1225 Connecticut Avenue, N.W.
Phone: 202 327 6000
Washington, D.C. 20036
June 15, 1999
Mr. Jonathan G. Katz
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6-9
Washington, D.C. 20549
The Regulation of Securities Offerings
Commission File No. S7-30-98
Dear Mr. Katz:
We support the Commission,s efforts to eliminate unnecessary obstacles to capital formation while improving the quality and timeliness of public company disclosures. Some of the proposed reforms contained in the Commission,s &Aircraft Carrier8 release are a step in the right direction because they allow public companies more freedom to communicate information and control the timing of their registered security offerings and permit pay-as-you-go offerings for seasoned issuers. However, we do not believe that the entire package of proposed reforms to the current system should be adopted. We question whether the proposals can be justified from a net benefit perspective, particularly considering the possible delays that could arise from certain aspects of the proposal. Instead of adopting the Aircraft Carrier as a package, we believe that the Commission should focus in the near term on improving and expanding the availability of the current shelf registration system with a more focused incremental approach to reform designed to ease access to public capital markets while ensuring that investors have the information they need to make informed investment decisions. Longer term we believe the Commission should reconsider the recommendations for the &company registration8 system as a conceptual framework for an improved system.
The extremely complex proposal would:
? Replace nine existing registration forms;
? Change the current shelf registration procedure to allow eligible Form B issuers and certain Form A issuers to choose the date of effectiveness (without SEC staff review) while requiring them to deliver preliminary prospectus information and file prospectus supplements as post-effective amendments (subject to Section 11 liability).
? Accelerate the due dates for and expanding the disclosures in most Exchange Act reports.
? Impose new signature requirements for officers and directors that sign 1934 Act reports and registration statements.
? Change the prospectus delivery requirements for most offerings (except for business combinations).
? Eliminate many of the current &quiet period8 restrictions on issuer communications around the time of securities offerings.
? Ease the current integration rules to allow companies more flexibility to switch between public and private offerings.
? Eliminate Rule 144A offerings with registration rights (commonly known as Exxon Capital exchange offers).
? Expand underwriter due diligence guidance for expedited offerings on proposed new Form B.
? Expand the availability of registration and reporting under Regulation S-B.
The &Aircraft Carrier8 proposal represents a significant change in the registration process for certain seasoned public companies because it would allow them greater flexibility to control the timing of their registered security offerings primarily by removing the possibility of SEC staff review from the registration process. On the other hand, the proposal would impose new reporting obligations, prospectus delivery requirements and add further complexities to the regulatory scheme that could make it more difficult to comply with the Commission,s rules and further increase the costs of periodic reporting and securities registration.
The Commission,s July 1996 concept release (File Number S7-19-96) sought comment on a number of possible reforms to the current regulatory scheme, including a &company registration8 system recommended by the Advisory Committee on the Capital Formation and Regulatory Processes. The &universal8 shelf concept in the company registration system would provide eligible seasoned issuers greater control over the timing of their offerings (by eliminating the SEC,s review of offering documents in all but &extraordinary transactions8) and flexibility to issue various classes of securities using a single registration statement.
In our response to the Commission,s concept release dated October 30, 1996, we generally supported many of the Advisory Committee,s recommendations. We continue to believe that some of those recommendations are sound proposals that should be adopted, for example:
? Adopting a &pay as you go8 policy for filing fees would reduce the upfront costs associated with filing the initial universal shelf registration statement.
? Allowing registrants to specify in the shelf registration statement only the dollar amount of securities to be registered, rather than both the type of securities and the dollar amount would reduce the impact of &market overhang.8
? Continuing the current practice of allowing shelf takedowns to occur without SEC review of offering materials.
? Adopting more flexible prospectus delivery requirements.
? Allowing a shelf registration statement to cover securities to be offered by a parent or any named majority-owned subsidiaries.
In our view, those and other incremental improvements to the current shelf registration system, which has served public companies and investors well for many years, are preferable to the severe restrictions on shelf registration and added complexities in the Aircraft Carrier proposal.
We are aware that securities industry participants, registrants and others have expressed significant concerns about many aspects of the Aircraft Carrier, including the proposed elimination of the registered exchange offer technique, the &inclusive prospectus8 concept, mandatory preliminary prospectus delivery requirements and the near dismantling of the shelf registration system. The Commission should carefully consider public commentary on each aspect of the proposed amendments before adopting any of the proposed reforms. While we do not believe the Commission should adopt the Aircraft Carrier as proposed, if the Commission decides to undertake rule-making on the Aircraft Carrier as a package, we have a number of comments on specific aspects of the proposal. We have focused our comments on those aspects which more directly affect our role in the securities registration process.
Acceleration of Due Date for Earnings Releases
The proposal would accelerate periodic reporting of quarterly and year-end results by requiring all public companies to file selected financial data in a Form 8-K by the earlier of (1) the date of the company,s earnings press release; or (2) within 30 days after the end of the first three quarters of a registrant,s fiscal year or within 60 days after year-end. As an alternative, the Commission also requested comment on whether the Forms 10-Q and 10-K filing due dates should be accelerated instead of requiring the proposed Form 8-K filings. While we agree that encouraging the free flow of information to investors in a timely manner is a desirable goal for Commission rule-making, we are concerned about the quality of the information that would be reported in the proposed Form 8-K filings as well as the potential behavioral impact on established control systems for registrants that find it difficult to accelerate their financial statement close processes.
While many registrants routinely make their earnings press releases within the time frame suggested by the Commission, many do not, and most of those who do make press releases do not include the balance sheet information required by S-K Item 301. As the Commission noted, some larger, more sophisticated registrants have developed effective financial statement close processes that enable them to produce financial data and release operating results very soon after period end*in many cases earlier than the proposed due dates for the Form 8-K filing. However, other registrants, particularly small business issuers, unseasoned or other less sophisticated registrants, would be challenged to complete their financial statement close process and confidently release data in a public filing within the proposed schedule.
We are concerned that adopting a broad-based requirement to file selected financial data on Form 8-K (before the registrant has had time to complete the applicable Exchange Act report for the period in question) would cause many registrants to rush through important aspects of their established system of internal control over financial reporting in order to meet the proposed Form 8-K filing due date. Some registrants might decide that in order to meet the proposed due date, important control procedures and other aspects of the internal control system over financial reporting must be deferred until after the Form 8-K filing. This regulatory environment would unnecessarily increase the risk that when those control processes are later completed during the intervening time between the Form 8-K filing and the due date of the Form 10-Q or 10-K, errors will be detected and adjustments to previously released data will be required. We do not believe that adopting a regulatory scheme that promotes the possibility of this outcome is in the best interest of registrants or investors and we encourage the Commission not to adopt the proposed Form 8-K filing.
If a new Form 8-K filing requirement is adopted, the Commission should reconsider whether the balance sheet information in Item 302 of Regulation S-K is necessary for the protection of investors in an earnings release filing. We question whether informed investors would (or could) draw appropriate conclusions about a registrant,s financial condition based upon such limited information without access to the complete balance sheet information and related footnote disclosures that would be included in Forms 10-Q or 10-K.
If the Commission,s primary motivation for proposing a new Form 8-K filing is to reduce the possibility of &selective disclosure,8 we suggest that a better alternative would be to require public companies to file earnings releases in Form 8-K when they publicly release earnings before the due date of the applicable Exchange Act report. Further, if such a requirement is adopted, the year-end Form 8-K filing should clearly indicate whether or not the independent auditors have issued their report on the registrant,s annual financial statements.
For many of the same reasons as set forth in the preceding paragraphs, we also do not support a broad-based acceleration of the due dates for filing annual and quarterly reports with the Commission. We believe that this proposal would be particularly burdensome for many registrants, particularly smaller, less sophisticated registrants. However, as previously mentioned, we believe that many large, sophisticated registrants are capable of filing their Exchange Act reports earlier, and we support regulatory reforms that encourage, but do not require, earlier filing. In this regard, the Commission could provide an incentive to registrants to file their Exchange Act reports earlier by making accelerated Exchange Act reporting one of the eligibility criteria for Form B and for designating the effective date of registration statements on Form A. In our view that would be preferable to requiring all companies to file piecemeal selected financial data. In any event, we believe that small business issuers should be exempted from any acceleration of the due dates for annual and quarterly reports.
Acceleration of Due Dates for Certain 8-K Reportable Events
The current system of reporting auditor changes, including the SEC Practice Section notification letter procedure, has been carefully crafted and has worked well to ensure that the public receives timely information about auditor changes. We do not support the proposal to accelerate the due date (from 5 days to 1 day) for filing S-K Item 304 disclosures regarding auditor changes. We do not believe that one business day is enough time for registrants to properly prepare and file all of the disclosures required by S-K Item 304, particularly when there have been disagreements or other reportable events. In the case of disagreements, for example, registrants ordinarily seek input from their independent auditors to determine whether a reportable disagreement has occurred, and if so, to ensure that the matter is accurately and adequately described in Form 8-K. Accelerating the due date for reporting the auditor change together with all other S-K Item 304 disclosures could lead to more frequent amendments and/or auditors, responses to registrants, S-K Item 304 disclosures that express disagreement with the disclosures. We do not believe the public is well served by receiving timely, but possibly incomplete or inaccurate disclosures.
As an alternative, the Commission should consider retaining the proposed one-business day due date, but limiting the disclosure requirements for the initial Item 4 Form 8-K filing to reporting only the fact that an auditor change event (auditor dismissed, resigned or declines to stand for reelection) has occurred. This filing would serve to timely notify the marketplace and the Commission,s staff about the auditor change event. The remaining S-K Item 304 disclosures could then be filed in Form 8-K/A within five business days after the event occurs. If the Commission considers further investor protection measures necessary, the proposed eligibility criteria for use of Form B and for self designating the effective date of registration statements on Form A could be changed to require the full Item 304 disclosures be filed (in Form 8-K/A) before the registration statement becomes effective (similar to the approach used today for filing Item 7 Form 8-K information for acquired businesses that exceed the 50% significance level).
Proposed Form 8-K Reports Regarding Auditor Notifications
The Commission has proposed new Form 8-K reporting obligations when independent auditors notify registrants that (1) a previously issued audit report should no longer be relied upon and (2) the independent auditors will not consent to the use of a prior audit report with respect to the registrant or a significant subsidiary in a filing with the Commission. The Commission also requested comment on whether registrants should file a Form 8-K to report when they seek to have other auditors reaudit a prior audited period. We have the following comments on those aspects of the proposal.
Withdrawal of Auditors, Report
We understand that the Commission,s staff has been considering the question of whether the Commission,s rules and current professional guidelines accomplish the goal of assuring prompt and unambiguous disclosure when information about possible material errors in audited financial statements previously filed with the Commission comes to the attention of management or the auditors. We share the view that the public should be timely informed of matters that call into question a registrant,s past financial statements, provided that the information that raises such questions is both reliable and has a material effect on those financial statements. However, we do not believe that the proposed amendment to Item 4 of Form 8-K, as constructed, will effectively accomplish the goal of more timely reporting these situations to the public. To more effectively achieve that goal, we suggest that any new Form 8-K reporting trigger concerning the reliability of previously filed financial statements be based upon when the registrant determines that its financial statements should no longer be relied on, rather than deferring the reporting requirement to a later point (which may never even occur) when the independent auditors ¬ify8 the registrant. As explained below, in most circumstances it is not necessary for the auditors to ¬ify8 the registrant that a previous audit report can no longer be relied upon (which we hereinafter refer to as withdrawing the auditors, report).
Under generally accepted auditing standards (AU Section 561), when information comes to the auditors, attention after the date of the audit report that is of such a nature and from such a source that the auditors would have investigated it had it been discovered during the course of the audit, the auditors must take certain actions (whether or not the auditor-client relationship still exists):
1. First, auditors must determine whether the information is reliable and if so, whether the facts existed at the date of the auditors, report.
2. If the subsequently discovered information would have affected the auditors, report (if it had been known) and the auditors believe there are persons currently relying, or likely to be relying, on the financial statements that would attach importance to the information (which would invariably be the case for public companies unless the company had already disclosed the matter), the auditors should take certain actions to prevent further reliance on the previous audit report. Those actions would include, among other things, advising management to make appropriate disclosure Such disclosures would clearly indicate that the previous financial statements should no longer be relied upon, and that revised financial statements and the independent auditors, report either have been issued or will be issued upon completion of an investigation. of the newly discovered information and its impact on the financial statements. Of course, if management, in carrying out its fiduciary responsibilities, makes such disclosure on its own, or pursuant to a Commission rule as we suggest, the auditors would have no reason (or responsibility under professional standards) to take any further action to prevent continued reliance on the audit report. This is because once a company makes appropriate disclosure about a pending restatement, the investors would no longer rely on the pre-restatement financial statements or the auditors, report.
3. If management refuses to make the appropriate disclosures after discussing the matter with the independent auditors, professional standards (AU 561.08) require auditors to notify each member of the board of directors of management,s refusal and of the fact that, in the absence of disclosure by the company, the auditors will take additional steps as necessary to prevent further reliance upon the auditors, previously issued report. Among such further actions are: (1) notifying the company that the auditors, report must no longer be associated with the financial statements (i.e., withdrawing the report); (2) notifying regulatory agencies, such as the Commission, that the auditors, report should no longer be relied upon; and (3) where practical, notifying each person known to be relying on the financial statements that the auditors, report should no longer be relied upon.
In practice, auditors generally do not withdraw their report when the company makes appropriate disclosure (for example, that an investigation into the matter is being conducted or that there is a pending restatement). We note, however, that in virtually all of the limited number of cases where a registrant refuses to cooperate and the auditors are thus forced to withdraw their report and make communications to third parties to prevent further reliance on their report as described in AU Section 561.09, the auditors would simultaneously resign. Such resignation would trigger complete disclosure of the matter pursuant to the existing requirements of S-K Item 304 and Item 4 of Form 8-K. Thus, any additional Form 8-K filing trigger based solely upon an auditor notification would be redundant and would not necessarily result in any more timely reporting than under the current system in virtually all conceivable circumstances.
In summary, the text of the proposed Form 8-K filing trigger should be revised to require the Form 8-K filing within one business day after the registrant determines that its previously filed financial statements should no longer be relied on, or if not sooner made, no later than one business day after the independent auditors advise management to make appropriate disclosure that the previous financial statements should no longer be relied upon. Furthermore, because a report made under this proposed trigger event would not always involve an auditor change, the disclosure should be separately set forth under a different Form 8-K item number.
Disclosure Requirements When Auditors Refuse to Consent
We do not support the proposal to require a Form 8-K filing when a registrant,s principal auditors (or a significant subsidiary,s independent auditors) notify the registrant that they will not consent to the use of their prior audit report on the registrant,s financial statements or on the financial statements of a significant subsidiary in a filing with the Commission. We cannot envision circumstances where incumbent auditors would refuse to consent to the use of a prior report on a registrant,s financial statements without resigning, except where the auditors, refusal to consent pertains to: (1) a pending restatement, which would be fully disclosed by the registrant if the Commission adopts the changes we proposed in the preceding section; or (2) a disclosure in a to-be-filed document or report. In the latter case, the interests of investors is served by the auditors, refusal and the registrant,s registration statement is effectively stopped before it is filed. If such a disagreement is not resolved to the auditors, satisfaction, the registrant,s refusal to amend the filing would lead to the auditors, resignation. Under the existing disclosure requirements, disagreements with auditors or other reportable events that call into question a registrant,s prior financial statements filed with the Commission are promptly reported in Form 8-K at the time of the auditors, resignation.
In our experience, situations where auditors refuse to consent in a current report or registration statement to the use of a previously issued auditors, report ordinarily involve predecessor auditors or auditors of acquired businesses, rather than the registrant,s incumbent audit firm. Therefore, these situations usually have no bearing on the registrant,s primary financial statements. The auditors, decision not to render a consent may be made for a variety of reasons, some of which may have no bearing on the reliability of the registrants, (or a significant subsidiary,s) financial statements. Neither the AICPA,s Code of Professional Conduct, generally accepted auditing standards, nor the rules and regulations of the SEC require independent auditors who have performed a financial statement audit to subsequently sign a consent for inclusion of their report in an SEC filing. Further, Statement on Auditing Standards No. 58 does not require predecessor auditors to disclose the reasons why they decided not to reissue their audit report. Moreover, there is no requirement for disclosure of those reasons to the former client or its audit committee, because a client relationship does not exist. The proposed Form 8-K filing would, however, attach a negative connotation to the registrant,s past filings that may be unwarranted. Today, when auditors refuse to consent, the registrant must deal with the matter by either having the financial statements in question re-audited, or by foregoing making registered security offerings until such time as the consent is no longer required by the Commission,s rules. The existing system serves to protect investors by effectively stopping the registration process, and the proposal to require a Form 8-K filing when management determines that its prior financial statements should no longer be relied upon (as we have suggested), when considered together with the current disclosures about auditor changes and disagreements with auditors should serve the Commission,s investor protection concerns in these circumstances. There is no need for the proposed new filing trigger.
Registrant Seeks to Have Prior Periods Reaudited
The Commission requested comment on whether a Form 8-K should be required when a registrant seeks to have other auditors reaudit the financial statements of a prior audited period. We believe that engagements to reaudit financial statements of prior audited periods are rare in circumstances other than initial public offerings and pooling-of-interests business combinations. In these cases, management,s decision to engage a new firm to reaudit a prior audited period is ordinarily driven by business considerations rather than by any concern about the reliability of past financial statements. For example, some registrants base their decision to have a prior period reaudited on a desire to have a more recognized firm involved in their IPO, while others desire to streamline and expedite future filings with the Commission by eliminating the need to obtain consents from numerous predecessor audit firms following one or more poolings. Neither of those circumstances call into question the registrant,s previous financial statements. We believe that the effect of a Form 8-K filing could have the undesirable effect of needlessly alarming investors.
In those rare circumstances where a registrant engages a new audit firm to reaudit a prior period, presumably there would have been an auditor change fully disclosed and reported (together with all applicable S-K Item 304 disclosures) in a Form 8-K at the time of the auditor change. We question whether a registrant,s subsequent decision, for valid business reasons, to expand the scope of a successor auditor,s engagement to cover previously audited periods is particularly relevant to investors at the time of the decision*unless circumstances have arisen that call into question the reliability of the past financial statements. In the latter circumstance, our proposed change to the Form 8-K filing requirement (see preceding section) would elicit timely disclosure of the matter whether or not new auditors are engaged to reaudit a prior period. We believe that the Commission should undertake a more thorough analysis of the potential consequences of this proposal before undertaking any rule-making action with respect to this question. Such analysis should identify the specific circumstances, if any, that warrant incremental disclosure about auditor changes and reaudits above and beyond the current S-K Item 304 requirements.
Auditor Association with Registration Statements
Eligible Form B issuers and certain Form A issuers would be allowed to choose the date of effectiveness of their registration statements without SEC staff review. Eligible issuers could choose to declare the registration statement effective: (1) immediately upon filing; (2) at a specified future date; or (3) a date to be specified in a future amendment.
If a registrant designates a specified future date as the effective date on the cover of the registration statement, or states that the effective date will be designated in a future amendment, the Commission,s rules should be revised to require updated auditors, consents in an amendment on or before the effective date unless the effective date is within 5 business days of the initial filing (or the most recent pre-effective amendment that contained a current auditors, consent) and there are no changes to any information covered by the auditors, report in any subsequent amendment. This eliminates the possibility of auditors being asked to render consents in filings that are not declared effective for extended periods and allows auditors to complete their post-report review of subsequent events through the effective date of the registration statement, as required by professional standards (SAS 37, AU 711).
Underwriter Due Diligence Practices
The Commission has proposed to expand the guidance in Securities Act Rule 176 to include additional practices that would be favorably considered by courts in determining the adequacy of an underwriter,s due diligence investigation for expedited offerings registered on new Form B. To a large extent, the proposed factors merely codify current underwriting practices. However, the Commission also requested comment on whether certain additional factors (all but one of which would represent significant changes to current practice) should be added to the list of recommended underwriting due diligence practices in Rule 176.
Adding any new practices to the list of factors in Rule 176 could influence underwriters to require them in all underwritten offerings*not just in expedited offerings on Form B*the scope of the current proposal. If the Commission determines that these or any other substantive changes are both necessary and appropriate, it should separately propose them. In addition, any further consideration of the merits of these or any other practices must thoroughly consider the costs versus the perceived investor protection benefits. Some of the factors the Commission is considering could add significantly to the cost of registering securities, which could have the unfortunate consequence of encouraging companies to make private placements instead of registering their offerings. This unintended result clearly would detract from one of the stated goals of the Commission,s reform initiatives*to encourage companies to register their securities offerings. With this framework in mind, we have the following comments on the additional practices mentioned in the release.
Attestation Reports on Management,s Discussion and Analysis
The Commission requested comment on whether obtaining attestation reports on Management,s Discussion and Analysis (MD&A) under AICPA Statement on Standards for Attestation Engagements No. 8, Management,s Discussion and Analysis (SSAE 8), should be added to the illustrative list of underwriting due diligence investigation procedures in Securities Act Rule 176. We do not support a proposal to make SSAE 8 reports an underwriting requirement. It is unclear whether the incremental benefits (in terms of improved MD&A disclosure) to be derived from engaging independent auditors to perform this service would outweigh the incremental cost of the service. Further, MD&A information is already covered in typical comfort letters obtained by underwriters currently. We believe that corporate boards and audit committees are in the best position to determine whether an examination or review of MD&A by independent auditors is justified on a cost-benefit basis, and the Commission should allow them to make that decision based upon each registrant,s facts and circumstances.
The Commission requested comments on whether a management report to the audit committee regarding procedures established to assure accurate and complete periodic reports should be required to be filed and whether such reports should be added to the list of recommended due diligence procedures in Rule 176. Rather than considering a stand alone management report filing requirement, we believe the Commission should consider this matter in tandem with rule-making in response to the recent Blue Ribbon Committee report, which recommended a report from the audit committee. As recommended, the audit committee report would disclose whether or not the audit committee has reviewed the audited financial statements with management and the independent auditors, discussed judgments regarding significant accounting principles with the independent auditors, met privately to discuss the information obtained from management and the independent auditors, and, in reliance on that review, whether the audit committee believes that the company,s financial statements are fairly presented in accordance with GAAP. While we believe the requirement for a &GAAP8 conclusion by the audit committee goes beyond their oversight role, we still believe these report recommendations should be considered in tandem.
Disclosure Review by a &Qualified Independent Professional8
The Commission requested comment on whether a year-end &disclosure review8 by a &qualified independent professional8 should be added to the list of recommended underwriting due diligence procedures. The release did not define who a &qualified independent professional8 would be, but asked for comment on whether it should be limited to certain professions, such as the legal or the accounting profession. This idea lacks clarity and it is therefore difficult, if not impossible, to make reasonable judgments about the costs or benefits of such a review. Further, this is the wrong context in which to consider the merits of such a review. As suggested above, if the Commission believes that such a review is necessary and appropriate from an investor protection standpoint, it should separately pursue the idea*outside the context of providing due diligence guidance to underwriters*with the accounting and legal professions before proceeding with any rule-making. At a minimum, appropriate professional standards would have to be developed regarding the scope and nature of the reviews as well as reporting on the results of such an engagement. In addition, any future analysis of the feasibility and merits of such a review should thoroughly consider the costs and benefits of having these reviews performed.
Reviews of Interim Financial Statements
The Commission also requested comment on whether reviews of interim financial information by independent accountants under AICPA Statement on Auditing Standards No. 71, Interim Financial Information, (SAS 71) should be added to the list of factors that would be favorably considered (by courts) in determining the adequacy of an underwriter,s due diligence defense. In contrast to the three practices addressed above, current underwriting practices have evolved to require SAS 71 level assurance on interim financial information in registration statements (as a condition to the issuance of a comfort letter) and this proposal to a large extent reinforces current practice for issuers that make frequent public offerings.
Risk Factor Disclosures in Exchange Act Reports
The Commission has proposed to require risk factor disclosures in Exchange Act annual reports and registration statements with quarterly updates in Forms 10-Q and 10-QSB. While we support this idea in concept, we believe that in tandem with expanding risk factor disclosure requirements to annual and interim Exchange Act reports, additional initiatives are needed, either private sector or regulatory, to elicit more meaningful risk factor disclosures while eliminating boilerplate. In this regard, we note that the Commission,s staff often focuses on the content and clarity of risk factor disclosures in its review of registration statements. Perhaps the Commission could codify much of the guidance that is currently being informally communicated through the comment letter process to help registrants identify the risk factors that should be disclosed and draft their disclosures.
Form B Disqualification for Going Concern Reports
As proposed, an issuer that receives an auditors, report that contains a going concern explanatory paragraph for the most recent fiscal year would not be eligible to use Form B and could not control the timing of an offering on Form A. The Commission requested comment on the proposed disqualification criteria and asked whether this provision would create undue pressure on auditors not to issue the going concern opinion. We do not believe that the proposed disqualification criteria would have any affect on auditors, judgments about the appropriateness of a going concern opinion.
Form B Eligibility
It is unclear to us how Form B eligibility would be assessed in a reverse acquisition. We believe the rules should be clarified to indicate that Form B eligibility would be based on the accounting acquirer,s eligibility following a reverse acquisition.
SEC Staff Review of Annual Reports Upon Request
We support the proposal that provides for SEC staff review of a registrant,s annual report upon request (which would enable the registrant to designate the effective date of registration statements on Form A for the remainder of that year). To further improve the process, the SEC staff should promptly notify the registrant, in writing: (1) when it plans to commence the review; (2) when it has completed its review (if there are no comments); and (3) when the staff is satisfied that all comments have been satisfactorily resolved.
New Types of Information in Registration Statements
The proposal would permit various new types of communications (e.g., offering information, free writing materials, factual business communications, regularly released forward-looking information) around the time of public offerings and establish rules regarding whether and when they must be filed and which liability provisions apply to which types. We share the Commission,s concerns about leveling the playing field and curbing selective disclosure of information. However, we are concerned that the complexities of the filing requirements, definitions and liability scheme described in the proposed communication reforms package may ultimately serve to deter registrants, communications, rather than promoting a free flow of information as intended.
Under the proposed &inclusive prospectus8 concept, it will be difficult to determine which portions of a particular communication are required to be filed, the proper placement of such information in the registration statement, and exactly what information is subject to Section 11 liability. The definitions of the new forms of communications are not mutually exclusive, yet the filing requirements for each form differ, in some cases based on when the communication is made. The following examples illustrate some of the potential complexities:
? A single communication could conceivably contain &free writing,8 &factual business communications,8 ®ularly released forward looking information8 and &offering information8 (or some combination of each type). It is unclear what filing requirements and liability scheme would be associated with such a communication.
? The release provides that free writing materials that contain &offering information8 would be treated as offering information (filed and subject to Section 11 liability) whereas free writing materials used during the applicable &offering period8 that do not contain &offering information8 would be filed, but not subject to Section 11 liability. Whether or not a particular communication contains &offering information8 will most likely be subject to varying interpretations.
? &Free writing8 materials would be filed outside the prospectus portion of the registration statement, but &offering information8 is required to be included in the prospectus portion of a Form B registration statement. It is unclear how an issuer would file post-filing free writing materials if such materials also contain &offering information.8
? Some references in the Commission,s release indicate that &free writing8 materials used after the filing date of the registration statement must be filed (in the registration statement) upon first use, whereas others indicate that such materials must be filed before the first sale. Under Part II of proposed Form B, the instructions state &You must file free writing materials by the time of first sale. The proposed regulatory text of Securities Act Rule 425 requires the filing of post-filing &free writing8 information (as described in proposed Rule 165) on or before the date of first use.
At a minimum, the text of the rules and proposed form instructions need to be clarified as to when (first use, before first sale) and where (e.g., in the prospectus, outside the prospectus, in an Exchange Act report incorporated by reference) each type of communication must be filed.
If the Commission chooses to proceed with these expanded communications proposals, the rules should be clarified to more clearly distinguish whether and when Section 11 liability attaches to a particular communication. Perhaps communications that are not subject to Section 11 could be filed in some other form or report (e.g., Form 8-K) separate from the effective registration statement or any amendment thereto (even though incorporated by reference) to help make this distinction.
We also are concerned about the proposed requirements to file free writing and offering information used after the effective date of the registration statement as part of the prospectus. We believe this proposed requirement is flawed because there is no mechanism or process to ensure that all parties are aware of the existence of these materials or that they have or will become part of the effective registration statement. It is unclear, for example, whether an updated auditors, consent would be required in a post-effective amendment to file free writing materials that are first used for marketing purposes after the effective date of a Form B registration statement. To eliminate the possibility that one or more parties to registered security offerings do not have an opportunity to review the entire registration statement, we suggest that any free writing materials, offering information or other information that will become part of the effective registration statement (other than Exchange Act reports that are incorporated by reference upon filing) be filed by the effective date of the registration statement.
While we support reforms to improve the capital formation process and improve the quality and timeliness of public company disclosures, we do not believe the Aircraft Carrier proposals should be adopted and we question whether the proposals can be justified from a net benefit perspective. Instead of adopting the Aircraft Carrier as a package, we believe that the Commission should focus in the near term on improving and expanding the availability of the current shelf system with a more focused, incremental approach to reform. Longer term we believe the Commission should reconsider the recommendations for the &company registration8 system as a conceptual framework for an improved system.
* * * * *
We would be pleased to discuss our comments with the Commission or its staff at your convenience.
Very truly yours,
Copy to Mr. Lynn Turner
Mr. Brian Lane