|Alan J. Berkeley||Francis J. Morison|
|Kenneth J. Bialkin||Robert H. Mundheim|
|John T. Bostelman||John F. Olson|
|John M. Brandow||Gregory K. Palm|
|James H. Cheek III||Ralph L. Pellecchio|
|Stephen H. Cooper||Morton A. Pierce|
|James D. Cox||Linda C. Quinn|
|Daniel P. Cunningham||John M. Rintamaki|
|Daniel Dunson||Rachel F. Robbins|
|JEdward H. Fleischman||William P. Rogers, Jr.|
|Bradley J. Gans||Robert Rosenman|
|Edward F. Greene||Richard H. Rowe|
|Joseph A. Grundfest||Thomas A. Russo|
|Richard E. Gutman||Richard J. Sandler|
|David B. Harms||Leslie N. Silverman|
|John J. Huber||Alan R. Sloate|
|Roberta S.Karmel||Norman D. Slonaker|
|Stanley Keller||Hurley D. Smith|
|Mark Kessel||A.A. Sommer Jr.|
|R. Todd Lang||Larry W. Sonsini|
|Donald C. Langevoort||Lee B. Spencer, Jr.|
|Alan B. Levenson||Allan G. Sperling|
|John M. Liftin||Arbie R. Thalacker|
|Philip R. Lochner, Jr.||James R. Ukropina|
|Bevis Longstreth||Steven MH Wallman|
|Simon M. Lorne||John W. White|
|Hugh H. Makens||Charles S. Whitman, III|
|Bruce Alan Mann||William J. Williams, Jr.|
|The Aircraft Carrier -|
|A New Starting Point for Discussion|
1. The existing public capital-raising process has evolved over the last 30 years at the initiation (and under the close oversight) of the SEC and has generally served issuers, selling security holders and investors well.
2. There are no serious problems with the registration process that warrant major overhaul and disruption of current practices. There are problems that should be fixed. Most can be fixed by rule-making or changes in administrative practice.
3. There are serious problems with (a) the permissibility of oral and written offers in connection with registered public offerings and (b) the dividing line between private and public offerings that need to be addressed.
4. Any solution must accommodate immediate electronic confirmation (such as through DTC's ID System), settlement as early as T+1 and, accordingly, elimination of any requirement to deliver final prospectuses with confirmations or prior to settlement.
5. With respect to issuers that meet an appropriate threshold of seasoning, reliance for dissemination of information about recent material developments relating to the issuer must be placed on the efficient market theory, understood as the marketplace's relatively quick absorption of material information accessible through the SEC's Website and issuer press releases. This recognizes and takes advantage of the market's existing reliance on analysts and other intermediaries to assess corporate disclosures, the increasing role of electronic dissemination of information and the growing comfort of the public as well as intermediaries with communication through the Internet. Any solution should be flexible enough to accommodate continued developments in, and broader acceptance of, the electronic dissemination of information.
6. The efficiency of the U.S. public capital-raising process must be maintained, and if possible enhanced, if U.S. capital markets are to compete effectively with the new Euromarket. Efficiency will also encourage migration from U.S. private to U.S. public markets.
1. Start with existing registration process (Forms S-1, S-3, F-1 and F-3) and improve it. Eliminate Forms S-2 and F-2?
2. Continue universal shelf registration on Forms S-3 and F-3, together with Rule 415.
- Registration would cover unlimited amount of securities registered. Provide for pay-as-you-go fees.
- Permit use of shelf for secondary sales - without allocation between primary and secondary - without identification of sellers that [are not affiliates (as redefined below) and?] will offer less than specified threshold amount.
- Permit addition of new classes of securities, plans of distribution, indentures and guaranteed finance subsidiaries by post-effective amendments that become effective upon demand.
- Permit addition of other related company co-registrants (e.g., subsidiary guarantors) by post-effective amendments that become effective when declared by SEC.
3. Issuer's '34 Act record (SEC Website-EDGAR)1 must contain all required information (except for expanded Rule 430A information) and be accurate and not misleading at time of accepting commitments to buy. Expanded Rule 430A information may be subsequently transmitted to the SEC and retroactively included in '34 Act record. This record will constitute the "registration statement" for purposes of Section 11.
- Rule 430A should be expanded to include size of offering, estimated proceeds, maturity. Other security terms?
- Must other terms of securities be finalized in advance? If so, permit written term sheets to be used without being required to be filed.
- Is there other information about issuer, not required in '34 Act reports, that should be permitted to be added late?
- While distribution is still in progress, 8-Ks, 10-Qs and specified 6-Ks filed with SEC are incorporated by reference in registration statement and are subject to § 12(a)(2) liability.
- Issuers should be encouraged to include their '34 Act record in their own generally accessible Website.
4. For purposes of Section 12(a)(2), purchasers will be deemed to have purchased in reliance on the issuer's '34 Act record, but, as between seller and purchaser, information included in the issuer's '34 Act record since the opening of the last full SEC business day before acceptance of purchaser's commitment to purchase (other than pricing information) will not be deemed to be part of the issuer's '34 Act record unless:
a) Actual Communication: Information is actually communicated to purchaser before acceptance of commitment to purchase (see Section 11(a)) - whether orally or in writing to be determined by seller, subject to the risk of proof. If investor consents, electronic delivery (e.g., posting on issuer's Website) can satisfy this requirement.
b) Constructive Communication: Information is "effectively disseminated", which means the information is reasonably likely to be reflected in price most potential investors aware of the information would be willing to pay for the securities. The following are conclusively presumed to constitute effective dissemination of information:
i) Disclosed in a press release issued prior to 6:00 P.M., Eastern time, the day before acceptance of the commitment to purchase.
ii) Disclosed in a press release issued more than three hours before acceptance of the commitment to purchase if the press release identifies the Website address where a copy of the press release may be found.
iii) Appeared [in Dow Jones broad tape, Bloomberg's, Wall Street Journal (National Edition), Financial Times, etc.] two hours before acceptance of the commitment to purchase (whether or not the purchaser has access to such information sources).
iv) In the case of an institutional purchaser, included in the issuer's Website prior to acceptance of the commitment to purchase if the presence (but not the content) of such information on the Website is actually communicated to the purchaser prior to acceptance of the commitment to purchase.
5. Define "prospectus" in § 12(a)(2) to include term sheets used to offer and sell registered securities. Consider permitting the use of other written offering material - which would also be included in the term "prospectus" in § 12(a)(2). Neither term sheets nor other written offering information would be required to be filed with SEC. State that accuracy and misleading character of this supplemental information can be measured against the issuer's '34 Act record in the SEC Website.
6. Amend Securities Act Rules 137-39 as proposed in Aircraft Carrier, except that research in ordinary course will not be a "prospectus" subject to Section 12(a)(2) liability.
7. Eliminate requirement to deliver final prospectuses with confirmations. Instead, amend Rule 15c2-8 to require delivery by broker-dealers of final prospectuses (promptly after availability) to all purchasers who request.
8. Rule 174 - Leave as is, except that, where prospectus delivery is required, provide for incorporation of the final prospectus (including any relevant prospectus supplement) and '34 Act record into confirmation, coupled with obligation to deliver final prospectus (and any relevant prospectus supplement) on request.
9. Form S-1
- Expand Rule 15c2-8 to include blank check, microcap and partnership roll-up securities. Other securities?
- Exempt from § 5: (a) communications more than 30 days before filing of registration statement and (b) information released in ordinary course of business consistent with past practice.
10. Form S-3
- Exempt S-3 eligible issuers from § 5 for oral and written offers generally. Oral and written offers would continue to be subject to SEC action under '33 Act § 17(a) and '34 Act § 10(b).
- Issuers, directors, signing officers and underwriters would be liable under § 11 for the issuer's '34 Act record on the SEC Website, and users would be liable, under § 12(a)(2), for oral and other written communications used to offer and sell the securities.
- Retain Forms S-3/F-3 for true secondary offerings of common shares of unseasoned issuers.
- Increase eligibility thresholds? With grandfathering.
11. Rule 176
- Receipt of SAS 71 and 72 letters of auditors and disclosure letters of issuer's and underwriters' counsel should be relevant in all offerings.
- Consultation with research analyst (if any), subject to any Chinese Wall limitations in place, should be relevant in all offerings.
- Review of registration statement and incorporated documents, discussions with management, pursuit of "red flags" and obtaining certification of management should be safe harbor in sales off S-3/F-3 shelf and relevant in other cases.
12. Private Placements
- Eliminate restrictions on offers. Offerees that do not purchase are not injured. Confine protection to purchasers. (It is not feasible to exempt offers if issuer subsequently files a registration statement, but not if it elects instead to complete a transaction as a private placement.)
Control (§ 2(11))
- create rebuttable presumption as to "control" around (a) 20% beneficial ownership without board representation or (b) 10% beneficial ownership with board representation. Higher threshold? Inside directors? Certain officers, e.g., CEO, CFO et al.? Difference between seasoned and unseasoned issuers?
Underwriter (§ 2(11) or Rule 144)
- Should employees not deemed control persons be able to sell without time limit either (a) without registration or compliance with Rule 144 or (b) otherwise in compliance with Rule 144 - subject to short swing and insider trading limitations? At least in case of seasoned companies? In return for this relief, should officers and directors be required to file Form 4s sooner?
- consolidate definitions of "accredited investor" (Reg. D), "QIB" (Rule 144A) and "qualified purchaser" ('40 Act). Consider broader category for direct placements by smaller or start-up issuers with family, friends, etc.?
- eliminate restriction on general solicitation.
- permit purchases by registered broker-dealers and resales to exempt purchasers.
- eliminate restriction on offers.
- liberalize definition of QIB as proposed above.
- Should seasoned shelf-eligible issuers effectively be forced to use registered offerings rather than private placements? Putting it differently, should every sale of securities by a seasoned issuer be deemed to be a sale of shelf-registered securities? Problem - material developments not ripe for public disclosure (handle by disclosure to purchasers with contractual restrictions on resale until publicly disclosed?), § 11 liability and filing fees.
- Should resales by exempt purchasers be restricted for some period [six months? one year?] to some closed circuit of exempt purchasers such as SITUS or PORTAL with none of the limitations that made SITUS and PORTAL unworkable or unacceptable?
- Eliminate restriction on "directed selling efforts".