January 28, 2005
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: File No. S7-38-04: Securities Offering Reform
Dear Mr. Katz:
Brinson Patrick Securities Corporation ("Brinson Patrick") appreciates the opportunity to comment on the proposed rules and rule amendments (the "Proposed Rules") contained in SEC Release No. 33-8501 (the "Release"), that would modify a variety of registration, communications and offering rules and procedures under the Securities Act of 1933.
Brinson Patrick is the investment banking affiliate of Brinson Patrick Capital Management, Inc. which was formed in 1993. Brinson Patrick focuses exclusively on providing continuous equity capital raising services to established public issuers. Our program helps these companies and their shareholders access the equity markets more efficiently, with lower overall cost, with limited market impact and reduced earnings dilution by allowing them to sell shares over time, as they need the capital.
We have read with interest the changes proposed to be effected by the Proposed Rules. Generally, we support the changes contained in the Proposed Rules.
We have the following specific comments regarding the Proposed Rules:
1. The Release describes a new category of issuer, referred to as a "Well Known Seasoned Issuer" ("WKSI"). Achieving status as a WKSI is potentially important to an issuer, as (for example) that status enables the issuer to take advantage of the automatic effectiveness for certain shelf registration statements (see below).
While we support the establishment of this new category of issuer, we believe that the standard set forth by the SEC for inclusion in the category ($700 million of public float) is too limited. We agree that public float can be used as a proxy for whether an issuer has a demonstrated market following; however (as the SEC noted in the Release), it should not be viewed as the exclusive determinant of this fact. For example, the proposed public float standard gives significant weight to the market price of an issuer's securities and the number of securities in the public's hands, while underweighting the period of time an issuer has been publicly reporting and essentially ignoring the volume of trading in the issuer's securities.
We believe, for example, that another way of filtering public companies to arrive at those that have a strong public following is through a combination of (i) the period of time that the issuer has been a reporting company; (ii) the public float of the company and (iii) the trading volume of the stock of the company. These are criteria that have long been used to entitle issuers to use the Form S-3 short registration form. (In fact, the Release itself notes that trading volume is a useful indicator of "the scrutiny that an issuer receives from the market...." (Release text at footnote 45)).
We propose that as an alternative to the WKSI standard contained in the Release, the following standard be considered for adoption: minimum float of $150 million; minimum period as a reporting company of 36 months; and common equity having an average daily trading volume of at least $1 million (computed in a manner consistent with the computation of "ADTV" under Rule 100(b) of Regulation M). The foregoing standard is consistent with the standard for excepted securities under Rule 101(c)(1) of Regulation M, and incorporates additionally the three-year reporting period contained in Form S-3 prior to the modification of those standards effected in 1992. The standards are also consistent with the requirements to use Form S-3 under the more stringent, pre-1992 standard.
Our proposal is that a company could satisfy either the $700 million float test or the alternative standard described above in order to be characterized as a WKSI.
2. The Proposed Rules provide that information in prospectus supplements is to be deemed part of, and included in, the registration statement. We believe that this requirement could negatively impact the capital raising process, since it will impose Section 11 liability on information in prospectus supplements that, at the present time, is not subjected to such liability.
3. Similarly, creating a new effective date for shelf registration statements for liability purposes in connection with shelf takedowns will add to the cost of capital formation, since it will impose Section 11 liability on underwriters and issuers where such liability does not exist.
4. We support eliminating restrictions on "at the market" offerings. In particular, we support eliminating the 10% float limitation on conducting at the market equity offerings. In addition, we support eliminating the requirement that the underwriter of an at the market equity offering be named in the registration statement. Both requirements impose artificial burdens on capital formation, with no counter-veiling benefits.
5. We support the new provisions enabling automatic effectiveness of shelf registrations for WKSI issuers. We believe this is a significant enhancement to the capital formation process. As discussed above, we believe that this benefit ought to be made available to a broader range of companies that have demonstrated (through the criteria defined above) that they have a significant market following over an extended period of time.
6. We support the new requirement that "access equals delivery" for purposes of fulfilling prospectus delivery obligations. We believe that it recognizes the current broad availability of information in a prospectus over the internet.
Similarly, we support the proposal to expand the availability of Rule 153 to cover transactions effected through NASDAQ and alternative trading systems.
7. Further, we believe that the new prospectus notification provisions contained in proposed Rule 173 should be clarified by providing (in the Rule or in the adopting release) that compliance with Rule 153 will be deemed compliance with Rule 173.
We believe that this was probably the intent of the SEC when it drafted Rule 173. One means of satisfying Rule 173 is delivery of the final prospectus, and Rule 153 provides a means by which the final prospectus is deemed to have been delivered. In any case, where a buyer is purchasing securities through an impersonal exchange or other matching or execution mechanism, the seller of securities would not be in a position to identify the buyer for notification purposes.
Please direct any questions you may have about our comments to Todd Wyche of Brinson Patrick at 212-453-5000 or Stephen Schultz of Kleinberg, Kaplan, Wolff and Cohen at 212-986-6000.
BRINSON PATRICK SECURITIES CORPORATION