April 21, 1997
Comments RE: Rule 144 Proposal (File No. S7-7-97),
Reg S Proposal (File No. S7-8-97) and
Rule 430A Proposal (File No. S7-9-97)
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Katz:
Please treat the comments in the attached March+April 1997 issue of The Corporate Counsel as this writer's additional comments on the Commission's proposed amendments to Rules 144 and 145,
Reg S, and Rule 430A, supplementing our comments in the attached January+February 1997 issue of The Corporate Counsel.
Please don't hesitate to call me to amplify on any of my comments.
Jesse M. Brill
THE CORPORATE COUNSEL
Vol. XXII, No. 2 MARCH+APRIL 1997
HIGHLIGHTS & PITFALLS
More On The Rule 144 (and Reg S and 430A) Proposals
As our readers know, the reduced Rule 144 holding periods become effective on Tuesday, April 29, at which time restricted securities held one year can be sold under Rule 144 and the paragraph (k) complete cutoff will kick in after two years. (Issuers and brokers that have not yet modified their compliance procedures may wish to re-read our March+April 1996 and January+February 1997 issues.)
April 29 also marks the close of the comment periods on the February 18 proposals to amend Reg S and Rule 430A, and further amend Rule 144. (See our January+February 1997 issue at pg 1.) And, although the Staff normally accepts late comments, readers that have not yet submitted comments should not tarry here. We get the sense that these proposals are on a fast track. And, we are concerned that, in their laudable desire to move quickly, the Staff and the Commission could be making some serious mistakes (which can easily be corrected at this stage, but would take a long while to fix after the fact, a la the long delay in fixing Reg S).
The Reg S Proposal
We like a lot the proposal to level the playing field by establishing Reg S holding periods (i.e., for reselling into the U.S. market) which are identical to the new Rule 144 holding periods. What troubles us, however, is the Staff's apparent belief that it must couple the Reg S fixes with the Rule 430A proposal, which proposal we believe requires a lot more thought.
Since the adoption of Reg S in 1990, the Commission has exposed itself to mockery by not slamming the door shut on illegal distributions cloaked in the Reg S protective umbrella. It should now take the simple step to make all unregistered sales into the U.S. market subject to the same rules. What fair-minded person could object to everyone playing by the same rules? There is no need for tradeoffs or bones here. Just action.
The Reg S proposal could and should be adopted by June, without a 430A tradeoff.
As we stated in our last issue, not only does the 430A proposal appear to provide less seasoned, more speculative issuers a way to avoid some of the important safeguards of the 1933 Act registration process (including underwriter due diligence), but it also provides an end run around the considered, deliberate approach currently embodied in Commissioner Wallman's company registration proposals. It could also reopen the door to the very abuses the Commission is trying to purge from Reg S (for domestic as well as foreign offerings).
Although the 430A proposal to permit delayed pricing, etc. appears on its face to be somewhat innocuous, in effect, it opens the door to mini-universal shelf registration for virtually all issuers. Our concern is that the very same unscrupulous persons who were pushing Reg S deals to raise capital for companies at discounts of 15 or 20% from the current market price, where the purchasers could turn around and sell their stock back into the U.S. after 40 days, would now be able to offer the same "deals" (offshore or domestically) without the need to hold the securities even 40 days. As we see it, an unseasoned company could file a registration statement, put it on the shelf, shop the deal to the same people who have been soaking up the Reg S "offshore" deals, price it at a 15% discount, and then watch those buyers turn around and immediately sell those shares into the market, without public purchasers even knowing where the shares had come from. (The only persons who would receive prospectuses in this scenario are the cadre of "investors" out there who have been gobbling up these deals.)
Needless to say, this proposal should not be on a fast track and need not be coupled with the Reg S proposal. Indeed, coupling adoption of the 430A proposals with the Reg S changes would lend an aura of legitimacy to the very practices that the Reg S amendments are intended to prevent.
The Rule 144 Proposal To Eliminate The Manner of Sale Requirement
We understand the Commission's desire not to stand in the way of progress and to permit innovative ways to sell and trade securities in the electronic age. Our concern is that, by proposing to eliminate entirely the manner of sale requirement, the Commission is going much farther than it needs to here (i.e., a carve out for electronic bulletin board transactions).
The key to why Rule 144 has worked so well over the years has been that the SEC has had an enforcer (or "gatekeeper") out there ensuring compliance, i.e., the broker. Currently, all Rule 144 sales require public sales through a broker (or to a market maker). By eliminating the need for a broker, the SEC would be (to quote one commentator who, like this writer, has been involved in Rule 144 compliance since the Rule's inception) "removing the policeman from the beat." In addition to compliance with the brokers' transaction requirements (i.e., agency trade unless market maker, and no solicitation), the broker verifies compliance with each of the other provisions of the Rule (i.e., the amount limit, holding period if restricted securities, current public information, and filing Form 144).
Having been in the trenches over the years, this writer has observed first hand how brokers prevent Rule 144 violations (not to mention Section 16 and Rule 10b-5), even where issuers have pre-clearance procedures in place for insiders. Indeed, companies (even those with pre-clearance procedures) rely on brokers to ensure compliance with Rule 144. Moreover, sales of restricted securities by non-insiders do not get caught in an issuer's pre-clearance net. Lastly, there are still many companies (especially less seasoned, more speculative companies) with no pre-clearance requirements.
If the broker/gatekeeper is removed, we can foresee a much greater incidence of violations discovered after the fact (when the legended shares reach the transfer agent) that issuers and counsel will now have to deal with. And, we foresee a greater amount of time spent by companies verifying Rule 144 compliance, including establishing burdensome new procedures such as legending all affiliates' stock. We can even foresee a new Rule 144 compliance cottage industry developing.
[Eliminating Form 144. Lastly, our cost (and tree) saving suggestion to (a) eliminate Form 144 for sales of restricted securities by non-affiliates, and (b) consolidate Forms 4 and 144 for sales by affiliates (see our January+February 1997 issue at pg 4) would not be viable without a gatekeeper. Anyone who observed the pre-Rule 144 (old Rule 154) compliance situation would confirm that the filing of Form 144, by exposing transactions to sunlight and scrutiny, has meant that violations could no longer be swept under the rug and ignored. Without a gatekeeper, it would be necessary to maintain the Form 144 filing requirement in order to maintain any semblance of compliance.]
As another consequence of elimination of the manner of sale requirement, sellers and middlemen (including those who will soon be looking for a new venue once the door is slammed shut on their Reg S business) would be permitted to solicit buyers. And, sellers could make extraordinary payments to these new facilitators of 144 sales. In short, Rule 144 sales are not supposed to be "distributions," but there would no longer be the safeguards and proscribed activities in place to prevent distributions.
We are also concerned that, in attempting to keep up with modern trading and hedging techniques, the Staff and Commission may be falling victim to our very bright, very creative brethren in the securities business who are creating transactions that, in effect, accomplish the very same ends that the securities laws are intended to prevent.
Rather than being swayed by semantics, the Staff and the Commission need to stand up and say: If a person subject to Rule 144 engages in a transaction with a counterparty that in turn results in a transaction by the counterparty in the market place, that open market transaction should be subjected to the very same requirements that would apply if the person subject to Rule 144 had directly engaged in the open market transaction. Thus, Rule 144 should apply to counterparties' sales.
Our Tough-Love Stances
Unfortunately these days, too many of us are constrained by relationships with constituents or clients to speak up for what is right. In the end, although short-term interests may be served by taking wrong positions, the long-term integrity of the markets is dependent on taking the right position even when it may be against our immediate self interest. For our part, we will always call it like it is.
We urge our readers who haven't already done so to send comments to the Staff. In addition to mailing comments, comments can now be e-mailed directly to the SEC at: email@example.com. And, those e-mailed comments are posted on the SEC's Web site (www.sec.gov) at the Proposed Rules page (click on the parenthetical statement that electronic comments "are available").
Staff Takes Favorable Position Facilitating Electronic Road Shows
As many of our readers know, between the filing date and the effective date of a 1933 Act registration statement, offers constituting a "prospectus" may be made only via the filed (preliminary) prospectus. And "prospectus" includes, in addition to any written communication, a communication by radio or television. (See §2(10) of the 1933 Act.) Thus, it is important that road shows (which drum up institutional and broker interest in an offering) stay within the confines of oral and visual presentations that would not be considered a prospectus.
The Staff recently issued a no-action letter taking the position that it would not treat as a "prospectus" the private transmission of a road show presentation to a financial network's subscribers, at least under the facts presented in Private Financial Network (March 12, 1997, not reported to date in CCH). The request letter contains an excellent description of road shows.
The Staff's position (which apparently concurred with the position in the request letter distinguishing private transmissions from broadcasting) contained several conditions:
We can envision the number of brokers attending a road show growing exponentially where, instead of having to leave one's desk to attend the meeting, one can attend via a video or computer terminal. [Where it is contemplated that road shows will be disseminated electronically, counsel will need to focus on whether there should be specific undertakings in the underwriting agreement.]