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OBERLINDAU 54-56-60323 FRANKFURT AM MAIN
June 10, 1999
Securities and Exchange Commission,
450 Fifth Street, N.W.,
Washington, D.C. 20549.
Attention: Mr. Jonathan G. Katz, Secretary
Re: Regulation of Securities Offerings (aka the "Aircraft Carrier") -- File No. S7-30-98(1)
Dear Mr. Katz:
In this letter we respectfully submit our comments on the Aircraft Carrier Release, including our conclusion that the proposals are, on balance, so inherently unworkable that they should be abandoned in favor of the more incremental reform described in Part V of this letter.(2)
We recognize and respect the intellectual strength and creativity with which the SEC and its staff have approached this project, and the enormous commitment it has represented in resources, energy and time. In making the Proposals, the SEC has demonstrated that significant change to the regulation of securities offerings can be contemplated. While we agree with most of the SEC's stated objectives for the Proposals, for the reasons outlined in this letter we strongly believe that the reforms should take a different approach than that of the Proposals. However, we believe that we are furnishing our views in only the most constructive spirit, and hope that the SEC and its staff will continue seriously to pursue, within a different framework, the worthwhile effort of reforming the regulation of securities offerings. We believe, as more fully discussed in Part V (page 37), this framework should build on the immensely successful EDGAR electronic disclosure system that the SEC had the foresight and leadership to establish.
The Release proposes an elaborate set of new rules, amendments and forms (collectively, the "Proposals") that, among other things, would radically restructure the requirements of the Securities Act applicable to registered distributions of securities. We believe that the Proposals would not address many of the aspects of the current regulatory system that are in need of reform and, more significantly, would adversely affect the successful shelf registration system that has been a source of strength in the U.S. capital-raising process for over 15 years. We urge the SEC to withdraw the Proposals and, as soon as possible, to propose incremental reforms in the context of the current system, including the positive aspects of the Proposals and the other needed reforms described below.
As we observed in our comment letter to the SEC regarding the 1996 securities regulation concept release, we believe the capital markets have changed dramatically and fundamentally over the years, and there are many outdated and problematic aspects of the current system that should be corrected.(3) In particular, there are serious problems today with the regulation of (i) oral and written communications around the time of a registered offering and (ii) private placements. These problems get worse with each advance in communications technology.
Unfortunately, the Proposals do not address the private placement issues at all and make only limited (though very useful) changes in the area of communications. Instead, the Proposals focus on restructuring the Securities Act registration process. We strongly believe that the Form A/Form B restructuring that is at the core of the Proposals should be abandoned. This radical departure from the current registration system would not achieve many of the SEC's own stated objectives. In addition, it would inject delay and uncertainty, and most likely higher costs, into the capital-raising process.
Part I of this letter provides, in summary form, our principal comments on the Proposals and provides cross-references to our more detailed comments in other parts of this letter. Part II explains why we believe the proposed Form A/Form B restructuring of the registration process should be abandoned and cannot be remedied through mere adjustment. Part III identifies some pressing problems that are not addressed, or are not sufficiently addressed, by the Proposals and outlines how we recommend they be solved. Part IV sets forth in tabular form our comments on specific aspects of the Proposals.
In Part V, we outline the principal elements of an incremental approach to reform as an alternative to the wholesale restructuring of today's securities regulatory system embodied in the Proposals. We also describe and support a counterproposal built on these elements that is being crafted by a group of securities attorneys, including members of our firm. We support this counterproposal because we believe it would achieve many of the SEC's stated objectives for the Proposals but, unlike the Proposals, it would not adversely affect issuers, investors or the efficiency of the U.S. public capital markets. We respectfully urge the SEC to begin its reform efforts with this counterproposal or another incremental solution instead of the Proposals.
A. We agree that aspects of the current regulatory system are outdated and in need of reform.
We agree with the SEC's observation that "investors will receive the benefits of registration only if the [SEC] continues to make the registration system flexible enough to be a viable alternative in the capital markets of today and the future."
The global capital markets have changed dramatically and fundamentally over the years, and the U.S. regulatory system has not kept pace with these changes. The current system is strained in many ways. For example, advances in technology and communications media and the globalization and institutionalization of markets are exacerbating the current system's already-problematic regulation of (i) oral and written communications around the time of a registered offering and (ii) private placements. The problems will only get worse as these technology, communications and market trends continue. If the U.S. public capital markets are to remain the standard bearer for the world, flexible, forward-looking reform is required.
See Parts II.A.1. (page 14), II.B.1. (page 20) and III. (page 31).
B. The proposed radical restructuring of the current registration system is neither appropriate nor necessary. Incremental reform, or no reform at all, would be superior to the Proposals.
In the past, the SEC has responded to deficiencies in investor protection and changes in market realities with incremental reforms that have improved the flexibility and efficiency of the regulatory system without jeopardizing market functioning. We believe the SEC should again engage in this kind of effective incremental reform.
The Proposals would dramatically restructure the registration process. The existing registration system is the product of a gradual evolution in response to changes in the products and participants in, and mechanics of, the capital markets. The current system's problems, while real, are not sufficiently serious to warrant a major overhaul and the risk of serious disruption of the current capital formation process. We believe the current system, even with its problems, would be better for issuers, underwriters and investors than a system based on the proposed Form A/Form B restructuring.
We believe it probable that the Proposals would introduce substantial new costs without corresponding meaningful benefits, and we recommend that the SEC expressly consider the cost-benefit analysis. Under filing and delivery requirements of the proposed Form A/Form B registration system, offering participants would have to observe procedures that, in many cases, are unnecessary for the protection of investors and are at odds with current market mechanics.
See Parts II.B. (page 19) and V. (page 37).
C. The Proposals' central goal of improving the quality of information available to investors at the time they make investment decisions should not be achieved through physical delivery requirements. Instead, reforms should recognize and take advantage of (i) advances in technology and communications media and (ii) the market's increased ability to absorb information.
We believe the SEC should build on the phenomenal success of the EDGAR system in crafting reforms to the securities regulation system. EDGAR provides a powerful and flexible disclosure tool that was not available to the authors of the Securities Act or previous reformers. We urge the SEC to consider achieving its disclosure objectives through flexible EDGAR-based "access" requirements rather than reverting to physical delivery requirements.
We agree that accurate, complete and timely disclosure should continue to be the touchstone of the securities offering regulatory process, and we support the Proposals' goal to increase the quality of the disclosure available to investors at the time investment decisions are made. However, we believe the physical delivery requirements of the Proposals are not the appropriate method for achieving this goal.
The requirement physically to deliver preliminary prospectuses or term sheets to investors prior to pricing likely would be detrimental. Delay and uncertainty would be added to the offering process, which would necessarily decrease market efficiency. (Issuers may also face added production and distribution costs.) We believe that, in many cases, this requirement is not necessary to achieve increased availability of information. In the case of seasoned issuers, the markets have grown comfortable with, and already rely upon, the quick absorption of information once it is available in a press release or on an Internet website - for these issuers, the markets have reasonably abandoned reliance on physical delivery because technology has made it inefficient and unnecessary. The validity of constructive delivery and the efficient market theory, concepts on which today's shelf registration and integrated disclosure system is based, has been confirmed through over 15 years of market experience and has been reinforced through advances in communications technology.
Accordingly, we believe reforms should recognize and take advantage of today's information technology and should be flexible enough to accommodate continued developments in, and broader acceptance of, the electronic dissemination of information.
We applaud the SEC for its foresight and leadership in conceiving the EDGAR system, well before the popularity of the Internet made electronic access an everyday fact for even retail investors. The SEC should continue to build on this important information technology in adapting the securities regulation system to the new millennium. We believe the widespread acceptance of EDGAR provides the SEC with the ability to craft effective new disclosure requirements that (i) will ensure more timely and more complete disclosure to investors and (ii) will not significantly harm capital formation. In the case of seasoned issuers, we urge the SEC to abandon the Proposals' new physical delivery requirement, which we believe would be an adverse shift, and instead achieve its enhanced disclosure goals through a more flexible and EDGAR-based access requirement.
See Parts II.B.3 (page 24) and V. (page 37).
D. Reforms should address identified problems and be tailored to avoid adverse effects on capital formation and inappropriate allocation of liability.
There are several elements of reform that we believe are not sufficiently addressed in the Proposals. First, the existing regulatory system should be examined with a view towards identifying where it is out of step with market practices and where its integrity is jeopardized. Reforms should represent a measured response to these concerns.
We respectfully urge that the SEC not seek to solve problems through system-wide regulation unless there is strong evidence that problems exist to an extent appropriate for, and that can be effectively addressed by, a system-wide remedy. In particular, we note that the Release does not cite evidence of any systemic abuse of (i) the information dissemination requirements of today's shelf registration and integrated disclosure system, (ii) the Exxon Capital and "stepping-stone" procedures, or (iii) the use of shelf registration for secondary sales, that would warrant the proposed significant changes in these areas.
Second, reforms should to the extent possible accommodate the diversity of products and participants in the capital markets. Otherwise there is great risk that regulation will drive capital formation away from the registered market and into the unregistered and foreign markets.
Third, regulation, and in particular the exposure to liability, can have substantial effects on the behavior of market participants. We believe that, as a result of market participants' rational responses to the burdens imposed by the Proposals, many of the SEC's principal objectives for the Proposals would not be realized or, if realized, would be accompanied by significant costs.
Fourth, while the risk of liability and its attendant remedies is an effective method for ensuring investors receive good disclosure, it is not good public policy to impose liability in instances where a person subject to liability is not in a position to influence the offending disclosure or practice. When liability is imposed, the scope of accompanying remedies should match the range of likely harms.
See Part II. (page 13).
E. The Form A/Form B restructuring of the registration process is unworkable and risks raising the costs of capital formation, discouraging the availability of non-statutory information and driving issuers away from the U.S. public capital markets.
The Release identifies no problems with the current registration process that justify the proposed system-wide restructuring. We believe that problems with the Form A/Form B approach include:
1. The new requirements to (i) deliver and file a preliminary prospectus or term sheet prior to pricing and (ii) file all "offering information" and "free writing" cannot be complied with in the context of current market practices. These requirements would introduce a lag between an issuer's decision to go to market with an offering and the ability to do so. This lag would be (i) at least one day and possibly several days in the case of large, seasoned issuers and (ii) at least three days in the case of small, seasoned issuers.
2. The SEC's stated goal of providing all investors access to additional, useful information prior to the time they make their investment decision likely would not be achieved. Instead, there would be a strong disincentive for issuers or underwriters to generate any written information not specifically required by the SEC forms and regulations.
3. As a procedural matter, the Release does not analyze the costs to issuers, underwriters and investors of the delay and uncertainty that this restructuring would add to the offering process. An analysis of whether the Proposals would "promote efficiency, competition and capital formation" is required by Section 2(b) of the Securities Act. We believe the Proposals should not be adopted unless the benefits can be shown to justify the costs.
4. The proposed Form A/Form B restructuring would impose liability more broadly than necessary. Many of the obligations that would be imposed by Form B, including (i) establishing the Form B eligibility of all offering participants, (ii) identifying and filing all "offering information" and "free writing", (iii) effecting pre-pricing term sheet delivery and (iv) obtaining signature page certifications of directors for each filing, have limited practical utility. Among other things, cross-liability is likely to discourage much of the additional disclosure the SEC seeks to promote. Even more troubling is the fact that the Proposals seem to impose the severe offering-wide remedy of rescission - a "put right" for a year - for the failure of any distribution participant to satisfy many of these obligations, whether or not the failure was material to the investment decision.
5. Smaller, seasoned issuers should not be prohibited from registering secondary resales on Form S-3 or its replacement (i.e., Form B). The Release does not explain why this reversal of a long-standing approach is appropriate. In addition, we believe the Release underestimates the impact such a reversal would have on companies that (i) need venture capital and (ii) use securities for acquisitions.
6. Resolution of SEC staff comments on Exchange Act reports should not be a condition to issuer eligibility for Form B. This condition would undercut the Proposals' promise of effectiveness on demand. Issuers and other distribution participants should have the discretion, as they do today, to judge whether the comments are material (taking into account reputational effects and potential liability in the event of a subsequent disclosure change in response to comments).
7. The financial eligibility criteria for "first class" market access (i.e., short-form registration) should not be tightened. The Release provides no compelling reason why approximately 30% of the issuers currently eligible for shelf registration on Form S-3 should be limited to using Form A. That more basic form limits the availability of incorporation by reference, may not be used for shelf registration and generally requires delivery of a preliminary prospectus at least three days before pricing. The Release cites no evidence that the disclosure practices of, and the availability of information regarding, these over 1,000 issuers justifies such a change. These new financial eligibility criteria, coupled with the Proposals' (i) imposition of the requirement that Form A issuers deliver preliminary prospectuses at least three days before pricing and (ii) elimination of Exxon Capital and shelf registration of secondary offerings, likely would impede access to, and increase the cost of, capital for these issuers.
We believe these problems would introduce unnecessary and substantial delays and related costs to the registered offering process and risk driving issuers to the unregistered and offshore capital markets.
See Parts II.B. (page 19) and II.C. (page 30).
F. The Exxon Capital and "stepping-stone" lines of no-action letters should not be repealed.
Repeal of the Exxon Capital line of no-action letters could have a serious effect on the high yield securities market. This is an institutional market, and abuses have not been demonstrated. Although the development of this market was probably not contemplated when the Exxon Capital letter was issued, the market is now quite substantial. Entire categories of issuers have become dependent on this capital-raising method. Adverse economic consequences could follow from withdrawal of the Exxon Capital procedure, and we urge the SEC to act cautiously.
The Release observes that expanded Form B eligibility for QIB-only offerings would mitigate the loss of this market. On the other side of this position, we note that (i) issuers that have not been public for at least 12 months and non-reporting foreign private issuers are not eligible for Form B, (ii) the "QIB only" provisions would re-introduce the long-recognized impracticalities of the "conduit" or "presumptive underwriter" doctrine, and (iii) Rule 144A offerings are often accompanied by side-by-side sales to accredited institutional investors that are not QIBs. Also, the fact that some issuers would be eligible to use Form B under the Proposals does not seem adequate justification for the repeal of Exxon Capital for all issuers.
Under the "stepping-stone" line of no-action letters, a non-reporting foreign private issuer that has made a Rule 144A or other private equity offering in the United States may use an Exxon Capital-style registered exchange offer to make its initial U.S. public offering, typically in conjunction with listing on a U.S. securities exchange. While the Release is silent on the status of these letters, we presume the SEC intends to repeal them as well. Repeal would eliminate a strong inducement for foreign issuers to join the U.S. public reporting system. This step runs contrary to the SEC's frequently stated position that foreign issuers should be encouraged to accept the transparent financial disclosure requirements of the U.S. regulatory system and, we believe, would result in fewer, not more, foreign private registrants. The Release cites no concerns with the "stepping-stone" process and, in light of the continued globalization of markets, we believe it would be a mistake to abandon this method of encouraging Exchange Act registration.
We respectfully suggest that the SEC should be changing these procedures only in response to demonstrated problems, and in ways that improve the capital formation process. The success of the private debt market, which relies to a significant extent on Rule 144A and the Exxon Capital line of no-action letters, and the success of the stepping-stone line of letters illustrate that the capital markets are diverse and that tailored changes can add efficiency and promote capital formation.
See Part II.B.5. (page 28).
G. We agree that the current system unnecessarily obstructs market access and the free flow of useful information around the time of an offering. We support the deregulatory initiatives of the Proposals relating to research, oral communications, effectiveness on demand, and elimination of physical delivery of final prospectuses. These positive initiatives should be proposed instead in the context of the current registration system.
The conclusions in the Release are correct that (i) the uncertainty of SEC staff review and (ii) the restrictions on oral communications and the publication of research are areas in need of reform. The current review policies of the SEC staff impose uncertainties that may have opportunity costs for issuers and may create an incentive for issuers to pursue exempt transactions in lieu of registered offerings. We agree that the possibility of pre-effective review of registration statements of seasoned issuers should be eliminated.
The current regulation of research and oral communications unnecessarily restricts the free flow of useful information concerning an issuer around the time of an offering of the issuer's securities. We strongly support the Proposals that would relax the current restrictions on research and oral communications. We agree that oral communications (including oral offers) should be permitted by or on behalf of large, seasoned issuers at any time. We support the proposed expansion of the Section 5 research safe harbors in Rules 137, 138 and 139 (although we do not support the Proposals' implied extension of Section 12(a)(2) liability to safe harbor research).
The proposal to eliminate physical delivery of final prospectuses recognizes market realities, and this important step forward should be adopted with slight modifications as soon as practicable.
See Parts II.A.1. (page 14), II.B.1. (page 20), III.E. (page 35) and V. (page 37).
H. The proposals relating to underwriter liability illustrate the recognition of a fundamental problem, but should be refined to reflect the diversity in the roles of underwriters in today's marketplace.
We support the extension of Rule 176 to Section 12(a)(2). Also, the proposed new guidance in Rule 176 should apply to all offerings by all issuers and flexibility should be added. Limiting the guidance to offerings of equity and non-investment grade debt securities that are marketed and priced in fewer than five days seems artificial and, accordingly, could limit the value of the guidance.
We agree with the SEC that factors relevant in determining whether a person conducted a "reasonable investigation" for the purposes of Section 11 or exercised "reasonable care" for the purposes of Section 12(a)(2) should include whether such person (i) reviewed the registration statement (including incorporated documents), (ii) discussed the contents of the registration statement with management, (iii) obtained certifications of management, (iv) received a "comfort letter" from the issuer's independent public accountants, (v) received disclosure letters from counsel and (vi) pursued any "red flags" that arose in connection with the offering.
The Rule 176 guidance should not "mandate" research analyst participation in the diligence process or independent professional review of the issuer's annual report. There are a number of circumstances when it would not be appropriate or reasonable to employ a research analyst, including when an underwriter does not have a research analyst on staff and when it is appropriate to shield an analyst from material non-public information. We believe that the decision of whether an additional professional should be added to assist in due diligence should be made on a case-by-case basis by the offering participants in the light of the circumstances, including (i) the availability of a capable research professional and (ii) the capabilities of the existing professionals.
There are additional problems with underwriter liability that should be addressed. For example, the policy underlying Section 11 liability for underwriters assumes an ability to influence registration statement disclosure, including Exchange Act reports, that is inconsistent with the role of underwriters in many offerings today by large, seasoned issuers. We believe the SEC should further address underwriter liability to reflect the diversity of the roles of underwriters in today's marketplace, including acknowledging that the activities that constitute a "reasonable investigation" or the exercise of "reasonable care" in the case of fast-paced offerings on short-form registration statements are significantly less than in the case of offerings on long-form registration statements such as initial public offerings.
See Part III.F. (page 36).
I. We support the increased flexibility and certainty issuers would have in switching from a private to a public offering and vice versa under the proposed amendments to Rule 152.
The SEC should provide additional clarity and flexibility to the integration doctrine. For example, "quiet" filings should not constitute "general solicitation". Given the length of the SEC's comment process and the SEC's desire to encourage registered offerings, issuers should be permitted to file a registration statement and switch to a private offering if preliminary prospectuses have not been distributed to investors, without having to wait 30 days and without being required to accept contractually the equivalent of Securities Act liability.
In addition, we believe the SEC should expressly abandon the current "five factor" test for integration. Because the test does not provide bright lines and the adverse consequences would be severe, it may unnecessarily constrain capital raising in today's markets. More significantly, the proposed amendments to Rule 152, together with modifications we suggest later in this letter, would make the test unnecessary. The integration doctrine should be relevant only when an issuer seeks to (i) avoid registration through abuse of the private placement exemption, such as through multiple private placements that together resemble a public offering, or (ii) use the registration process as a means to promote a private placement when no bona fide registered offering is expected.
See Part III.B. (page 32).
J. There are problems with the current system not discussed in the Release or addressed by the Proposals, including major anomalies and complexities in private placement regulation. These problems should be addressed immediately.
The SEC should, among other things: (i) close the "Section 4(1½) gap" by eliminating Preliminary Note 4 to Regulation D, by expanding the definition of "qualified institutional buyer" in Rule 144A and by modifying Rule 144A to delete references to offers; (ii) narrow and clarify the definition of "affiliate" by adopting the definition proposed in 1996 by the Advisory Committee on the Capital Formation and Regulatory Processes (the "Advisory Committee"); and (iii) narrow the definitions of "general solicitation" in Regulation D and "directed selling efforts" in Regulation S.
See Part III. (page 30).
K. The SEC should make incremental reforms to the regulation of the securities offering process that (i) address identified problems, (ii) reflect and take advantage of the increasing role of electronic dissemination of information, (iii) accommodate the diversity of the products and participants in the capital markets and (iv) maintain, and if possible enhance, the efficiency of the U.S. public capital markets. We believe that it is possible to construct a package of reforms within these parameters, and we urge the SEC to consider approaching reform along the lines of the counterproposal described in Part V.
In Part V of this letter (page 37), we suggest that the SEC address the problems with today's regulatory system through incremental reform. We also provide our views on what the principal elements of reform should be, and we describe a counterproposal that is being crafted by a group of securities attorneys, including members of our firm.
We urge the SEC to consider this counterproposal because we believe it would (i) achieve many of the SEC's stated objectives for the Proposals, including increasing the quality of generally available issuer information at the time investment decisions are made without jeopardizing investor protection, and (ii) be flexible enough to accommodate changes in information technology and market practices. Most importantly, we believe the counterproposal embodies an approach that would achieve these results without harming issuers, investors or the efficiency of the capital formation process.
II. Why the Proposals Should Be Withdrawn
Overview. We agree that the current regulatory system could be improved significantly, but we believe the Proposals are not an appropriate method for achieving the needed reforms.
The Proposals would significantly restructure a registration process that has been instrumental in producing the world's largest and most respected capital markets. We believe restructuring would not achieve many of the SEC's stated objectives. More significantly, the restructuring would adversely affect parts of the current system that work well. We believe these consequences flow from two core attributes of the Proposals.
First, the design of the Proposals does not adequately resolve the inherent tensions among the SEC's various objectives for reform. In particular, the scope and degree of liability, which strongly influence behavior, are too broad. For example, the Proposals seek to enhance the free flow of research and other market information around the time of an offering by significantly expanding the scope of permitted written communications, but we expect that these deregulatory efforts would be undermined by the Proposals' far-reaching assignment of Securities Act liability (and vicarious liability) for such communications and resulting self-censorship by market participants.
Second, the Proposals would impose filing and compliance procedures that conflict with the current market practices and needs. These procedures could increase risk, and therefore the cost, of capital formation and discourage the registration of offerings. For example, the proposed Form A/Form B restructuring, with its physical delivery and filing requirements, does not adequately provide for the diverse mix of products and participants in today's capital markets. In many cases (e.g., investment grade debt offerings by seasoned issuers, MTN programs, reverse inquiry sales), the markets have adjusted to the rapid, electronic or oral dissemination of information relevant to an offering, and issuers, underwriters and investors are best served if issuers have the flexibility to act with comparable speed. The Proposals would lengthen by at least a day in the case of large, seasoned issuers, and many days in the case of smaller, seasoned issuers, the time required to conduct an offering and, accordingly, would preclude such flexibility in the registered markets. The results would, we anticipate, include higher costs of capital in the U.S. registered markets, the exclusion of retail investors from many registered offerings and more, not less, activity in the unregistered and offshore markets.
We believe these consequences are so inherent in the Proposals that they cannot be remedied through refinements or clarifications during the rule-making process. Accordingly, we recommend that the Proposals be withdrawn, the Form A/Form B restructuring be abandoned, and the SEC pursue incremental reform along the lines of the counterproposal outlined in Part V of this letter.
This part of our letter has three sections. Section A summarizes the SEC's main stated objectives for the Proposals. In Section B, we (i) discuss whether the objectives are appropriate (i.e., whether achieving them would provide meaningful benefits), (ii) analyze whether the objectives would be achieved by the Proposals and, most significantly, (iii) describe the likely adverse effects that would result from the changes the Proposals would make in pursuit of some of the SEC's stated objectives. Section C sets forth in more detail why we believe the Proposals cannot be fixed and, accordingly, should be withdrawn.
A. The Proposals are linked by five main objectives for reform.
This section summarizes the main stated objectives of the Proposals, and reviews the significant components of the Proposals that are designed to achieve each stated objective.
1. The publication of research and the flow of other useful market information should continue during an offering. Under the Proposals, direct restrictions on communications by or on behalf of the issuer would be relaxed in virtually all offerings. The degree of relaxation would be tied to the characteristics of the issuer (its size and Exchange Act reporting history) and the SEC form used for registration (either (i) Form B - the new short form replacement of Forms S-3 and F-3 - or (ii) Form A - the new long form replacement of Forms S-1 and F-1). For example, in offerings registered on Form B, offers, whether oral or written, would be permitted at any time before or after the filing of the registration statement subject to compliance with new filing requirements for written offering information. The current prohibitions on "gun jumping" (making an offer prior to the filing of a registration statement) and use of non-conforming prospectuses (using a written document other than the SEC-filed prospectus to make an offer) would be eliminated.
This objective also is reflected in the proposed expansion of the research safe harbors in current Rules 137, 138 and 139.
2. There should be "equal access" to all offering materials, not just the statutory prospectus. A theme that runs through the Release is the SEC's concern that there is a gap between the disclosure actually being used to sell the securities to certain investors and the disclosure filed in the registration statement or as a Rule 424 prospectus. The Proposals would require that registration statements be complete (excluding Rule 430A pricing information) before the first sale and that all "offering information" and "free writing" be filed with the SEC prior to the first sale (or, if offering materials are first used after such sale, prior to their first use(4)). The collective scope of "offering information" and "free writing" is extremely broad - it includes all written materials used "by or on behalf of the issuer" during the "offering period" (except for certain research and ordinary course business communications).(5)
The proposed enhancements to the current Exchange Act reporting requirements also reflect this "equal access" objective. Domestic issuers would be required to file quarterly and annual financial information on Form 8-K significantly prior to the required filing dates for their quarterly and annual reports; risk factor disclosure would be required in annual and quarterly reports; and current disclosure of additional items, including the departure of the chief executive, chief financial or chief operating officer, would be required to be made on Form 8-K.
3. Offering materials should be delivered physically to all investors prior to the time they make their purchase commitments. Current market practices would be greatly changed by the Proposals through the requirement that investors physically receive specified information prior to making their purchase commitments (i.e., prior to the time of pricing in underwritten offerings). As with the proposals regarding communications, the specific delivery requirements would be tied to the characteristics of the issuer (i.e., size and reporting history) and whether the offering was registered on Form A or Form B.
In a Form B offering, a term sheet containing transaction information (e.g., issuer, size of the offering, security terms, etc., but not Rule 430A information) would have to be delivered to all purchasers prior to the time of pricing.
In initial public offerings and offerings by "unseasoned" issuers, which would be registered on Form A, a preliminary prospectus would have to be delivered at least seven days before pricing, and in other Form A registered offerings (i.e., offerings by seasoned issuers not eligible for Form B), a preliminary prospectus would have to be delivered at least three days before pricing. In addition, if a "material change" that had not been "previously disclosed by any other means to investors" occurred in a Form A registered offering, the issuer would have to "deliver" a document describing the change at least 24 hours before the commitment to purchase.
4. The deregulation of communications should not jeopardize investor protection - issuers and other distribution participants should have Securities Act liability for all written offering materials. While the Proposals would remove direct restrictions on communications, distribution participants would be subject to substantial Securities Act liability (a form of indirect restriction) for most written offering materials.
The Proposals divide written offering materials into two categories - "offering information" and "free writing". Written offering materials would be "offering information" if they were used by or on behalf of the issuer during the offering period and included any specified "required information" about the issuer or the offering. Section 11 liability for "offering information" would extend to all distribution participants. "Free writing" would comprise any offering materials that (i) did not contain any "required information" or (ii) contained only "required information" that had been filed previously as part of the registration statement, and it would subject only users of the information (i.e., "sellers") to Section 12(a)(2) liability.(6)
Whether offering materials are "offering information" or "free writing" is extremely significant from a liability perspective. Each distribution participant would be subject to Section 11 liability for "offering information", regardless of whether the participant used the information or approved of or knew of its use. Section 12(a)(2) liability for "free writing" would extend only to users of such information.
The liability aspects of the Proposals operate somewhat differently, and raise more troublesome issues, in Form B than in Form A.
In Form B offerings, where communications would be unconstrained, the expansion of liability resulting from the "inclusive" prospectus concept would be significant - all distribution participants would be subject to Section 11 liability and would be subject to a filing requirement for all "offering information" used by any distribution participant during the "offering period" (defined as the period beginning 15 days prior to the first offer and extending until the completion of the distribution).(7) Only users would be subject to Section 12(a)(2) liability for "free writing" but, as a result of the filing requirement, each user would have potential liability to all purchasers.(8) Thus, the Proposals would couple the increased freedom of a distribution participant to communicate in a Form B offering with the imposition of significant Securities Act liability (including vicarious liability).
In Form A offerings, the new classification scheme for written materials would result in disclosure practices and an allocation of liability similar to the current system. Offering participants would continue to be prohibited from making oral or written offers prior to the filing of the registration statement. After a conforming Form A registration statement is on file, the "offering information" essentially would be the preliminary prospectus and the other materials in the registration statement. All other written offering materials used after the filing of the registration statement would be "free writing". To the extent the new "free writing" ability is used during the pre-effective period, liability concerns like those discussed above for Form B would probably cause participants to limit the content to well-vetted subsets of registration statement disclosures, which would not add information to the marketplace.
The Proposals would also require signers (including a majority of the issuer's directors) of Securities Act registration statements and Exchange Act periodic reports (e.g., Forms 10-K and 10-Q) to certify that they have read the documents and that, to the best of their knowledge, they contain no material misstatements or misleading statements.
5. Issuers should be encouraged to choose registration over private offerings by providing them with greater control of the registration process and by making certain private placements less attractive. According to the Release, the Proposals are based on the SEC's recognition that (i) investors will receive the benefits of registration only if the registration system is flexible enough to be effective in today's capital markets and (ii) a large share of the stress on the current system is the result of the need of issuers to raise capital quickly, on a schedule they can control. The Release acknowledges that the current review policies of the SEC staff impose uncertainties, which may involve opportunity costs and which create incentives for issuers to pursue exempt transactions and offerings in offshore markets in lieu of registered offerings. The Proposals would seek to encourage registration by permitting certain offerings, including (i) offerings by large, seasoned issuers, (ii) offerings by qualified smaller, seasoned issuers and (iii) QIB-only offerings by seasoned issuers, to proceed without prior review by the SEC staff.
In order to make certain unregistered offerings less attractive, the Proposals would withdraw the no-action letters that permit the Exxon Capital and "stepping-stone" procedures for registered exchange offers following Rule 144A debt offerings and certain other unregistered offerings.(9)
B. The Proposals would not achieve the SEC's principal objectives. Other SEC objectives would be achieved, but their benefits to investors, issuers and the U.S. public capital markets generally may fall short of expectations. Most importantly, in pursuing some of these objectives, we expect the Proposals would inject substantial delay and uncertainty into the offering process, which would have adverse effects on investors and issuers, and would drive issuers to the unregistered and offshore capital markets.
The Proposals seek to achieve the SEC's objectives through a combination of deregulation (e.g., removing restrictions on communications, expanding the research safe harbors and eliminating SEC staff pre-effectiveness review of certain registration statements) and re-regulation (e.g., requiring physical delivery of preliminary prospectuses and term sheets, imposing comprehensive filing requirements, expanding liability for offering materials and eliminating Exxon Capital procedures).
We believe that the balance between deregulation and re-regulation in the Proposals is such that, if issuers and underwriters act as we expect they would, the Proposals would not achieve the SEC's primary objectives. In addition, we believe the objectives that would be achieved may fall short of expectations in their benefits to investors or other capital markets participants.
The Proposals also would require issuers and underwriters to follow new procedures that would add delay and some uncertainty to the registration process. We believe that the help to investors from these new procedures would not justify the harm to issuers and investors through increased costs of raising capital. They would also likely create an incentive for issuers to move to the unregistered and offshore capital markets.
The following critique parallels the summary of the SEC's five main objectives for the Proposals discussed in Part II.A of this letter.
1. We strongly support the SEC's objective to increase the free flow of research and other useful information around the time of an offering. However, we expect there would be at best a modest increase in the free flow of useful information, and we expect there could be a decrease in the production of research and client-specific information. The Release acknowledges, and we agree, that there are many instances in today's markets where issuers and market professionals would produce additional useful information if the current restrictions on written communications were relaxed. We believe, however, that the combination of the Proposals' (i) comprehensive filing requirements - virtually all offering material must be filed prior to the first sale (or first use, if first used thereafter) - and (ii) imposition of Securities Act liability on virtually all written communications would significantly constrain the production and dissemination of written information around the time of an offering.
Specifically, we expect that the "inclusive" liability provisions of the Proposals would cause distribution participants to prohibit or substantially restrict by contract the dissemination of written offering materials to investors. Because Section 11 liability would apply to all distribution participants (including issuers, which have no "due diligence" defense) for all "offering information" used by any distribution participant, we expect there would be a strong incentive for distribution participants to agree contractually not to disseminate any written offering materials other than the statutory prospectus and pre-approved direct excerpts therefrom (i.e., information that is generally available today).
This incentive would be reinforced by the fact that (i) the penalty for failure to file "offering information" and "free writing" could be rescission - a "put" right for a year - or similarly severe damages and (ii) it likely would be difficult to distinguish between "offering information" (which subjects all distribution participants to Section 11 liability) and "free writing" (which subject only users to Section 12(a)(2) liability).(10) If the penalties for failure to file are severe, or if it is difficult or costly to determine whether a particular piece of offering material is "free writing" or "offering information", the most effective means for participants to eliminate these risks would be to prohibit the production of such materials.(11) It is likely that issuers and managing underwriters would follow this "gag order" course of action.
While we strongly support the expansion of the research safe harbors, which would permit the production of research in more situations, we believe the proposal no longer to exclude Rule 138 and Rule 139 research from the definition of "prospectus" (and, as a result, from the scope of possible Section 12(a)(2) liability) would deter the production of research. The Release cites no evidence that the current liability exposure for research - administrative sanctions and civil liability under the Exchange Act anti-fraud provisions - is insufficient for the protection of investors.
In addition, we believe the Proposals' comprehensive filing requirements would create significant disincentives for distribution participants to produce client-specific or audience-specific materials. Under the Proposals, client-specific materials related to an offering would have to be filed and would be publicly available. These materials often contain proprietary and sensitive information (e.g., sector forecasts, information regarding the client's portfolio, etc.). Under the Proposals, a distribution participant that produced such materials (and, potentially, all other distribution participants) would be subject to liability claims by all investors for materials tailored to a specific client or audience. As a result, to avoid the release of proprietary information and liability, including vicarious liability, to unknown parties for tailored information, distribution participants would probably (i) agree not to produce these kinds of focused materials and (ii) limit their communications, if any, on these subjects to oral presentations. We believe this information has value - it assists investors in evaluating their investment decisions in the light of their particular circumstances and raises the general level of market understanding - and should not be discouraged.
2. Although the Proposals' filing requirements would create "equal access" to offering information, we believe there would be only a modest increase in the quality of generally available information. In addition, there could be adverse market effects because institutional investors might be denied information they currently receive. The Proposals' filing requirements mandate the filing of virtually all written offering information, so there is little doubt that the SEC's "equal access" objective would be achieved. However, for the reasons set forth in the previous section - e.g., (i) "inclusive" and severe vicarious liability for most written offering materials and (ii) the potential revelation of proprietary information - we believe there would be little or no increase in the quality of generally available information. "Equal access" would be achieved but whether there would be a significant benefit to investors can be questioned.
The SEC's objective of "equal access" has theoretical attractiveness. However, it is at odds with history, practice and law, and we believe its pursuit could even have counterproductive effects. The concept of "equal access" is not embodied in the Securities Act. Securities Act Section 11 premises disclosure liability only on (i) failure to include in the registration statement material information required to be disclosed by the Securities Act or SEC rules (such as Schedules A and B, Regulations C, S-K and S-X and the registration forms), (ii) inclusion of materially false information or (iii) inclusion of materially misleading information. There is no Section 11 liability for failure to include information that is not required by the Securities Act or its rules and forms, as long as the disclosures that are made contain no material misstatements and are not materially misleading. In other words, there is no requirement in Section 11 (or Section 12(a)(2)) to disclose all material information to all investors. This aspect of the Securities Act was intentional(12) and has been judicially confirmed.(13) A necessary corollary of this principle is that the same information does not have to be given to all investors. (Of course, liability will attach to information that is given, even though not required, if it contains material misstatements or misleading statements.)
In some cases, there may be non-required information that is sufficiently sensitive that an issuer or other distribution participant may wish to limit the group of potential plaintiffs if something goes wrong. As discussed above, information also may be proprietary and the user may want to limit the audience that receives such information (e.g., client-specific information, sector forecasts and valuation techniques). Forcing all written information issued to anyone in an offering to be shared with the general public may well cause rational distribution participants to produce less information or deliver it orally rather than in writing.
We support equal access to a broad body of required information, as at present, but not to all information used in the offering. We would also support the SEC's examining the current disclosure requirements with a view towards changing or adding specific required information in a manner that strikes an appropriate balance between availability of the information and its relevance to the investment decision.
In addition, the Release suggests, but does not specifically state, that the SEC's goal of "equal access" includes requiring the filing of materials traditionally presented to institutional investors at "road shows" (e.g., videos, slides, etc.). We believe a filing requirement would not result in the general availability of these materials. Instead, these investor meetings would become more limited in content and information that distribution participants wished not to file would be communicated orally without visual aids. Not only is this the reverse result of the filing requirement but, because some information cannot be effectively communicated in oral-only presentations, there likely would be a decrease in the quality as well as the quantity of information available to institutional investors.
It is generally accepted that the U.S. capital markets are being increasingly dominated by institutional investors. Despite the much-publicized increase in on-line trading, we believe most retail investors still participate in the market through mutual funds and benefit plans. Market prices are determined for the most part by institutional trading and, therefore, by the information available to institutions. We believe that because implementing the "equal access" concept as proposed would have the practical effect of denying information to institutional investors, it would remove that information altogether from the market's price discovery process in securities offerings. Many economists would assert that depriving the market of correct information will result in less accurate pricing, which affects all investors.
The fact that all investors in a firm commitment offering will receive the same initial public offering price means that all investors do receive the pricing benefits or detriments of information furnished to institutional investors - i.e. equal pricing not equal access should continue to be the standard.(14)
3. The Proposals would require that certain offering materials be delivered to investors before their purchase commitments can be accepted, and would appear to impose substantial liability for noncompliance. This mandate would cause major changes in current practices that would inject delay and uncertainty into the offering process. We believe the negative effects of this delay and uncertainty would include (i) increased incentives for issuers to pursue unregistered and offshore offerings, (ii) smaller offerings, lower prices and higher underwriting spreads, (iii) higher transactions costs and (iv) the exclusion of retail investors from many offerings. Although some investors may have physical access to information earlier as a result of this mandate, in light of the substantial negative effects it would create, we believe the benefits of achieving this objective would not justify the costs.
We expect that the SEC included this provision principally for the benefit of retail investors - institutional investors do not need physical delivery to ensure access to information. The goal of the provision would be frustrated if the mandate itself resulted in retail investors - the intended beneficiaries - being excluded from the offering process.
We urge the SEC to analyze more thoroughly whether the Form A/Form B restructuring and the Proposals in general would "promote efficiency, competition and capital formation". This economic analysis should consider whether the goal of earlier investor access to information could be achieved by a less disruptive means, including constructive delivery through EDGAR.
We believe the mandatory delivery requirements would inject delay and uncertainty into the offering process at two levels. First, in many offerings, the time between the decision to go to market with an offering and pricing of the offering would be delayed - e.g., in comparison to today's shelf system, large, seasoned issuers would be delayed by a day or two and smaller, seasoned issuers would be delayed by many days and possibly weeks.(15) Second, once the issuer and underwriter have settled on the proposed terms of the offering and have identified the potential investors, no new potential investors could be added without going back to "square one" - e.g., if at pricing there was a desire to increase the size of the offering by adding new investors, the pricing would have to be delayed by at least the length of the pre-pricing delivery periods.(16) This would be particularly troublesome in Form A offerings where the delay would be at least three days (seven days in the case of initial public offerings and other offerings by unseasoned issuers). In short, the Proposals would place significant "speed bumps" in the way of taking an offering to the market and changing an offering midstream.
Markets move at an increasingly fast pace and are increasingly global. In addition, the size and structure of proposed offerings often change in response to market conditions. In light of these realities, we believe the introduction of "speed bumps" into the U.S. registered offering process will push some offerings offshore to the new "Euro" market or other international markets, or into the private domestic markets. We believe this shift would be substantial.(17)
In instances where issuers seek to access the registered market, they may be forced to accept smaller offerings, lower prices and higher underwriting spreads. For example, if at the time of pricing of a debt offering a seasoned, small issuer (including an issuer of investment grade debt securities) were faced with a deteriorating market, it would not be able to respond to "thin" demand by adding an additional underwriter and a new pool of potential investors. Instead, it would have the choice of (i) accepting a higher effective capital cost or a smaller deal, (ii) providing the underwriters with sufficient economic or other incentives to assume the risk of a deal with "thin" demonstrated demand or (iii) delaying the offering at least three days and assuming the corresponding market risk.
We believe these negative consequences would arise in both Form A and Form B offerings, but that they would be particularly aggravated in Form A offerings. In this regard, we believe that Exchange Act Rule 15c2-8 - which imposes a pre-sale distribution timing requirement for preliminary prospectuses in initial public offerings - strikes an acceptable balance between the investor's need for time to review the disclosure of a new issuer and the issuer's need for flexibility.
In some cases, the problems caused by the imposition of minimum delivery periods for preliminary prospectuses could be solved by distributing preliminary prospectuses to the largest reasonable pool of potential investors. This would increase transactions costs and likely would cause investors to be inundated with materials they would never read. In addition, this broad distribution approach would not eliminate the "speed bumps" created by the 24-hour update requirement for material changes or the requirement to go back to "square one" if new investors are added or the offering is fundamentally restructured.
We expect that the delivery requirements would result in the exclusion of retail investors from many offerings under both Form A and Form B. While delivery (and redelivery) to institutional investors could probably be accomplished in a day or two, ensuring delivery (and redelivery) to retail investors without jeopardizing the offering would be virtually impossible. Some investors will have fax, e-mail or Internet web service. But obtaining their individual consent to use these electronic delivery methods will, if done responsibly, require that they send back the written consent before delivery can take place. That will cause more delays. Inevitably, some investors will be unwilling to give their consent; many others will just fail to do so.
For investors who do not have, or who do not consent to use of, electronic delivery methods, the delays of regular mail will effectively preclude their participation in almost all Form A and Form B offerings by seasoned issuers and in many Form A initial public offerings. (Hand or overnight delivery services are prohibitively expensive in the volume required for retail sales.)
Thus, the new delivery requirements could cause the exclusion of many retail, and probably some institutional, investors from registered offerings rather than result in their having physical access to information sooner. We expect that this aspect of the Proposals was designed principally to benefit retail investors. We believe the goal of the new delivery requirement would be frustrated if the requirement itself resulted in retail investors - the intended beneficiaries - being excluded from the offering process.
Section 2(b) of the Securities Act requires the SEC to consider whether the Proposals would "promote efficiency, competition and capital formation". We believe the SEC should examine more throughly the costs and benefits of this new delivery requirement, the Form A/Form B restructuring and the Proposals in general. The major change to current practices embodied in the Proposals should only be pursued if, after this economic analysis, the benefits can be shown to outweigh the costs.
Finally, we expect there would be significant transition costs in switching from the current system to the Form A/Form B regime. Underwriters would have to develop, test and implement new delivery and compliance systems, which we expect would be costly. In addition to development and implementation costs, we expect the new systems would be more complex and costly to operate - underwriters would have to monitor compliance with many new requirements (e.g., (i) Form B eligibility for the issuer and all underwriters, (ii) delivery of preliminary prospectuses and term sheets, (iii) the filing of all "offering information" and "free writing" and (iv) the "stickering" of research).
We urge that the SEC also analyze whether the objectives of the Proposals, including earlier investor access to information, could be achieved in a less disruptive manner.
The SEC deserves much credit for its foresight and leadership in conceiving the EDGAR system, well before the popularity of the Internet made electronic access an everyday fact for even retail investors. EDGAR is now mandatory for domestic registrants and the SEC has said it intends to require foreign registrants to file via EDGAR in the future. Public dissemination of EDGAR data, which began in 1984, indeed "marked a milestone in public access to timely information relating to the nation's securities markets."(18) We believe no other country has such a transparent, complete and real-time information system about its public companies. The EDGAR database is available free to the public not only from the SEC's website but also from numerous private information firms and websites. The SEC has recently further enhanced the EDGAR system by converting it to accept and display Internet-formatted (HTML) documents.
We urge the SEC to continue building on this phenomenally successful and important information technology in adapting the securities regulation system to the new millennium. We believe the widespread acceptance of EDGAR provides the SEC with the ability to craft effective requirements that (i) will ensure more timely and more complete disclosure to investors and (ii) will not significantly harm capital formation. For example, in the case of seasoned issuers, we believe the SEC can achieve its enhanced disclosure objectives through an EDGAR-based access requirement that the issuer's Exchange Act record be updated prior to the time investors make their purchase commitments.(19) Reverting to a physical delivery requirement, as the Proposals mandate, would seem to represent a 180º shift - we believe for the worse - in SEC policy. The EDGAR electronic system should remain at the heart of the securities regulatory system.
4. The investor protection goals of the Proposals would be achieved. This would occur, however, because there likely would be no major increase in written communications, not because of new real protections. We agree with the SEC that all reforms should be judged in light of their investor protection consequences, and we support the SEC's objective that the deregulation of communications should not jeopardize investor protection. However, as discussed in detail above, we believe the Proposals so emphasize investor protection through the imposition of liability that the benefit of deregulation would go largely unrealized. The comprehensive filing requirements and "inclusive" liability aspects of the Proposals would be a disincentive for the production of new information.
We urge the SEC to consider the liability framework for written and oral communications of the counterproposal described in Part V. We believe it strikes a balance between deregulation and liability that would improve the quality of available information around the time of an offering without jeopardizing investor protection.
5. Issuers would not be encouraged to choose registration. The Proposals could cause more issuers to choose an unregistered approach to capital raising. We agree with the SEC that the registration of securities offerings should be encouraged. We also agree that "investors will receive [the] benefits of registration only if the [SEC] continues to make the registration system flexible enough to be a viable alternative in the capital markets of today and the future". The Proposals employ a two-pronged approach encourage registration by creating incentives for registered offerings and disincentives for some unregistered offerings.
The Proposals' incentives are effectiveness on demand and the flexibility to use offering materials other than the statutory prospectus. The Release correctly concludes that the review policies of the SEC staff create uncertainty and an incentive for issuers to pursue exempt transactions rather than registered offerings. We agree that the possibility of pre-effective review of registration statements of seasoned issuers should be eliminated. Unfortunately, we believe that, on balance, the positive incentives to register created by these aspects of the Proposals would be overshadowed by the negative incentives to register created by the Proposals' pre-pricing delivery and comprehensive filing requirements.
In addition, effectiveness on demand is not an adequate substitute for the ability to sell already registered securities off a shelf registration statement. Preparing and filing a complete registration statement takes time and, accordingly, replacing shelf registration with effectiveness on demand would create new delays. One result of these delays would be an increased incentive to pursue unregistered and offshore offerings. Given the choice between shelf-style procedures in an unregistered or offshore market - i.e., almost immediate market access - and effectiveness on demand in the U.S. public capital markets - i.e., market access only after a registration statement is prepared and filed - we expect that reasonable issuers frequently would choose unregistered and offshore offerings.
The Proposals' disincentive for unregistered offerings is repeal of the Exxon Capital and "stepping-stone" lines of no-action letters. We believe adverse economic consequences to the high yield securities market could follow from repeal. This is an inherently institutional market, and abuses have not been demonstrated. In addition, there likely would be only a limited contribution to the SEC's goal of encouraging registration. We expect that some issuers would seek to make unregistered offerings even without the expectation of an Exxon Capital exchange (presumably at a higher cost of financing). In addition, we believe that there would be a net decrease in the aggregate number and size of completed offerings - we expect some offerings that could have been completed on an unregistered basis with the expectation of an Exxon Capital exchange will not be undertaken in either the registered or unregistered markets.
Elimination of the "stepping-stone" procedures would remove a strong incentive for foreign issuers to join the U.S. reporting system and extend the benefit of public trading in the U.S. to all of their shareholders. We believe this result runs counter to (i) the SEC's objective of encouraging registration and (ii) its stated policy that foreign issuers should be encouraged to accept the transparent financial disclosure requirements of the U.S. reporting system.
We urge the SEC to consider whether the limited benefits of the repeal of the Exxon Capital and "stepping stone" lines of no-action letters are justified. The SEC should also consider whether there are alternatives to repeal that would address its objective without harming capital formation.
C. The problems outlined in this part of our letter are not isolated; they run throughout the Proposals. Because these problems are inherent, it is not practical or possible to fix the Proposals through refinements or clarifications. The Proposals should be withdrawn.
Overview. As demonstrated by the preceding analysis, the Proposals' shortfall in meeting the SEC's objectives and the significant adverse effects the Proposals likely would have on investors, issuers and the capital markets generally can be traced to two sources. First, there are inherent tensions among the SEC's goals that are not appropriately addressed in the Proposals. Second, the filing and delivery requirements the Proposals would impose on issuers and underwriters are significantly out of step with today's market practices and needs.
These issues are not isolated. They are intertwined in the Form A/Form B restructuring that is at the core of the Proposals. In addition, many of the adverse consequences that we expect could occur are the result of a combined effect various aspects of the Proposals would have on the behavior of market participants. For example, the undesirable outcome that issuers and other distribution participants would not produce materials beyond the statutory prospectus would be caused by the combination of the Proposals' (i) filing requirements, (ii) severe and vicarious liability provisions and (iii) uncertain definitions of "free writing", "offering information" and "offering period". We believe it would be impossible to resolve the problems the Proposals would create through refinements or clarifications during the rule-making process. Accordingly, we believe the Proposals should be withdrawn and the Form A/Form B restructuring should be abandoned.
We do not believe that the problems of the existing registration process justify the potential disruption of current practices that the Proposals would require. Instead, we urge the SEC to pursue incremental reform that (i) addresses identified problems and (ii) recognizes and takes advantage of advances in technology and telecommunications media and the market's increased ability to absorb information.
III. Problems Not Addressed by the Proposals and Our Recommendations for How They Should Be Solved
Despite the intended comprehensiveness of the Proposals, they do not address, or only partially address, many key areas of the current regulatory system that urgently need reform. Below, we identify these areas and suggest possible solutions in the context of the current system.
A. There are major anomalies and complexities in private placement regulation that should be eliminated.
The regulation of the offer, sale and resale of unregistered securities relies on a patchwork of registration exemptions, including Regulation D, Rule 144 and Rule 144A. These exemptions were not crafted in unison and need to be updated to reflect current market realities. In particular, we have encountered significant issues relating to (i) the regulatory "no man's land" between Regulation D and Rule 144A and (ii) the dissemination of information concerning private offerings. The Proposals do not adequately address these problems.
1. The "Section 4(1½)" Gap Should Be Closed. There is a significant and unnecessarily wide gap between the regulation of (i) securities issued pursuant to Regulation D, which exempts sales by an issuer to initial buyers but not resales, and (ii) securities sold pursuant to Rule 144A, which exempts resales to QIBs. First, offers under Regulation D may be made to anyone as long as the offers do not amount to "general solicitation"; under Rule 144A, offers may be made only to QIBs. It seems anomalous that Rule 144A is stricter in its offeree limitations than Regulation D. Second, an initial buyer in a Regulation D offering has no available safe harbor for resales to other "accredited investors" that are not QIBs, but must instead rely on the more uncertain "Section 4(1½)" interpretation of the Securities Act. This lack of a safe harbor for resales to "accredited investors" affects dealers that purchase as principal for resale to "accredited investors" as part of the initial placement, as well as "accredited investors" seeking to make private secondary resales to sophisticated buyers that are not QIBs. It raises questions as to whether the limitations on offers are the same as those under Regulation D and as to the procedures appropriate to restrict resales of securities sold to "accredited investors" that are not QIBs.
The uncertainties and complexities caused by these differences are often referred to as the "Section 4(1½) gap". We recommend that to narrow this "Section 4(1½) gap" the SEC should:
a. Eliminate Preliminary Note 4 to Regulation D. Preliminary Note 4 provides that Regulation D is available only to issuers and exempts from registration only the initial sales by the issuer to an "accredited investor" and not resales, even if part of the chain of the initial placement. The Regulation D exemption from registration should be made available to affiliates and dealers. Availability of the exemption should not be conditioned on the form of the initial placement of securities. Whether the transaction is structured as (i) a dealer resale or (ii) an issuer sale through a broker-agent has no bearing on the private nature and purchaser sophistication characteristics of Regulation D transactions. Instead, Regulation D should require only that the ultimate purchasers not be acquiring the securities with a view to distribution.
b. Expand the definition of QIB in Rule 144A. The Release suggests that the definition of QIB should be narrowed. Instead, we strongly recommend that the definition of QIB instead be broadened so that investor eligibility for Rule 144A offerings and secondary market transactions is closer to the "accredited investor" standard for Regulation D offerings. In particular: (i) natural persons and all types of entities (e.g., municipalities) should be eligible to be QIBs, as they are now eligible to be "accredited investors"; and (ii) the QIB dollar thresholds for securities owned or invested on a discretionary basis should be reduced significantly. When the SEC initially adopted Rule 144A, it intentionally set the QIB eligibility criteria at a very high level until there was sufficient experience to determine whether leakage to the public markets was likely. We believe that nine years of experience without leakage problems have demonstrated the integrity of the QIB market and would justify relaxing the QIB eligibility criteria.
The SEC should consider whether, in the interest of eliminating unnecessary complexity, a comprehensive definition for the various categories of exempt persons should be adopted. There are many unnecessary differences among the current definitions of (i) "accredited investor" in Section 2(a)(15) of the Securities Act, (ii) "accredited investor" in Regulation D, (iii) "qualified institutional buyer" in Rule 144A, (iv) "eligible swap participant" in CFTC Regulation 35.1(b)(2) and (v) "qualified purchaser" for purposes of Section 3(c)(7) of the Investment Company Act of 1940 that could be reduced to achieve greater consistency without compromising investor protection.
c. Modify Rule 144A to delete references to offers. The Rule 144A exemption from registration should not be conditioned on whether offers have been made only to QIBs. It can be difficult to confirm QIB status at the offer stage, which in practice may limit offerees to those that have been previously vetted. It is also unnecessary for the protection of investors, because an offeree who does not purchase will not have been harmed. Also, the availability to the public of information concerning Rule 144A offerings disseminated by third parties undermines the rationale for conditioning exemptive status on the absence of non-qualifying offers. It seems anomalous that (absent general solicitation) there is no direct restriction on the number or class of offerees in a Regulation D offering but there is a QIB restriction on offers in a Rule 144A offering. In our view, the Regulation D approach of focusing on actual purchasers should be sufficient.
B. The current artificial barriers to the flow of information concerning unregistered offerings are ineffective and, in some cases, contrary to the best interests of investors.
Advances in communications technology and the efforts of third party information services have made secondary price quotes, securities ratings, rating agency offering reports, analyst research reports(20) and other information concerning the private securities markets widely and instantaneously accessible, based on information obtained from offerees and security holders, and not at the behest of the issuer or its agents. Also, reporting issuers should, and in certain instances are required to, disclose material developments, including significant private placements. These disclosures can be protected by the Rule 135c safe harbor. This readily-available flow of third-party information, coupled with the substantial amount of permitted issuer disclosure, undercuts the rationale for prohibiting (i) limited content general solicitations and (ii) "directed selling efforts". We recommend that, in order to bring information restrictions in line with market realities, the SEC should:
1. Eliminate or relax the prohibition on "general solicitation". Rule 502(c) of Regulation D should be modified to permit general circulation of limited-content announcements regarding potential private placements. We suggest a general relaxation similar to the state-specific small issue exemption of Rule 1001. Rule 1001 permits wide circulation of a limited content general announcement in connection with small offerings by California-related issuers to "qualified purchasers", which the Release identifies as similar to Regulation D "accredited investors".
The SEC should also create a safe harbor to permit an issuer to conduct a private placement concurrently with a public offering of the same securities and to consummate sales in the private offering either before or after those in the public offering. While we believe this should be permitted for any private offerings to "accredited investors", it would still be a very useful safe harbor if the private offering were limited to QIBs (whether or not made in reliance on Rule 144A).
2. Eliminate the "directed selling efforts" prohibition. Regulation S should be modified to eliminate the prohibition on "directed selling efforts" (defined in Rule 902(b)). Inappropriate sales activity in the United States should be addressed as a Section 5 violation, and not as part of the Regulation S safe harbor for the offshore offering. The Regulation S offering should not lose its safe harbor exemption merely because an issuer or a securities professional involved in the distribution disseminated information about the offering in the United States. In the case of a Regulation S offering that occurs concurrently with a registered offering in the United States, the restrictions on directed selling efforts make no sense.
C. The definition of "affiliate" is too broad and ambiguous.
The Securities Act's restrictions on unregistered sales by "affiliates" are intended to prevent issuers from indirectly creating public markets for their securities.(21) We believe that the breadth and ambiguity currently associated with the concept of "affiliate" has effectively expanded the prohibition on resales well beyond those persons reasonably likely to act as conduits for distributions by an issuer. We recommend that the SEC:
1. Adopt a narrower definition of "affiliate". The SEC should adopt the definition proposed by the SEC Advisory Committee chaired by Commissioner Wallman so that the class of persons subject to "affiliate" resale limitations includes only the chief executive officer, inside directors, director representatives of controlling shareholders, holders of 10% or more of the voting power who also control at least one board seat and all holders of 20% or more of the voting power. Such persons should be presumed to be "affiliates" but permitted to resell without restrictions if they can rebut the presumption of control arising from their relationship with the issuer. Rule 144(a)(1) should be modified to reflect this rebuttable presumption. This narrowing and clarification of the concept of "affiliate" would add much needed certainty to the scope of Section 2(a)(11).
D. The shelf registration requirements should be modified to enhance issuer and shareholder flexibility.
The shelf registration system should be enhanced by eliminating rigidities and uncertainties. We recommend that the SEC:
1. Permit secondary offerings from a universal shelf. The SEC staff takes the position that "universal" shelf provisions contemplate only primary offerings. The market access benefits of the shelf system should be extended to selling security holders. The SEC should amend its interpretations to permit secondary offerings to be registered on universal shelf registration statements without requiring smaller selling security holders to be named and by permitting larger selling security holders to be named in the prospectus supplement at the time of the takedown.
2. Eliminate the possibility of certain staff reviews. As discussed above, we agree with the SEC that current review policies of the SEC's staff impose costly uncertainties and create an incentive for issuers to pursue exempt transactions and offerings in non-U.S. markets in lieu of registered offerings. We believe that the SEC should eliminate (i) the possibility of pre-effective review of registration statements of at least shelf-eligible issuers and (ii) the policy of requiring a pre-offering review of prospectus supplements in connection with offerings of "novel" securities.
3. Permit multi-issuer registration. Parent companies should be provided the flexibility to choose, at the time of a takedown rather than at the time of filing, which registrant (the parent or one of its subsidiaries) will be the issuer of any particular offering of securities. The SEC should adopt a universal registrant rule permitting parent companies to name themselves and all their majority-owned subsidiaries as possible issuers on a single shelf registration statement without allocating the securities to any particular issuer.
4. Permit pay-as-you-go shelf registration. Under the current shelf rules, issuers must register a specific dollar amount of securities, pay a corresponding registration fee and identify all classes of securities to be issued in accordance with Item 202 of Regulation S-K. These requirements substantially reduce issuers' flexibility without providing any benefits to investors. The SEC should amend its rules and forms to permit an issuer to file, for a nominal fee, a shelf registration statement without describing the classes of securities to be offered or paying a registration fee, provided that, at the time of a takedown, the issuer would be required to (i) disclose the class and other terms of the securities offered and (ii) pay the applicable registration fee.
A necessary corollary of pay-as-you-go would be the elimination of the Rule 415(a)(2) requirement that the issuer reasonably expects to offer and sell the registered securities within two years. We believe this limitation should be eliminated even if pay-as-you-go is not implemented.
5. Relax restrictions on at-the-market offerings. At-the-market offerings provide issuers with a useful tool for raising capital. We believe that the current restrictions on such offerings go beyond what is necessary to ensure investor protection and the orderly operation of markets. Accordingly, the SEC should relax the current "10%" and "sold through an underwriter" restrictions on at-the-market offerings in Rule 415(a)(4).
E. We support the SEC's proposal to modernize prospectus delivery.
We support the SEC's suggested remedy for the outdated requirement to deliver a physical final prospectus. The Proposals would eliminate in most offerings the Section 5 requirement that a final prospectus be delivered to investors no later than the time the confirmation is delivered if (i) a prospectus that conforms to the requirements of Section 10(a) (other than the omission of Rule 430A information) is filed before any confirmations are sent, (ii) the new pre-pricing term sheet (or preliminary prospectus) delivery requirements have been satisfied and (iii) the confirmation contains a legend that explains where a final prospectus may be obtained free of charge.
We agree with the SEC that the rationale underlying the requirement physically to deliver a prospectus has been undermined by the realities of today's marketplace. Communications technology and market efficiencies have reached the point today where accessibility to information should produce substantially the same policy result as physical delivery of prospectuses did in 1933. The move in June 1995 to T+3 settlement has aggravated the problems associated with physical delivery. It is completely unrealistic to expect this process to work when settlement moves to a T+1 timeframe or ultimately to T+0. While we believe the SEC should abandon the Form A/Form B restructuring in general, we suggest that the SEC address the specific problems with the prospectus "delivery" requirement now to reflect not only current realities, but also the inevitable future reality of T+1.
The SEC should adopt rules permitting all distribution participants to satisfy the final prospectus delivery requirement through incorporation by reference in transaction confirmations in all offerings. The availability of this alternative could be conditioned on (i) all material issuer-related developments being reflected in the issuer's SEC filings prior to confirmation and (ii) expanded Rule 430A-type information (i.e., transaction information) being included in the issuer's SEC file within a specified period after confirmation.
F. Address more thoroughly the discontinuity between the present role of underwriters and their exposure to liability.
Technological and regulatory changes have dramatically affected the role of underwriters in the preparation of registration statements. The pressure to tap market opportunities is such that underwriters are often required to conduct "due diligence" on an expedited basis, and may face competitive bidding-like situations in which insistence on protracted due diligence will be an adverse factor in their selection. However, the policy underlying Section 11 underwriter liability presumes an ability to influence registration statement disclosure and never contemplated shelf offerings based on incorporated Exchange Act reports. This discontinuity between what Section 11 presumes and the role of underwriters in today's marketplace presents a fundamental problem that should be addressed at this time. There is also an incongruity, particularly in the shelf context, in the operation of Section 11(d). An underwriter's Section 11 liability is measured at the time it becomes an underwriter. The liability of the issuer, directors, signing officers and experts is measured as of the effective date of the registration statement or the filing of an annual report, which is frequently months earlier.
We noted in Part I.H. (on page 10) that we believe the proposals relating to underwriter liability illustrate the recognition of a fundamental problem and that we support, with limited modifications, the proposed amendments to Rule 176. However, we believe the SEC should further address underwriter liability to reflect the realities of the role of underwriters in today's marketplace. For example, we believe the SEC should expressly acknowledge that the activities that constitute a "reasonable investigation" or the exercise of "reasonable care" in the case of fast-paced offerings on short-form registration statements are significantly less than the activities that would be necessary to satisfy those standards in the case of offerings on long-form registration statements such as initial public offerings.
Attached to this letter as Annex A is a tabular presentation of our comments on specific details of the Proposals and on certain matters on which the SEC has specifically requested comments.
V. Principal Elements of an Incremental Approach to Reform and Description of a Counterproposal
Even though we believe the Proposals should be withdrawn, we agree with the SEC that aspects of the current regulatory system are outdated and in need of reform. We firmly support most of the SEC's stated objectives for the Proposals, including increasing the publication of research and the free flow of useful market information around the time of a registered offering (while ensuring that investor protection is maintained).
We believe, however, that reform should start from a different point than that of the Proposals.(22) Set forth below are the principal elements that we believe our preferred incremental approach to reform should include.
A. Viewing this mix of objectives for reform in the light of current market practices, we believe there are several principal elements that should be part of any package of reforms.
We believe that, for a package of reforms to be successful, it must remedy the problems caused by the current restrictions on communications around the time of a registered offering. It also must achieve the SEC's disclosure enhancement goals - ensuring more timely and complete disclosure to investors (while maintaining investor protection). In addition, the resulting system also should be flexible enough to accommodate changes in market practices, and it should not harm (and should strive to enhance) the efficiency of the existing public capital-raising process. Viewing this mix of objectives in the light of the realities of the capital formation process, we believe the following elements should be part of any package of reforms:
1. Build on the current process. We believe that reforms should start with the existing registration process (i.e., Forms S-1, S-3, F-1 and F-3) and improve it. Forms S-2 and F-2 could be eliminated, though.
2. Rely on EDGAR access and the efficient market theory. Reforms should recognize and take advantage of advances in communications media. For seasoned issuers, information dissemination regulations should reflect the efficient market theory, understood as the marketplace's relatively quick absorption of material information that is generally accessible (i.e., through EDGAR and the SEC's website). A requirement of access to current information should replace any requirement for physical delivery of information.
The combination of (i) the capabilities of the EDGAR system, (ii) the market's existing reliance on analysts and other intermediaries to assess corporate disclosures and (iii) the growing comfort of retail investors with communications through the Internet, provides a powerful and flexible disclosure tool that was not available to the authors of the Securities Act or previous reformers.
In the case of reporting issuers, we believe a flexible EDGAR-based access requirement could be crafted that would ensure more timely and complete disclosure to investors without adversely affecting capital formation through cumbersome physical delivery.
3. Emphasize timely issuer information. A reformed system should require that issuer-related information be up-to-date in the public EDGAR file at the time of accepting investor commitments to purchase, but should remain flexible as to the timing of required filing of transaction-related information. The flexible process of oral discussions and optional writings concerning transaction-related information should be permitted to continue so that "speed bumps" can be avoided. Rule 430A should be expanded to permit much more transactional information retroactively to apply as of the commitment date once the information has been filed in the public record.
4. Maintain disclosure liability. Section 11 liability should be based on the public record disclosures at the time of first sale, with retroactive inclusion of the expanded Rule 430A information. The time of first sale should be deemed the "effective date" for Section 11 purposes, thereby measuring all participants' liability as of the same date. (As previously noted, in the current shelf system an underwriter's Section 11 liability is measured as of the time it became an underwriter, whereas the liability of others is measured from the possibly much earlier effective date or annual report filing date.)
Section 12(a)(2) liability of sellers should be based on the information disseminated to the investor at the time of sale (including retroactive inclusion of expanded Rule 430A information). For seasoned issuers, all information placed in the public record more than a certain time before sale (e.g., one business day) should be conclusively deemed disseminated. For more recent information, the seller should have the choice of whether to physically or (if the recipient agrees) electronically deliver the information itself, or to rely instead on other specified methods of public dissemination, such as by press release issuance, or web site posting, a sufficient period of time prior to sale.
5. Expand universal shelf registration. We believe that (i) the market access and flexibility provided by shelf registration have contributed substantially to the efficiency and depth of the U.S. capital markets and (ii) there are no systemic problems with shelf registration that justify the curtailments suggested by the Proposals.
The current shelf registration system should be further expanded by permitting secondary offerings from a universal shelf, eliminating the possibility of most pre-effective staff reviews, permitting multi-issuer registration without having to allocate among parent and subsidiaries, permitting pay-as-you-go registration, eliminating the two-year limitation on the amount registered and relaxing restrictions on at-the-market offerings. These specific suggestions are discussed in more detail in Part III.D. (page 34).
6. Accommodate faster settlement cycles. The reformed system must be able to support settlement as early as T+1, or ultimately T+0, and immediate electronic confirmation, including prospectus delivery (i.e., constructive delivery) with confirmations on or prior to settlement. The move in June 1995 to T+3 settlement has aggravated the problems associated with the current regulatory system's physical delivery requirements. It is unrealistic to expect this process to work under a T+1 or T+0 timeframe.
As noted in Part III.E. (page 35), we believe communications technologies and market efficiencies have reached the point where accessibility to information should produce substantially the same policy result as physical delivery of final prospectuses did in 1933.
7. Expand permitted research and issuer communications. Changes to the system should include expansion of the research safe harbors and the new issuer communications safe harbors along the lines of the Proposals.
8. Anticipate further technological change. The reformed system should be flexible enough to accommodate continued developments in, and even broader acceptance of, the electronic dissemination of information.
Many of the strains on the current system are traceable to advances in technology and communications media and the globalization and institutionalization of markets. Reforms should recognize that these trends are likely to continue.
B. A group of securities attorneys, including members of our firm, are crafting a counterproposal to the Aircraft Carrier that we believe effectively incorporates the principal elements of reform outlined in the previous section. We urge the SEC to begin its reform efforts with this or a similar counterproposal.
The counterproposal starts with the existing system, including universal shelf registration (with many of the enhancements we suggest in Part III.E. on page 35), and remodels the regulation of communications around the time of an offering.
1. The counterproposal would increase the scope of information required to be on file at the time investors make their commitments to purchase. At the core of the counterproposal is a new requirement that the issuer's Exchange Act record, which is generally accessible through EDGAR,(23) be complete (except for expanded Rule 430A information) and not misleading at the time of accepting commitments to buy. This record would constitute the "registration statement" for purposes of Section 11. Expanded Rule 430A information would be subsequently filed and retroactively included in the Exchange Act (i.e., Section 11) record.
For purposes of Section 12(a)(2), purchasers would be deemed to have purchased in reliance on the issuer's Exchange Act record. However, as between the seller and the purchaser, information included in the Exchange Act record since the opening of the last full SEC business day before acceptance of the purchasers' commitment to purchase (other than expanded Rule 430A information) would not be deemed to be part of the issuer's Exchange Act record unless it is "actually communicated" or "constructively communicated".
Information can be "actually communicated" orally or in writing, in the seller's discretion, subject to the risk of proof. If the investor consents, electronic delivery (e.g., posting on the issuer's website or e-mail) could also satisfy this requirement.
The concept of "constructive communication" of information is based on the application of the efficient market theory - information with respect to securities offerings should be deemed to be effectively disseminated to investors when it is reasonably likely to be reflected in the price most potential investors aware of such information would be willing to pay for the securities. The counterproposal also specifies various publication actions that would conclusively establish "constructive communication" of information, including disclosure in a press release issued prior to 6:00 P.M., Eastern time, the day before acceptance of a commitment to purchase. Information actually carried by specified financial news services (e.g., Dow Jones broad tape, Bloomberg's) at least two hours before purchase commitment would also be conclusively deemed to have been constructively communicated. For purchasers who are accredited investors, constructive communication would include being notified before commitment that there is news, and being given the web site address to find it, without having to have the seller recommunicate the information itself.
We believe this new requirement and its related assignment of liability would utilize advances in communications media to ensure more timely and complete disclosure to investors and would enhance investor protection, issuer flexibility and the efficiency of the capital formation process.
2. The counterproposal generally would provide issuers and sellers with greater freedom to communicate, subject to a corresponding extension of liability. Term sheets would be permitted. In offerings by Form S-3 (and F-3) eligible issuers, oral and written offers would be exempt from Section 5. In Form S-1 (and F-1) offerings, there would be greater clarity with respect to the permissibility of communications and the Rule 15c2-8 requirements would be expanded to problematic offerings.
The definition of "prospectus", as used in Section 12(a)(2), would be modified to include term sheets (and possibly other supplemental information) used to offer and sell registered securities, but, in contrast with the Proposals, this supplemental material would not have to be filed with the SEC. There would be an express provision that the accuracy and misleading character of the supplemental material could be measured against the issuer's Exchange Act record (which, as explained in the previous section, would have to be complete and not misleading at the time purchase commitments are accepted).
Form S-3 and F-3 eligible issuers would be exempt from Section 5 for oral and written offers generally. Issuers, directors, signing officers, experts and underwriters would be liable under Section 11 for the issuer's Exchange Act record. Users ("sellers") would be liable under Section 12(a)(2) to their purchasers for oral and other written communications (e.g., term sheets) used to offer and sell the securities.
In offerings registered on Form S-1 or F-1, (i) communications more than 30 days before the filing of the registration statement and (ii) information released in the ordinary course of business consistent with past practice would be exempt from Section 5.
Rule 15c2-8 would be expanded to include blank check, microcap, roll-up and other securities offerings where, because of a limited institutional following or other factors, constructive delivery may be considered insufficient to ensure investor protection. It would otherwise remain applicable only to initial public offerings and the current pre-sale distribution timing requirement would not be lengthened.
3. The counterproposal also includes many aspects of the Proposals. The Proposals relating to research, the physical delivery of final prospectuses and underwriter guidance are included in the counterproposal with modifications along the lines of our comments in the other parts of this letter.
We support the counterproposal because we believe it would solve many of the serious problems with today's regulatory system without harming the diverse constituencies that participate in the capital formation process, including issuers and investors. We respectfully urge the SEC to begin its reform efforts with the counterproposal or another incremental solution instead of the Proposals.
We would be happy to discuss any questions the SEC may have with respect to this letter. We ask that any questions please be directed to William J. Williams, Jr. (212-558-3722), John T. Bostelman (212-558-3840) or Walter J. Clayton III (212-558-4934) in our New York office.
Very truly yours,
SULLIVAN & CROMWELL
cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
Harvey J. Goldschmid, General Counsel, Office of General Counsel
Annette L. Nazareth, Director, Division of Market Regulation
Brian J. Lane, Director, Division of Corporation Finance
Anita T. Klein, Senior Special Counsel, Division of Corporation Finance
Julie Hoffman, Staff Attorney, Division of Corporation Finance
Research Safe Harbors Issuer Communications Form A Form B Also, any term sheet should not have to include
pricing-related information. Foreign Issuers 462(f)(1)(ii) General Offering Process Repeal of Exxon Capital Liability Exchange Act Disclosure Integration of Registered and Unregistered Offerings
Explanation Rule 137 would be expanded
to protect research on
virtually all issuers,
companies, and to protect
even first-time research.
Research issued by a firm not participating in a registered
offering poses little concern from a Securities Act perspective.
Expanding the safe harbor could somewhat encourage this
information flow, which would be beneficial to the marketplace. Rule 138 would be expanded
to apply to recently reporting
issuers and large public
nonreporting foreign issuers.
Legitimate research is useful to the marketplace. The expansions
include categories that pose little risk of abuse and where
legitimate research motives are present. Rule 139 would be expanded
to permit focused reports on
even smaller seasoned
reporting issuers and large
Schedule B offerings, and to
allow first-time research; it
would be expanded to allow
industry research on all
issuers and allow upgrades.
This expansion also allows more forms of legitimate research to
reach the marketplace. Rules 138 and 139 would be
expanded to apply also in
Rule 144A and Reg. S
The same analysis that research should not be treated as a public
offer in a registered offering supports the principle that research
is not an offer to a non-QIB nor "directed selling efforts." The
safe harbors should also provide that the research is not a general
solicitation in order to be useful in the many Rule 144A
offerings accompanied by private Section 4(1½) sales to
institutional accredited investors. Rules 138 and 139 would no
longer exclude covered
research from the definition
of "prospectus," and would
require research to be
stickered with a notice of the
broker-dealer's role in the
By limiting Rules 138 and 139 to protection against Section 5
violations, the changes raise the possibility of Section 12(a)(2)
liability (vs. 10b-5 liability) if the research is considered an offer
by an underwriter. This possible increased liability undercuts the
policy of promoting the availability of research around the time
of an offering. Also, the stickering requirement is unworkable in
practice because the broker-dealer's role will at times be
uncertain and will vary, necessitating many stickers. In addition,
research previously issued may be reissued in paper or
electronically, requiring complex procedures to attach and
remove the sticker. A bright-line safe harbor
would protect communications from being deemed
offers if made 30 days before
filing (Form A and Schedule
B) or before the offering
period (Form B).
While less relevant for Form B, the bright-line safe harbor
should permit more legitimate business communications during
the period prior to the start of a registered Form A offering. Factual business
communications by all
issuers and forward-looking
information by some issuers
could be issued even during
the 30-day quiet period.
These safe harbors may be helpful in certain circumstances but
are not likely to be broadly useful. The safe harbor for factual
business communications codifies long-standing practice. The
safe harbor for forward-looking information is so narrowly
drawn as to be rarely applicable. Pre-effective written
communications would be
permitted after filing the
registration statement, rather
than being limited to the
Although not generally needed for Form B offerings, this change
will be very useful in Form A and some Schedule B offerings. It
would permit use of written marketing materials in initial public
offerings and other Form A offerings, while protecting investors
through imposition of Section 12(a)(2) liability for this material.
However, the requirement to file the information may undercut
the usefulness of the new flexibility. A preliminary prospectus
must be sent to arrive 7
calendar days (initial public
offerings and first year
thereafter) or 3 calendar days
(other offerings) before
This requirement will narrow the potential universe of buyers, as
issuers and underwriters will be unlikely to delay pricing to
allow late additions of buyers. This will cause downsizing or
failure of hard-to-sell deals, and will result in lost upsizing or
lost pricing improvements for successful offerings. The effect
will be strongest on equity and other offerings dependent on
retail buyers. The Rule 15c2-8 pre-sale distribution timing
requirement for initial public offerings should remain as the only
requirement. It is flexibly based on expectations, is promulgated
under the Exchange Act (so rescission is not a consequence of
violation) and permits post-pricing addition of buyers. Material changes disclosure
must be sent to arrive 24
hours before pricing.
This requirement will have the same effect as the 7/3-day
preliminary prospectus delivery rule. If last-minute disclosure
changes occur, issuers and underwriters will drop from the
offering the investors they are unable to communicate with
quickly in order to avoid delaying the offering. This will have its
greatest impact on retail offerings. Pre-effective free-writing
must be filed.
This requirement would make information prepared for a
specific group available to, and subject to liability claims by, all
investors. It could also expose proprietary ideas to competitors
and the public. These two concerns could result in less of this
type of information being prepared than would be the case if
filing were not required. If the requirement is kept, the
requirement to file on or before first use should be relaxed to
allow additional time (such as within 2 business days of first
use), and the penalty for failure to file should be clarified as
being limited to SEC administrative action and not being
Section 12(a)(1) rescission. The issuer loses eligibility if
it has "bad boy" status.
In the world of on-demand registration it will be difficult or
impossible for the issuer and underwriters to verify the "good
boy" status of each other and of the issuer's directors and
executive officers. The result will be another possible speed
bump and an increase in risk for offering participants. If
Section 12(a)(1) rescission is the penalty, plaintiffs will have a
potential windfall for honest mistakes by others. Form B offerings may not
proceed if there are
unresolved SEC staff
This undercuts the certainty of file-and-go by blacking out the
issuer from the time the SEC staff comment letter is issued until
full resolution of comments. It gives the SEC staff unfair
leverage even during disputes over immaterial matters. Form B filings would no
longer presumptively be
deemed filed on the correct
form once effective.
This creates uncertainty and the potential for plaintiffs to claim
rescission after an offering. At a minimum, the Rule should
make clear that only SEC administrative action, and no private
remedies, can result from incorrect use of Form B. Financial eligibility criteria
would be tightened by
imposing a $1 million
average U.S. daily trading
volume requirement on
issuers having less than a
$250 million public float.
Demoting 30% of Form S-3/F-3 issuers to Form A will impede
their access to capital. Even for these seasoned issuers, Form A
generally requires preliminary prospectus delivery 3 days before
pricing and in practice will rarely be eligible for on-demand
effectiveness. Evidence of abuses justifying this inefficiency has
not been presented. The issuer must not only
have been reporting under
the Exchange Act for 12
months but also have filed at
least one annual report (10-K
This addition would be consistent with the theory that an issuer
must be sufficiently well-followed by the market in order to rely
on constructive delivery of its basic disclosures through
incorporation by reference. An annual report is a major
milestone in reporting to the market. Secondary offerings may not
use Form B if primary
offerings would not be
Secondary offerings have been permitted on short-form
registration since its inception in 1970. The Proposals will
prevent use of short-form resale registration of venture capital
and other securities of smaller seasoned issuers that were
originally privately placed when the issuer was nonpublic or
unseasoned. This new inefficiency has not been justified. Form B (and some Form A)
registration statements would
become effective upon filing.
Eliminating the uncertainty of SEC staff review and permitting
on-demand registration will encourage issuers to choose
registration and contribute to efficiency of the capital-raising
process. Pay-as you go can be
accomplished under Form B.
By filing for a small amount at the outset and then making a
second immediately-effective filing once deal size is known,
pay-as-you-go can be accomplished. It would be preferable
instead expressly to permit filing fees to be paid within 5
business days following actual sales. "Offering information" is
defined to include virtually
all written information
involving an "offer".
Item 1(a) of
The "inclusive prospectus" approach of the Proposals will make
all participants liable for broad types of writings by other
participants, which become part of the registration statement and
subject to Section 11. Difficulty in identifying these writings
and this cross-liability will cause participants contractually to
restrict this activity. Also, including proprietary offering ideas
as "offering information" forces them to be disclosed to
competitors and non-clients, which could stifle innovation.
Form B should revert to the traditional list of specified items that
constitutes the registration statement. The "first offer" marks the
start of the offering period.
Item 1(d) of
Identifying the start of the offering period is essential to knowing
what constitutes offering information for filing and liability
purposes. "Offer" is too vague, especially when applied not only
to the issuer but also to all underwriters. The standard should be
black and white, such as a specified number of days before
pricing. Offering information
includes disclosures "on
behalf of" the issuer.
Item 1(b) of
It is unfair to impose Section 11 liability on all offering
participants for "offering information" issued by one offering
participant without the knowledge of the others. Offering
information should be limited to issuer-sponsored writings.
Other material should be Section 12(a)(2) free-writing. Offers may be made before
filing the registration
statement if the material is
ultimately filed as part of it.
This additional flexibility is of limited practical benefit because
the equivalent can be accomplished today by issuers having
effective shelf registrations. Current shelf registrants would be
the most likely users of this flexibility under Form B or
Schedule B. Offering information must be
filed by first sale.
Item 1(b) of
Form B (also
Discarding the present "sell, then document" process will disrupt
the multi-billion dollar capital-raising process by imposing delay.
It will in effect demolish today's shelf registration system. Free-writing must be filed.
Filing exposes free-writing to groups of potential plaintiffs for
which it was never intended, thereby unfairly expanding
potential civil liability. Also, keeping track of what has to be
filed, when and by whom would be difficult if not impossible, in
the fast-paced and flexible Form B context. The penalty for failure to file
offering information or free-writing is not limited to
Item 1(b) of
Form B and
If free-writing must be filed, or offering information remains an
inclusive concept, failure to file should not give rise to private
civil liabilities, but instead only SEC administrative action.
Otherwise plaintiffs will have a potential windfall for innocent
mistakes by offering participants. A securities term sheet must
be sent to arrive before the
This requirement will delay Form B offerings by one or two
days, and in most cases will not provide useful incremental
information. For most offerings, the information will either be
available through previous filings or communicable orally. For
novel or complex offerings, the market has already demonstrated
it will require advance disclosure of term sheet-equivalent
Forward incorporation by
reference stops at time
securities term sheet is
Item 3(b) of
Forcing the issuer to file new information as a post-effective
amendment still does not result in its delivery to the investor.
This provision also creates an incentive to delay term sheet
delivery. (Elimination of the term sheet requirement would also
resolve this problem.) Material changes disclosure
probably does not apply to
and Item 6 of
By failing to mention Form B offerings, Rule 172(e) seems to
indicate no material changes disclosure (24 hours before pricing)
is required for them. But Item 6 of Form B requires filing of any
Rule 172(e) document. The Rule should be clarified and Item 6
changed to refer to the Rule 172(a) term sheet. Each Form 10-Q and 8-K
would be considered a "new
of Reg. S-K
This does not work analytically, because neither the 10-Q nor the
8-K is a comprehensive form. Extension of the statute of
limitations (if that is the goal) should be accomplished directly
by an undertaking to that effect. A prospectus must be
constructively delivered by
dealers for 25 days after all
By extending the after-market prospectus delivery period to all
offerings, rather than just initial public offerings, the SEC will
require issuers to file post-effective amendments for material
updates for 25 days after each offering, even if not required
under the Exchange Act. The Gustafson standing problem
should be addressed directly by defining "prospectus" for
Section 12(a)(2) purposes rather than indirectly through
Rule 174. Form B's new tightened
financial eligibility criteria
would measure the new $1
million average daily trading
volume test based on U.S.
If, despite the concerns expressed above under "Form B", the
criteria are tightened, foreign issuers should be permitted to
count worldwide equity trading volume, not merely U.S. trading
volume, for purposes of this requirement. The deadline for filing
Form 20-F would be
shortened from six months to
We believe many foreign private issuers already find it a
challenge to file their annual reports on Form 20-F within 6
months, principally because of the GAAP reconciliation
requirements (even Item 17 requires significant effort, and many
issuers report under Item 18, which should be encouraged). Repeal of Exxon Capital will
eliminate stepping stone
approach for non-reporting
foreign issuers to join U.S.
Although not discussed in the Release, repeal of Exxon Capital
would presumably also repeal the Vitro line of no-action letters.
Repeal of this stepping-stone approach for non-reporting foreign
issuers to join the U.S. reporting system after a Rule 144A equity
offering would be a highly undesirable policy change. Certain foreign government
Schedule B offerings would
be permitted on-demand
Currently, a Schedule B issuer is eligible for shelf registration
(today's on-demand offerings) if it has conducted a registered
U.S. offering within the past 5 years, without regard to size of
offering. We support on-demand effectiveness to this same
extent, and therefore oppose shortening the period to 3 years and
imposing a $250 million offering size requirement. Would the existing shelf
continue for Schedule B
offerings not eligible for on-demand effectiveness?
Currently Schedule B shelf registration is accomplished under
SEC staff interpretive guidance (Release No. 33-6424 in 1982;
and Release No. 33-6240 in 1980), rather than under Rule 415.
The Release describes a narrower group of Schedule B issuers
eligible for on-demand effectiveness than are currently eligible
for shelf procedures. The Proposals do not address the
Schedule B shelf releases, so they should remain available.
(Under Rule 165 of the Proposals, Schedule B prospectus
supplements could still be utilized if filed as free-writing under
Rule 425.) We suggest this availability be confirmed if final
rules are issued. Plain English risk factors
would be required in
Schedule B registration
While Schedule B registration statements should already contain
appropriate risk disclosure within the document, it seems
appropriate to require that these risks be listed in the forepart of
the prospectus in a manner consistent with other prospectuses. The Form A safe harbor for
communications 30 days
before filing would apply to
Schedule B issuers, instead
of the more liberal Form B
Schedule B issuers eligible for Form B-type on-demand
effectiveness (i.e., seasoned issuers making large offerings, as
proposed) should also be able to use the more liberal Form B
safe harbor. Canadian issuers could no
longer use their Canadian
reporting history to make
MJDS shelf offerings in the
The Proposals require prospectus supplements to be filed by
post-effective amendment and apply the 7/3-day preliminary
prospectus delivery requirement to Forms F-9 and F-10. As a
result, only Form B (with on-demand effectiveness), rather than
MJDS Forms F-9 and F-10, could be used for shelf-like
offerings by Canadian issuers. Form B's higher financial
eligibility thresholds and U.S. reporting history requirement will
eliminate this technique for many Canadian issuers. This
unilateral pullback from MJDS seems unjustified. Signers of registration
statement must certify they
have read it.
As a practical matter, signers can only be expected to read a draft
of the main registration statement before filing, not final copies
or amendments. Their Section 11 liability is adequate to ensure
they implement good review procedures. The requirement is not
workable. Signers must also certify
absence of misstatements
and misleading statements.
Certification could create additional liability for signers vs. non-signers. This disincentive to sign undercuts Securities Act
policy. Written concurrence of
managing or principal
underwriters to effectiveness
must be filed as an exhibit.
This new requirement places form over substance and adds
another mechanical obstacle. The underwriters can protect
themselves from Section 11 liability by not participating (i.e., not
being underwriters). Final prospectuses would not
have to be delivered.
Eliminating the requirement physically to deliver final
prospectuses with confirmation is necessary as markets move to
shorter settlement cycles. Also all or most of the information
will already have been delivered and all will be available. The Exxon Capital line of
no-action letters permitting
registered exchange offers
after certain Rule 144A
offerings would be
The SEC has not taken sufficiently into account that there is
already a very substantial domestic market and practice that are
dependent on Exxon Capital for offerings of non-convertible
debt and investment grade preferred stock. Destroying this
market will raise capital costs for the nonpublic or unseasoned
issuers not eligible to use the QIB-only eligibility of Form B (or
not able to do so because sales are also made to institutional
accredited investors). Form B is available for QIB-only offerings by smaller
The threat in the Release that QIBs could be "conduits" if they
resell too soon creates uncertainty that greatly reduces the
usefulness of Form B for smaller seasoned issuers. The similar
and troublesome presumptive underwriter doctrine was
withdrawn by the SEC staff in 1983 (American Council of Life
Insurance) and should not be revived as the conduit theory.
Also, Form B availability should be expanded to include private
offerings to institutional accredited investors under
Section 4(1½), when they accompany Rule 144A offerings. New guidance would list
special factors relevant to
due diligence in offerings
marketed and priced in under
5 days and investment grade
Limiting factors-based guidance to bright-line situations is
inconsistent. The new guidance should apply to all offerings.
However, the factor requiring a research analyst to be brought
"over the wall" should be deleted. Current practices vary and the
decision should be left to each underwriter in view of the
particular offering. We also support formally extending
Rule 176 to Section 12(a)(2). Should the new Rule 176
guidance also include an
accountant's SAS 71 review
of interim financials, an
SSAE 8 report on MD&A or
an annual independent
reviewer's disclosure report?
As to SAS 71 reviews, the SEC should act directly to require
these rather than act through underwriters. SSAE 8 reports are
difficult to obtain and not a widespread practice. An annual
disclosure report appears to be impractical and unrealistic in
view of potential liability for the reporting firm or person, among
other concerns. Plain English risk factors
would be required in
and 10, and
While the substance of the risk factor disclosure should already
be reflected in periodic Exchange Act reports, it could be more
convenient for investors to look for highlights of this information
in a single section of the document. Domestic issuers would be
required to disclose selected
financial data by 8-K 30 days
after each quarter and 60
days after year-end.
Item 14 of
There are already sufficient market forces to encourage the
timely release of quarterly and annual financial information
when appropriate. Mandatory accelerated release could be
burdensome to companies that do not already do so, or could
lead to greater risk of mistakes. We believe the requirement for
an 8-K filing should be limited to those companies that otherwise
release substantially all the relevant information (e.g., it should
not be triggered only by an announcement of sales). Domestic issuers would be
required to report more
events by 8-K and to file
most 8-Ks sooner.
We question the laundry-list approach to mandatory 8-K filings
and would prefer that current market practices be allowed to
continue regarding disclosures of material corporate events.
However, the new items are not difficult to identify, so we do not
oppose them. We do believe, on the other hand, that the
accelerated timing is too tight. Instead, we suggest maintaining
the current timing. If an earlier deadline is to be imposed, we
suggest it be within one or two business days of the issuer's
public announcement of the information triggering the filing. In
any event, we recommend that Rule 12b-25 be amended also to
apply to Form 8-K filings. (The current gap seems anomalous.) Should the filing deadlines
for Forms 10-Q and 10-K be
We do not believe additional pressure, and risk of error, should
be placed on domestic issuers by mandating earlier filing of
periodic reports. We would not object to a requirement to file by
8-K any financial statements and MD&A that are otherwise
publicly distributed, as would be the case for many annual and
some quarterly reports. A majority of directors and
the CEO must sign
Forms 10-Q and 20-F and
Subjecting quarterly 10-Q reports to the cumbersome
requirement of signing by a majority of directors will jeopardize
timely filings and be virtually impossible if directors also have to
certify reading the final report. The logistics of director
signatures for foreign private issuers are often much more
cumbersome than for domestic issuers, even if limited to the
annual 20-F report. Requiring a majority of directors to sign a
Form 8-A seems extremely counterproductive. Signers of periodic reports
and Exchange Act
registration statements must
certify they have read them,
and that they contain no
material misstatements or
Regarding the reading requirement, a broad group of signers can
be expected only to read a late-stage draft of a primary
document. We believe potential liability is adequate to ensure
proper review procedures. Regarding disclosure certification,
such certification could create additional liability for signers vs.
non-signers, which is unfair and creates a disincentive to sign. A private offering would be
considered completed and
not integrated with a
subsequent public offering if
the investors are committed
and the price is not
contingent on the market
price around the time of the
We believe this safe harbor would be somewhat helpful,
although it essentially only codifies existing practice. Issuers would have a new
safe harbor if they abandon a
private offering and commence a public offering, as
long as no securities were
sold in the public offering
and certain other conditions
This proposal will allow a limited form of "testing the waters"
privately to determine whether there is sufficient demand for a
public offering. Issuers would have a new
safe harbor if they abandon a
public offering and revert to
a private offering, subject to
contractual agreement by the
issuer and any "underwriter"
to accept Section 11 and
12(a)(2) liability on the
private placement disclosure
document if the placement
commences within 30 days
of abandoning the public
This proposal will allow issuers to avoid the current situation of
being blacked out for a period from raising private capital if
market or other developments have prevented a successful public
offering. We do not support the requirement that issuers and
"underwriters" contractually accept Securities Act liability in the
private placement. The private market has long fended
adequately for itself and we believe the current practice should
be allowed to continue. If the requirement is kept, it should be
clarified that "underwriter" refers to the private placement
agent(s) and not to the proposed underwriter(s) in the abandoned
Research Safe Harbors
Also, any term sheet should not have to include pricing-related information.
General Offering Process
Repeal of Exxon Capital
Exchange Act Disclosure
Integration of Registered and Unregistered Offerings
1. Release Nos. 33-7606A; 34-5743A, 63 Fed. Reg. 67,174 (December 4, 1988).
2. Sullivan & Cromwell has extensive experience in securities transactions. We have represented issuers, underwriters and investors in securities offerings since before the enactment of the Securities Act. In the three-year period of 1996-98, we acted in SEC-registered offerings of corporate securities valued at over $150 billion (based on information maintained by Securities Data Company).
3. See Sullivan & Cromwell letter to the SEC dated October 31, 1996 commenting on Release Nos. 33-7314; 34-37480; International Series Release No. 1010 (July 25, 1996) (the "1996 Concept Release").
4. It is not clear from the Release whether Rule 430A information (which generally is determined at the time of first sale) could be omitted, but we understand the SEC intends to clarify that omission of this information would be permitted. Even excluding Rule 430A information, the filing requirement would often be at odds with market practices and needs. There often is non-Rule 430A transaction-based information that is also not determined until the time of first sale (e.g., maturity, call dates, issue size, etc.).
5. The Release implies that "road show" materials, such as videos, slides and other presentation aids, would have to be filed even if they are not handed out. Practitioners today generally consider these materials as oral, not written.
6. We expect these definitions would cause significant confusion and uncertainty. This is extremely troublesome because the Release implies that the failure correctly to identify or file offering materials could result in (i) a Section 5 violation or (ii) an unanticipated assignment of liability (i.e., to all distribution participants instead of only users of the materials). In addition, the definitions appear to produce inconsistent results. The timing of a communication, not its content, could be central to the determination of whether it is "offering information" or "free writing". For example, offering materials that had identical "required information" and were used at various times would be classified differently - the first in time as "offering information" and the remainder as "free writing" - because the "required information" in the later used material would have been filed previously. Curiously, the non-"required information" in the first communication would be part of the registration statement while analogous (but not identical) information in the later communication would not be.
7. We believe the proposed definition of "offering period" is ambiguous and would be extremely difficult to apply in practice. To know the parameters of the offering period, the distribution participants would have to identify the "first offer", which presumably would require an investigation of the activities of the issuer and all other distribution participants, including those not ultimately participating in the offering.
8. While only the user would be subject to Section 12(a)(2) liability for "free writing", the Proposals imply that a failure to file "free writing" materials as required would be a form violation and, accordingly, could provide a right of rescission under Section 12(a)(l). If such a right existed and were broad in scope (i.e., applied to all purchasers), each distribution participant would be subject to substantial liability for the "free writing" actions of each other participant. Also, investors who read the material on file may seek to bring Section 12(a)(2) claims against its creator even though they were not intended recipients or did not purchase from the creator.
9. While the Release is silent on the "stepping-stone" procedures, we presume, given the similarity to Exxon Capital procedures, that the SEC intends to eliminate them as well.
10. These liability consequences of the Proposals have been described in Part II.A.4 on page 16.
11. It is particularly troublesome that the Proposals seem to impose the severe penalty of a Section 5 violation for breach of the filing requirements.
12. H.R. Conf. Rep. No. 152, 73d Cong., 1st Sess. (1933) (The omission must "relate to the statements made in order that these statements shall not be misleading, rather than making mere omission (unless the [A]ct expressly requires such a fact to be stated) a ground for liability where no circumstances exist to make the omission itself misleading.")
13. Cooperman v. Individual, Inc., 171 F.3d 43, [Current] CCH Fed. Sec. Law Rep. ¶90,450 (1st Cir. 1999) ("Although in the context of a public offering there is a strong affirmative duty of disclosure, it is clear that an issuer of securities owes no absolute duty [under Section 11] to disclose all material information."). See also, In Re Time Warner Inc. Securities Litigation, 9 F.3d 259 (2d Cir. 1993) ("[A] corporation is not required [under Rule 10b-5] to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts."); Basic v. Levinson, 485 U.S. 224 (1988) at n.17 ("To be actionable, of course, a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5.").
14. Of course, if the information in question is material, non-public information as to which the giver of the information or the recipient has a duty implicating the disclosure principles under the Federal securities laws, the recipient should not sell the acquired security into the market or otherwise trade on that information until the information is publicly disclosed or is no longer material. Offering information that is developed by an underwriter is generally considered not to be information as to which the giver or the recipient would have such a duty. Also, some offering information communicated by an underwriter may not be material, but instead merely explanatory.
15. This delay results from the interplay of the timing of the availability of the information and the time required physically to complete the new information delivery. Transaction-dependent portions of the information will not be available until the last possible moment, yet preparing and delivering a disclosure document will take time.
16. In the alternative, the increased risk of the offering could be borne by the underwriters' positioning the securities until the delivery requirements have been satisfied and additional investors (if any) are eligible to make purchases. We expect that acceptance of this risk would be conditioned on a higher underwriting spread.
17. The vitality of the Euro-denominated market for new issues of corporate debt securities is illustrated by recent activity. Two extremely large corporate debt offerings were recently effected in the Euromarket: Olivetti's June offering of 9.4 billion (US $ 9.8 billion) and Repsol's May offering of 3.25 billion (US $ 3.4 billion). The size of these offerings rivals the largest corporate debt offerings in the United States.
18. Release Nos. 33-7685; 34-41411, 64 Fed. Reg. 27897 (May 21, 1999).
19. In the case of new issuers, we believe that Exchange Act Rule 15c2-8, which imposes a pre-sale distribution timing requirement for preliminary prospectuses, strikes the appropriate balance between the investor's need to review new disclosure and the issuer's need for flexibility. Furthermore, as a broker-dealer regulatory rule under the Exchange Act, this preliminary prospectus delivery requirement carries only potential administrative sanctions, not private Securities Act liability, for the broker-dealer that fails to comply.
20. We support the proposed extension of the safe harbors in Rules 138 and 139 to Rule 144A and Regulation S offerings. We also recommend that the safe harbors provide that the research is not a general solicitation. This would make the expanded safe harbors useful in the many Rule 144A offerings accompanied by private Section 4(1½) sales to institutional accredited investors.
21. See Loss & Seligman, Securities Regulation 1108-1110 (1989); Hazen, Treatise on the Law of Securities Regulation § 4.24 (1995).
22. As noted in Part III.A. and III.B. (on pages 31 to 33), we believe there also are serious problems with the regulation of private offerings that need to be addressed. Our suggestions for how these problems should be addressed are set forth in Parts III.A. and III.B.
23. All domestic registrants are required to file via EDGAR, and the SEC has stated its intention to require foreign issuers to file via EDGAR in the future.