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U.S. Securities and Exchange Commission

Division of Corporation Finance:
Summary of SEC Proposals
To Reform the Offering System

June 2, 1999

The Securities and Exchange Commission regulates offerings of securities to the public. Our main mission is to protect investors. Investors who benefit from our rules and oversight range from the biggest institutions to individual investors.

In the last several years, we have been reviewing whether we could improve our regulation of securities offerings, both to protect investors better and to enhance efficiency in the system. After several years of study, we released a long, complicated set of proposals last November. A complete description of the proposals is in SEC Release No. 33-7606A. We have asked anyone interested in any or all of the proposals to comment by June 30, 1999.

To make the proposals easier to follow, we have drafted this summary of the key proposals. To ask questions or get more information about the proposals, please call Anita Klein or David Maltz at 202-942-2980 of the Division of Corporation Finance.

Table of Contents

I. Introduction to the Proposals
II. Registration of Offerings
A. Goals of Our Proposed Changes to the Current
Registration System

1. Attracting Offerings to the Registration System
2. Easing Registered Sales to the Most
Sophisticated Investors
3. Informing Less Sophisticated Investors About Less Familiar Companies
4. Ensuring registration protections
B. Implementing the Goals Through SEC Registration Forms
1. Form A
a. Who Would Register on Form A?
b. How Would Form A Change Current Registration?
i. Disclosure Presentation in Form A
ii. Changes to Who May Use Short-Form and Delayed Shelf Registration
iii. Timing of Effectiveness for Form A offerings
2. Form B
a. Who Would Register on Form B?
i. Offerings Made by Closely-Followed Companies
ii. Offerings Made Only to QIBs
iii. Offerings Made Only to Existing Security Holders
iv. Non-Convertible Investment Grade Securities
b. How Would Form B Change Current Registration?
i. Timing and Effectiveness for Form B offerings
ii. Disclosure about The Offering in Form B
iii. Delayed Shelf Offerings on Form B
iv. Disqualification From Form B
v. Secondary Offerings
3. Eliminating Exxon Capital Exchange Offers
4. Small Business Issuers
a. Definition of Small Business Issuer
b. Incorporation by Reference
c. Delay payment of the Filing Fees
5. Foreign government issuers
III. Communications
A. Goals of the Communications Proposals
B. Implementing the Goals Through Communications Rules
1. Offers in the Pre-Filing Period
a. Bright-Line Communications Safe Harbor
b. Exemption for Form B Offerings
c. Exemptions for Other Offerings
i. Factual Business Communications
ii. Regularly Released Forward-Looking Information
2. Written Communications During the Waiting Period
3. Written Communications During the Pre-Filing Period for Form B Offerings
4. Communications with Respect to Foreign Government Issuers
5. Research Reports
a. Publications by a Broker or Dealer That Is Not Underwriting a Company's Distribution of Securities
b. Publications by a Broker or Dealer About Securities Other Than Those It Is Selling
c. Publications by a Broker or Dealer Distributing Securities
d. Unregistered Offerings
IV. Prospectus Delivery
A. Goals of the Prospectus Delivery Proposals
B. Implementing the Goals Through Prospectus Delivery Rules
1. Delivery of Preliminary Prospectus Information
a. We are considering Multiple Proposals for Form B Offerings
b. Registered Offerings Not on Form B
2. Final Prospectus Delivery Exemption
3. Foreign Government Issuers
a. Foreign Government Issuer Registering for the First Time or Within One Year of Registering for the First Time
b. Foreign Government Issuer Registering More Than One Year After Registering for the First Time
4. Prospectus Delivery in the Aftermarket
V. The Role of Underwriters
A. Goals of the Due Diligence Proposals
B. Implementing the Goals Through Rule Guidance
1. Underwriter Liability in Quick Offerings
2. Investment Grade Debt Offerings
VI. Proposals Relating to Exchange Act Periodic Disclosure
A. Goals of the Exchange Act Proposals
B. Implementing the Goals Through Exchange Act Rules
1. Annual and Quarterly Reports
2. Material Event Reports on Form 8-K
a. Timely Disclosure of Annual and Quarterly Results
b. Expanding Disclosure; Shortening Due Dates
3. Signatures
4. Plain English in Exchange Act Reports
VII. Integration of Registered Offerings and Unregistered Offerings

 

I. Introduction to the Proposals

Generally speaking, our proposals affect five aspects of the federal securities laws:

The registration system

Our proposed registration system extends many of the flexibilities traditionally associated with private offerings to many registered offerings. This would primarily benefit publicly held companies that have made information available to the public for a year. We believe this system would encourage more companies to make public offerings while maintaining the level of investor protection afforded by the current registration system.

Communications around the time of the offering

We propose to lift all of the current restrictions on communications around the time of an offering by many public companies. We would not apply restrictions if the companies have been public for a year and they are closely-followed by the market or are selling only to sophisticated or informed investors. We believe that in those offerings a company's ability to inappropriately "condition the market" is limited. For other offerings, we would lift some communications restrictions and clarify the scope of other restrictions. For all offerings, we would allow the use of selling documents other than the prospectus.

Prospectus delivery requirements

We propose to require companies and their underwriters to deliver prospectus information to investors when they need it most: before their investment decisions.

Timing and contents of Exchange Act reports

We propose to shorten the amount of time public companies have to file reports about significant events that occur and reports containing basic information about quarterly and annual financial results. This would help ensure that current information about companies is publicly available as soon as possible. We also would require some additional information in public companies' annual and quarterly reports.

The integration of public and private offerings

Currently, a company must choose at the outset whether to offer securities publicly or privately. Once that decision is made, it is not easy to switch without running afoul of the federal securities laws. We propose rules that would allow companies to convert a private offering to a public offering, or vice versa, in response to changing market conditions. This flexibility also would permit companies considering offerings to make contact with potential investors to ascertain interest ("test the waters"), while maintaining investor protection.

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II. Registration of Offerings

Registration involves providing up-to-date disclosure about a company and its offering to the SEC and investors. Before the company sells its securities, the SEC staff may review that disclosure and request changes to it or additional information.

A. Goals of Our Proposed Changes to the Current Registration System

The SEC has four main goals in proposing changes to the registration system:

  • make registered offerings a more attractive alternative to companies as compared to unregistered offerings;

  • streamline registration requirements when companies are selling securities to the most sophisticated investors;

  • add investor protections in offerings made to less sophisticated investors by companies that are not closely-followed by the markets; and

  • ensure that the investor protections contemplated by the registration system apply in all registered offerings.

1. Attracting Offerings to the Registration System

When offering securities, a company may choose to make a public registered offering or a private unregistered offering. When companies and their underwriters make unregistered offerings, it is often because they are uncertain about how long it will take to complete the registration process with the SEC.

Through our proposed changes to the registration system, we aim to extend the timing flexibility typically associated with private offerings to many public offerings. This would encourage companies to raise capital in the public markets without compromising the quality of information available to investors. In addition, we hope to encourage more registered offerings because:

  • the disclosure is subject to a higher standard of quality;

  • investors receive securities they may trade freely;

  • investors have remedies to get their money back more easily in the event the disclosure is false or misleading;

  • individual investors get to participate more often in registered offerings;

  • registration lowers companies' cost of capital;

  • registration benefits the marketplace by increasing depth and liquidity; and

  • registration allows everyone to access the most current information about the company and the offering.

2. Easing Registered Sales to the Most Sophisticated Investors

Under the current system, we streamline registration for companies offering securities to more sophisticated investors only to a limited extent, and mostly for debt securities. Our proposals would recognize that those investors, while still deserving of basic registration protections, have greater capabilities to access and analyze information and more investment experience. When registration protections are in place, we therefore would allow companies to move through the registration process without delay when offering securities exclusively to the most sophisticated investors. This treatment would allow most public companies, regardless of their size, to sell registered, freely tradeable securities to larger institutions more quickly and easily than they can today.

3. Informing Less Sophisticated Investors About Less Familiar Companies

For over a decade, we have allowed more streamlined registration for companies that are the most closely-followed by the market and for whom the market is very efficient. Under those conditions, our position has been that the companies and their underwriters need not deliver historical information about these companies to investors during an offering. These companies file their historical information with the SEC and we assume that investors already have a general awareness of it. We also have reserved to these companies the ability to delay preparing, filing and delivering written information about an offering when selling any kind of securities.

As markets change, so do the characteristics of those companies that are most closely followed. We therefore propose new tests to distinguish between companies that are most closely followed by the markets and those that are not. Based on our research and experience, we would raise the thresholds that determine which companies are eligible for some of the streamlining benefits. The changes would ensure that less sophisticated investors get the information they need about companies that are not as closely followed by the markets.

4. Ensuring Registration Protections

We propose two changes to ensure that the investor protections contemplated by the Securities Act registration system apply in all registered offerings. First, under the current system, companies may sell securities with no written disclosure given to investors before they agree to invest, and no filing of that disclosure with the SEC until as long as two business days after the securities are priced. These "delayed shelf offerings" are the only registered offerings where the company need not file specific information about the offering with the SEC before selling the securities. Under the proposals, we would require filing no later than the day of the sale. This change would get the information about the offering to the market faster and also allow those who have just purchased the securities to see it sooner. In order to file on time, companies and their underwriters would have to act more quickly in preparing that disclosure.

The second proposed change to ensure investor protection addresses a group of SEC staff letters issued in the late 1980s and early 1990s. Those letters allow companies in a number of offerings to, in effect, register the offering after it already has taken place. As a result of these "Exxon Capital offerings," the investor protections inherent in the regulatory structure may be compromised. By withdrawing the letters but allowing expedited registration, we would ensure that many of the companies relying on those letters today would still have the timing advantages that leads them to do so.

B. Implementing the Goals Through SEC Registration Forms

Our current registration system for public offerings has four main forms for domestic companies and four main forms for foreign companies. We propose to replace all of those with Forms A, B and C. Companies would use Form C for business combinations and exchange offers. Form C would require substantially the same information as currently required for those transactions. We do not focus further on Form C in this summary. Companies would register capital-raising offerings on Form A or Form B.

1. Form A

a. Who Would Register on Form A?

Form A would be the entry-level form for registration. Companies would use this Form for all initial public offerings ("IPOs") and all offerings within 1 year of their IPOs. Smaller companies offering securities not rated "investment grade" by a recognized rating agency also would register on Form A if selling to less sophisticated investors.

b. How would Form A Change Current Registration?

There are three main changes that we would make to the registration system that currently applies to these companies:

i. Disclosure Presentation in Form A

Companies may present disclosure somewhat differently than in similar registered offerings today. Rather than presenting all information to investors in prospectuses, more companies could use two documents: the prospectus and the company's annual report that it previously prepared. In general, we would allow companies to do this a year earlier than allowed today. This change would save more companies the time and cost of putting into the prospectus the information that is already in the annual report.

Companies using this technique would incorporate the annual report into the prospectus by stating in the prospectus that investors can find information about it in its Exchange Act reports. Under the proposals, a company may incorporate by reference if it:

  • has been subject to the Exchange Act reporting requirements for 24 months;

  • has filed all reports due in the last 24 months;

  • has been timely in filing its reports for the last 12 months; and

  • either:
    • has a public float of $75 million; 1 or
    • has filed at least two annual reports.

ii. Changes to Who May Use Short-Form and Delayed Shelf Registration

The SEC currently allows a company to use "short-form" and "delayed shelf" registration only if it is demonstrated that the company is closely followed by the market and the market operates very efficiently with respect to disclosure by that company. "Short-form" registration is when a company incorporates by reference into its registration statement the annual and quarterly reports it has filed already and updates the registration statement by incorporating reports it files after the effective date. "Delayed shelf" registration is when a company files a generic registration statement that describes in general terms a range of possible offerings it might make. The delayed shelf registration statement becomes effective, the company incorporates subsequent Exchange Act reports, and after an offering has taken place it files a supplement to the registration statement describing that offering.

Recent research by our economists casts doubt on whether a close market following and a very efficient market exist for some companies that are currently automatically eligible to use short-form and delayed shelf registration. In order to ensure that less sophisticated investors receive information in offerings when they need it, we therefore have placed some offerings by those companies on Form A. Our proposals would limit when approximately 1,400 currently eligible companies could automatically use short-form and delayed shelf registration on Form B. 2 Those companies could still use short-form and delayed shelf registration when they are:

  • selling investment grade securities;

  • selling only to QIBs (Qualified Institutional Buyers); or

  • selling only to existing shareholders.

Those companies would register other offerings on Form A, which would not permit delayed shelf or short-form registration but which would allow incorporation of their past Exchange Act reports, as noted above.

iii. Timing of Effectiveness for Form A Offerings

Only after the SEC declares a registration statement "effective" may a company sell its securities. We do so only after screening the registration statement and, in some cases, fully reviewing it. This can cause timing difficulties for companies and their underwriters because of uncertainties and delays inherent in the SEC review process. Companies and their underwriters seek the ability to control the timing of sales both for practical planning purposes and to control their risk. The significant increase in the number of private offerings made in recent years evidences how important timing is to companies and their underwriters..

If adopted, the proposals would, for the very first time, allow a number of companies to have the timing flexibility they seek in registered offerings. On Form A, a company could specify when its registration statement becomes effective if it:

  • has been subject to the Exchange Act reporting requirements for two years;

  • has filed all reports due in the last two years;

  • has filed its reports on time for the last year; and

  • either:
    • has a public float of at least $75 million; or
    • has filed at least two annual reports and the SEC staff has reviewed the Exchange Act annual report that it incorporated in the Form A.

Those registration statements would not be subject to prior review by SEC staff. The staff would screen them shortly after receipt to check that the company was eligible for that benefit and to monitor for indications of violations of the antifraud provisions of the federal securities laws.

2. Form B

Form B is the easiest, fastest registration mechanism proposed by the SEC. It would permit immediate registration of offerings upon the company's and the underwriter's request. Form B could be used for any offering by a closely-followed company or for any company's offering to more sophisticated or informed investors

a. Who Could Register on Form B?

All companies must meet four general requirements and one of five specific requirements to use Form B. The general requirements are:

  • it must have been subject to the Exchange Act reporting requirements for at least one year;

  • it must have filed all reports due in the last year;

  • it must have filed its reports on time for the last year; and

  • it must have filed at least one annual report.

The specific requirements are:

i. Offerings Made by Closely-Followed Companies

A company could register any type of offering on Form B if it has either:

  • a $75 million public float and an average daily trading volume (ADTV) of $1 million; or

  • a $250 million public float.

ii. Offerings Made Only to QIBs

Any company may use Form B to offer any type of securities only to QIBs. If any company is making an offering only to this type of investor, it may use Form B. It may offer any type of securities. Dealers and investment advisers, since they generally do not invest for their own account, would not be eligible to purchase as QIBs in this type of offering on Form B. That restriction would not, however, prevent a dealer from acting as the underwriter for a company offering securities only to QIBs.

iii. Offerings Made Only to Existing Security Holders

Any company may use Form B when making an offering only to persons that currently own that company's securities in the following transactions:

  • a dividend or interest reinvestment plan;

  • a direct stock purchase plan;

  • a rights offering;

  • a conversion of outstanding convertible securities;

  • an exercise of transferable warrants; and

  • an offering of securities upon exercise of outstanding transferable options.

iv. Offerings of Non-Convertible Investment Grade Securities

Any company may use Form B if it is issuing securities that it expects a recognized rating agency to rate as investment grade by the time of sale. Those securities may not by their terms be converted into or exchangeable for securities that could not themselves be registered on Form B.

v. Market-Making Transactions

A broker-dealer that makes a market in the securities of a reporting company that is affiliated with it may use Form B to register those ordinary market-making transactions.

b. How Would Form B Change Current Registration?

i. Timing and Effectiveness for Form B Offerings

As noted above, companies and underwriters seek to control the timing of their offerings. Unlike today, we would allow them to do so for all offerings on Form B. Form B becomes effective at the company's and underwriter's discretion. They may choose to have it become effective:

  • immediately on filing;

  • on a date they specify when they file the registration statement; or

  • on a date they specify in a later amendment.

The SEC staff would not review these filings before effectiveness. Shortly after receipt, the staff would screen them to check that the offering was eligible for registration on Form B and to monitor for indications of violations of the antifraud provisions of the federal securities laws.

ii. Disclosure About the Offering in Form B

In Form B, we may give companies and underwriters greater flexibility in drafting the transactional disclosure if we determine that to do so would not compromise the quality or completeness of the information. We propose two alternatives as to what transactional disclosure a company must include in its registration statement. The first proposal would require the company to include some of the currently required items of transactional disclosure, but require other currently required items only if that disclosure is material. Under this approach, we hope that issuers and underwriters would tailor the information to the transaction. The second proposal would require the company to disclose all of the currently required items of transactional disclosure. Under either alternative, the company would file all offering information used by it or on its behalf during the "offering period". 3

iii. Delayed Shelf Offerings on Form B

Companies could continue to register delayed shelf offerings under the proposed system. Any company eligible to use Form B that finds it most convenient to place generic disclosure on file and supplement it with specific transactional disclosure could do so. In a non-shelf Form B offering, however, a company could skip filing the generic prospectus that starts a delayed shelf today and instead file a prospectus containing the relevant transaction disclosure at the time of the sale. Under that approach, the company also would benefit from not paying the filing fee until the time of sale, rather than paying a fee at the outset for the entire amount of the delayed shelf. Based on the flexibility of non-shelf Form B registration, we do not believe that as many companies would choose to set up a delayed shelf registration statement.

For those who choose to use a delayed shelf registration statement on Form B, the proposals also would change in two ways how information about each offering from the shelf is filed with the SEC. First, the proposals would speed up the filing in order to get information to investors and the market sooner. As proposed, the company would file the information pertaining to each offering from the delayed shelf on the day of sale. Today, a company generally need not file that information until two business days after pricing. Because of the late due date, companies often do not even ask their lawyers to begin drafting the offering disclosure until the buyers have agreed to purchase.

Second, the company would have to file the information about the offering as an amendment to the effective registration statement rather than as a supplement to the prospectus. This change would clarify that the information about the offering is subject to the highest standard of quality under the federal securities laws. That standard is the same one that investors rely on as applying to filed information about all other registered offerings.

iv. Disqualification From Form B

As proposed, some events and circumstances would disqualify otherwise eligible companies from registering on Form B. The disqualifications are based on criteria to distinguish whether the company is one that is financially troubled, is likely to be a potential vehicle for fraud, was a past violator of federal securities laws, or failed to comply in the past with the SEC's request to amend its Exchange Act periodic reports.

Form B would provide a great deal of freedom and flexibility to companies using it. When a company meets the profile set forth in the disqualifications, we believe investors may need the additional protection that comes with selective review by the SEC staff. In addition, we believe investors may need to have past and current information about the company placed within the prospectus, rather than included in other documents. We therefore would apply the same disqualifications with respect to companies' ability to choose their effective date or incorporate by reference on Form A.

v. Secondary Offerings

Today, a company of any size may register a secondary offering (an offering of securities by persons other than the company) using short-form and delayed shelf registration. Under the proposals, we would treat secondary offerings the same as primary offerings. Those companies that satisfy any of the previously discussed Form B requirements would be eligible to use Form B for secondary offerings. We propose that change for several reasons. First, we are concerned that investors need the same disclosure to make an investment decision whether the offering is a primary offering by the company or a secondary offering by others. If a company does not meet the Form B eligibility requirements for selling its securities, it therefore could not use Form B for others' sales of those securities. In addition, we are concerned that allowing secondary offerings on a simpler registration statement has created an opportunity for companies to create sham secondary offerings in order to get the benefit of using this registration statement.

We recognize, however, that we have permitted secondary offerings to use short-form and delayed shelf registration for a number of years. We therefore have asked for comment on whether we should allow secondary offerings on Form B.

3. Eliminating Exxon Capital Exchange Offers

Interpretative letters from the Commission on Exxon Capital exchange offers (named after a letter given to that company) allow companies to sell certain securities in a private offering and shortly thereafter register an offering of substantially identical securities in exchange for those securities privately placed. We propose to eliminate these interpretive letters because they can be used to evade the registration protections given to investors under the Securities Act.

Our proposals would create a registration system that captures the speed and flexibility associated with private offerings while retaining the benefits of registration for investors. Delays associated with registration would no longer exist for Form B offerings, and for numerous Form A offerings, since they would not be subject to staff review. Even smaller companies would be able to use Form B to register a QIB-only offering, provided that they have been reporting for one year. Thus, these companies would not need the Exxon Capital exchange offer to reach their goals of speed in the transaction and securities that are freely tradeable. For companies that have been reporting for less than one year, we would allow them to register investors' resale of the securities they bought privately, just as we do in all other cases today when investors in private offerings want to be able to trade freely. While this type of registration is less convenient for the company, it allows institutional investors to freely resell the securities.

4. Small Business Issuers

These companies would continue to use the small business registration forms. However, we have designed a handful of proposals specifically to aid smaller companies' capital formation and their transitions to public companies. The three most important ones are as follows:

a. Definition of Small Business Issuer

In light of their size and limited resources, small companies currently may register and report under the federal securities laws using a somewhat simplified disclosure system available only to "small business issuers." We propose to allow more companies to use that system. Currently, we define "small business issuer" as a U.S. or Canadian issuer that has less than $25 million in revenues and has a public float of less than $25 million. We propose to adjust this definition to increase the revenue threshold from $25 million to $50 million and eliminate the public float requirement. The change would allow roughly the same percentage of public companies to qualify as when we originally implemented the system.

b. Incorporation by Reference

We would allow a small business issuer to incorporate by reference under the same criteria used in Form A. We do not currently permit these companies to incorporate by reference in small business registration statements.

c. Delay Payment of the Filing Fees

We propose to permit companies filing small business registration statements to delay payment of the filing fee until shortly before effectiveness. We recognize that these companies often face substantial liquidity problems due to their smaller size, and that the cost of preparing and filing a registration statement is a relatively expensive endeavor. We believe the delay in payment of the filing fee would give these companies extra time to generate funds for these expenses and allow them to pay only the fee on the securities they will actually sell.

5. Foreign Government Issuers

We propose to permit some foreign governments that file registration statements to designate the date and time of the effectiveness of their registration statements, similar to Form A and Form B companies. To be eligible, the foreign government issuer must have registered an offering under the Securities Act within the three most recent years and be registering a firm commitment underwritten offering of at least $250 million.

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III. Communications

A. Goals of the Communications Proposals

We want to allow more communications between companies and investors around the time of a registered offering so that investors have as much information as possible before making an investment decision. Overall under the proposals, companies and underwriters would have much greater freedom to communicate with investors and the public at that time. In addition, underwriters would have greater freedom to continue to publish research around the time of an offering.

B. Implementing the Goals Through Communications Rules

1. Offers in the Pre-Filing Period

The current rules under the Securities Act prohibit a company from making any offers (or sales) of securities before filing a registration statement. 4 Currently, uncertainty as to whether the SEC will, in hindsight, view communications made during this pre-filing period as illegal offers may have led to a greater chilling of company communications than is necessary for investor protection. This uncertainty also creates complications for those planning the capital-raising process. For these reasons, we propose several rules to encourage free communications with investors and provide companies with more certainty about their communications during this period.

a. Bright-Line Communications Safe Harbor

First, we propose to establish a bright-line communications safe harbor for communications made far in advance of sales. The safe harbor would cover all communications made by or on behalf of any company at certain times during the pre-filing period, depending on which Form the company filed. In Form A offerings, we would not treat as an "offer" any communication made more than 30 days before the company files the registration statement. In Form B offerings, we would not treat as an "offer" any communication made before the "offering period" commences.

The safe harbor would have the effect of ensuring sellers that civil liability provisions that currently apply to offers would not apply to the communications covered by the safe harbor. We would condition the safe harbor for Form A offerings on the company, the underwriter and any participating dealer taking reasonable steps, within their control, to prevent further distribution or re-publication of the communication during the 30-day period.

b. Exemption for Form B Offerings

For Form B offerings, we also propose an exemption from the prohibition on offers prior to filing a registration statement. Thus, the company and underwriters would be able to market the securities before filing Form B. They would be able to communicate with investors at any time. This proposal would allow dealers to make offers to buy the securities at any time, and allow companies and underwriters to make offers to sell to dealers at any time.

c. Exemptions for Other Offerings

In offerings registered other than on Form B, communications in the 30 days immediately prior to filing a registration statement would still be potential offers. We would maintain the
30-day period because we would not assume that investors would be familiar with, or have available to them, plentiful, well-publicized information about smaller companies or companies that have not been filing public reports for long. Some types of company communications should nevertheless be allowed during those 30 days. We propose two new exemptions from the restrictions on offers that describe permitted communications.

i. Factual Business Communications

First, we seek to encourage the continuation of factual communications about the company to public investors during this period. Those communications are less likely to hype the markets, and material information should flow to the markets. We therefore propose to exempt any factual communications about the company from the restriction on offers during the 30-day period. We would define these communications broadly, and would generally include communications such as advertisements of the company's products, dividend notices and earnings announcements for past fiscal periods. Factual business communications would not, however, include forward-looking information. It also would not include information about the offering itself, although we propose to revise rules to specifically allow companies to correct inaccurate accounts or misstatements about their offerings.

ii. Regularly Released Forward-Looking Information

Second, in offerings by reporting companies, we would exempt communication of forward-looking information during the 30-day period if it is information that the company regularly releases. The forward-looking information would have to be consistent in time, manner and form as what the company ordinarily released in its last two fiscal years.

2. Written Communications During the Pre-Filing and Waiting Periods

The waiting period is the period between the filing of the registration statement and its effectiveness and distribution of the final prospectus. Under the current rules, offers in writing, by radio or by television during this period must contain the information that is found in the preliminary prospectus. Person-to-person oral offers are allowed and, unlike widely disseminated communications, do not have to satisfy the prospectus information requirements.

We believe that the waiting period should be a time of open dialogue between the company and its potential investors. We therefore propose to allow companies to make offers during the waiting period in any form without requiring that each communication meet the preliminary prospectus information requirements. This change would benefit companies, underwriters and investors. Companies and underwriters would be permitted to distribute written sales materials that they could not distribute to investors today. We call this "free writing." Investors would have the benefit of seeing sales documents that are tailored to address particular aspects about which they want information.

Under the proposals, all companies could engage in free writing during the waiting period if they:

  • comply with the proposed preliminary prospectus delivery requirements;

  • file the written or broadcasted free writing materials 5 with the SEC so that all investors have access to them; and

  • file a final prospectus, excluding pricing information, before the first sale.
Because companies making Form B offerings could begin their offering prior to filing, we propose to allow free writing in those offerings at any time under the same conditions applicable during the waiting period. They would file the free writing used before they filed the Form B at the same time as filing Form B.

Communications Proposals
Current rules
Pre-filing period
  • No "offers" are permitted.

  • Companies are uncertain whether the SEC will view communications they make during this period as an illegal "offer" and therefore chill company communications.
Waiting period
  • Offers in writing, by radio or by TV during this period must contain the information that is found in the preliminary prospectus. "Free writing" is therefore not allowed.

  • Person-to-person oral offers are allowed and, unlike widely disseminated communications, do not have to satisfy the prospectus information requirements.
Proposed rules
  Form A

More than 30 days before the company files the registration statement

  • Any type of communication is allowed.
  • The company, underwriter and dealer must take reasonable steps to prevent re-distribution of the communication during the 30 days before filing.
  • Communications are not "offers;" thus, no civil liability attaches.

During the 30 days before the company files the registration statement

  • Factual business communications are allowed.
  • Forward-looking information is allowed if it is the type of information the company regularly releases at that time.
  • Limited notice about the offering is allowed under Rule 135.

After the company files the registration statement
A company may use free writing in any form, so long as:

  • the company complies with the proposed preliminary prospectus delivery requirements;
  • files the written or broadcasted free writing materials with the SEC; and
  • files a final prospectus, excluding pricing information, before the first sale.
  Form B

Before the offering period begins

  • Any type of communication is allowed.
  • Communications are not "offers;" thus, no civil liability attaches.

During the offering period

  • Any type of communication is allowed.
  • Company and underwriter may offer to sell.
  • Dealers may offer to buy.
  • Free writing may be used at any time before or after filing a registration statement.
  • Free writing materials must be filed with the SEC.

3. Communications With Respect to Foreign Government Issuers

If a foreign government issuer is filing a registration statement for a firm commitment underwritten offering that exceeds $250 million and at least one year has passed since the date of effectiveness of its IPO, then we would permit the foreign government issuer to communicate to the same extent as a Form B company. Otherwise, we would treat the foreign government issuer the same as a Form A company.

4. Research Reports

The SEC has long been concerned that investors reading research reports may not take into account potential conflicts of interest when a broker or dealer publishing its analyst's research about a company is also acting as an underwriter in an offering for that company. While the SEC currently has three rules that enable brokers or dealers to publish analysts' research, the rules apply only in a limited number of registered offerings.

The limitations in the rules have caused brokers and dealers to refrain from publishing their analysts' research in the U.S. at a time when investors may seek current research reports to help them make investment decisions. The result is that U.S. investors may rely on research that does not reflect material changes or current data. Meanwhile, brokers and dealers are distributing analysts' research to investors outside the U.S. while withholding it from investors in the U.S. While larger U.S. investors are often not disadvantaged because they find out about research distributed outside the U.S. and arrange to receive it, the same may not be true of smaller U.S. investors.

We therefore propose to expand the scope of the current research rules to allow publication of research around the time of more offerings. These changes would benefit investors that are seeking the latest information, opinions and recommendations from research analysts. It also would benefit brokers and dealers whose analysts either have to stop publishing research at a critical time or publish too close in time to an offering to allow for their firm's participation as an underwriter. Companies that are issuing the securities also would welcome the publication of current research to the extent it interests more investors in the offering.

a. Publications by a Broker or Dealer That Is Not Underwriting Company's Distribution of Securities

One existing rule protects a broker or dealer's research publication from being considered an illegal offer when the broker or dealer is not participating in a distribution of securities. The rule applies if:

  • the research pertains to a reporting company;

  • the research is published in the regular course of business; and

  • the broker or dealer is not receiving consideration of any kind from persons with an interest in the securities being registered.

We propose to expand the rule to cover non-reporting companies. We also propose to delete the condition that the broker or dealer publish the report in the regular course of business. These changes would allow a broker or dealer to commence research coverage on private companies planning to make registered offerings, even where it had never before published a research report concerning that company.

b. Publications by a Broker or Dealer About Securities Other Than Those It Is Selling

The second existing rule protects a broker or dealer's research publication from being considered an illegal offer when the research is about a security of the company that is different in character from the one it is selling. For example, this rule covers a broker's publication of research on a company's equity securities while distributing the company's investment grade debt. The rule applies if:

  • the broker or dealer publishes or distributes the research in the ordinary course of its business; and

  • either:
    • the company has been reporting for three years; or
    • the company has a one-year reporting history and has a public float of $75 million; or
    • the company is a foreign private issuer with a public float of $75 million and a one-year trading history on a designated securities market outside the U.S.

We propose to expand this rule to cover research reports relating to securities of virtually all reporting companies, regardless of how long they have been reporting or their size. The expanded rule, however, would not cover securities of reporting companies that have historically posed certain risks. These include blank check companies, shell companies and companies making offerings of penny stock.

c. Publications by a Broker or Dealer Distributing Securities

The third existing rule permits a broker or dealer to report on the same securities it is distributing. The rule covers two types of reports: reports focused on a company and
industry-related reports. The conditions are more restrictive when a broker or dealer publishes research focused on a particular company.

The current rule allows publication of focused reports about companies that:

  • have been reporting for at least one year; and

  • either:
    • meet a $75 million minimum public float; or
    • are issuing investment grade securities.

The proposed rule would allow publication of focused reports as long as the company has been reporting for at least one year. The proposed rule also would allow for focused reports about a foreign government issuer registering for the first time if it is making a firm commitment underwritten offering of more than $250 million in securities.

Under specified conditions, the current rule allows industry-related reports if the company is a reporting company. We propose to extend the safe harbor to all companies regardless of whether they are reporting. Also, the proposed rule would remove the prohibition on a broker or dealer making a more favorable recommendation about the company in an industry-related report than the one it made in its last publication. Instead, if the broker or dealer makes a more favorable recommendation, it would need to disclose in the report the last two opinions or recommendations it published while not distributing the company's securities.

d. Unregistered Offerings

We would apply basically the same research report conditions to both registered offerings and offerings that are not registered in reliance on safe harbors for sales outside the U.S. (Regulation S) and in transactions involving sales to QIBs under the Rule 144A safe harbor. In the unregistered offerings, however, we would require that the publication be one that the broker or dealer distributes with reasonable regularity.

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IV. Prospectus Delivery

A. Goals of the Prospectus Delivery Proposals

If investors are informed of material information only after making an investment decision, the principle of full and fair disclosure to investors that is the hallmark of the Securities Act is not upheld. Our prospectus delivery proposals stem from our concern that the current system does not adequately ensure that all investors have sufficient time to consider prospectus disclosure before making their investment decisions. Several aspects of the current rules concern us.
The statute's prospectus delivery requirements focus on delivery of the final prospectus, which in today's markets mostly arrive after investors make their investment decisions. Current SEC rules require preliminary prospectus delivery only in IPOs. In IPOs, brokers and dealers must deliver a copy of the preliminary prospectus to anyone expected to purchase in the offering, but they may deliver as late as 48 hours before the broker or dealer sends the document that confirms the sale. Again, this appears to follow the time of investment decisions, and does not appear to ensure a sufficient amount of time for investors to consider fully the intricacies of an offering. In addition, that rule only applies to brokers and dealers, not issuers. We want to revise these rules so that investors receive disclosure with enough time to consider it before making their investment decisions.

B. Implementing the Goals Through Prospectus Delivery Rules

1. Delivery of Preliminary Prospectus Information

Our proposals to address the flaws of the current prospectus delivery system differ, depending on whether the company registers the offering on Form B or another Form. All of the proposals, however, focus on ensuring that information reaches investors prior to their investment decisions.

a. We Are Considering Multiple Proposals for Form B offerings

We are considering several possible approaches for delivery in Form B offerings. The first alternative would mandate the delivery of a securities "term sheet." The term sheet would:

  • summarize the material terms of the securities;

  • identify a contact person to whom questions and requests for final documents may be directed;

  • name any selling security holder and briefly identify any material relationship between such person and the company within the last three years; and

  • include a legend advising investors to read, before making an investment decision, the documents the company files with the SEC.

We would require delivery of the term sheet before an investor makes a binding investment decision. In addition, the company would have to file the term sheet before the first sale.

Another alternative would be to require delivery of a preliminary prospectus like current short-form prospectuses that contain just transactional disclosure. Like today, historical information about the company would not be delivered.

We also asked commenters to address many questions about Form B delivery, such as:

  • What information should be in a term sheet, if one is delivered?

  • Are there some securities for which there would be no need to require delivery of even a term sheet because of existing information in the market?

  • Is there a need to require delivery when the class of securities is one that the company already registered?

b. Registered Offerings Not on Form B

We propose to require the delivery of a preliminary prospectus for all of these offerings, whether made by reporting or non-reporting companies. The length of time an investor would have the preliminary prospectus before making an investment decision would vary depending upon how long the company has been filing Exchange Act reports with the SEC. The longer a reporting history the company has, the less time an investor would need with a preliminary prospectus because more public information about the company would have been available to the investor.

If this offering is the company's IPO, or is registered within a year of its IPO, the preliminary prospectus must be sent to each investor so as to arrive at least seven calendar days before:

  • the date of pricing in a firm commitment underwritten offering; or

  • in all other offerings, the date the investor signs an agreement to purchase the securities or otherwise commits to purchase them.

If the company registers the offering one year or more after its IPO, the preliminary prospectus must be sent to each investor so as to arrive at least three calendar days before:

  • the date of pricing in a firm commitment underwritten offering; or

  • in all other offerings, the date the investor signs an agreement to purchase the securities or otherwise commits to purchase them.

Material changes to the information may arise after the preliminary prospectus was delivered to investors. Investors may be informed about those changes either orally or in writing. If investors are not previously informed about those changes, that information must be set forth in a document sent to them so as to arrive at least 24 hours before:

  • the pricing of securities; or

  • the date the investor signs an agreement to purchase the securities or otherwise commits to purchase them.

2. Final Prospectus Delivery Exemption

We propose to create an exemption from the Securities Act requirement to deliver a final prospectus to investors. An investor today normally receives the final prospectus after making the investment decision. We believe that the benefit that an investor receives from having the information at that time is modest, especially in comparison to the cost of distribution. In addition, final prospectus delivery complicates the delivery by the broker-dealer of the document that confirms the sale to the investor. Because the Securities Act requires that the final prospectus precede or accompany that confirmation, confirmations can be delayed until the final prospectus is ready. Clearance and settlement of the purchase is then also delayed.

The exemption from delivering the final prospectus would apply if:

  • the preliminary prospectus information is delivered as required;

  • a final prospectus, except for certain pricing information, is filed with the Commission prior to the transmission of any confirmation; and

  • investors are informed before the sale about where they can acquire the final prospectus free of charge.

3. Foreign Government Issuers

We also propose to exempt foreign government issuers from the final prospectus delivery requirements and require them to deliver preliminary prospectus information. The proposed prospectus delivery requirements seek to ensure that investors have the information about the foreign government issuer that they need, at the time they need it, to make an informed investment decision. Foreign governments are exempt from the reporting requirements under the Exchange Act, unless they list their securities on a U.S. exchange. Investors therefore do not always have easy access to information about foreign companies even if they have registered before. We therefore do not base the delivery distinction for these issuers on their SEC reporting histories. The proposals would divide foreign government issuers into three categories.

a. Foreign Government Issuer Registering for the First Time or Within One Year Of Registering for the First Time

We would treat these issuers like Form A companies that do not have a one-year reporting history.

b. Foreign Government Issuer Registering More Than One Year After Registering for the First Time

– if offering more than $250 million in a firm commitment underwritten offering:

We would treat these issuers like Form B companies for purposes of prospectus information delivery requirements.

– if any other offering:

We would treat these issuers like Form A companies that have at least a one-year reporting history.

4. Prospectus Delivery in the Aftermarket

For a specified number of days after a registration statement becomes effective, dealers currently must deliver a final prospectus to persons who buy those securities. Investors buying in the market shortly after an offering of securities is sold ("the aftermarket") generally are less sophisticated than the ones able to purchase in the initial sale. They frequently purchase at a higher price than the offering price. They are often solicited or influenced by the same selling efforts as the initial purchasers. Today, however, the aftermarket delivery requirement applies only if the company is not a reporting company. Also, aftermarket delivery applies for a shorter time, 25 days instead of 90 or 40, when the securities are listed or quoted on NASDAQ than when they are not.

To ensure that the civil liability provisions of the Securities Act fully protect investors in the aftermarket, our proposals would require prospectus delivery to investors in the aftermarket in all registered offerings. Our research tends to indicate that a period of 25 calendar days would cover the appropriate period. The prospectus generally would arrive after the investment decision in the aftermarket. Therefore, we propose to allow the dealer to satisfy the obligation by notifying each investor of where it can acquire a copy of the final prospectus free of charge. We would not require physical delivery of the prospectus. The final prospectus must be on file with the SEC before the sale.

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V. The Role of Underwriters

A. Goals of the Due Diligence Proposals

In order to avoid being held liable for false or misleading disclosure in a registration statement, courts have stated that an underwriter must conduct an investigation "reasonably calculated to reveal all of those facts [that] would be of interest to a reasonably prudent investor." Courts determine whether an underwriter has performed this "due diligence" based on the facts and circumstances of each offering. As the courts have noted, it is impossible to have a rigid rule defining what is a reasonable investigation or how far an underwriter must go in order to verify a company's statements.

Broker-dealers have expressed concern about how a court would perceive their due diligence efforts when the offerings which they underwrite in current markets are conducted within a very short time period. They have asked us to consider creating a safe harbor from liability in those circumstances. A safe harbor, by its very nature, would have to describe actions that would constitute a reasonable investigation in every type of quick offering. In addition, a liability safe harbor could have the effect of encouraging underwriters not to take steps beyond those delineated in the safe harbor, even when the facts and circumstances warrant further action. We recognize, however, that courts may need guidance as to some of the factors to consider when evaluating due diligence if the time in which the offering is conducted is short.

B. Implementing the Goals Through Rule Guidance

1. Underwriter Liability in Quick Offerings

The SEC currently has a rule that identifies circumstances that the SEC believes are relevant in determining whether a person, other than the company, satisfies the due diligence standard. Those circumstances apply to any registered offering. We propose to add a new section to that rule. It would address offerings on Form B of equity or high yield debt securities that are marketed and priced in fewer than five days. We would include due diligence practices that we believe would enhance an underwriter's due diligence investigation. All of the practices reportedly are being used to some degree by most underwriters in those expedited offerings. They are:

  • whether the underwriter reviewed the registration statement and conducted a reasonable inquiry into facts or circumstances that raise concerns about the disclosure;

  • whether the underwriter consulted the relevant executive officer(s) of the company about the information in the registration statement;

  • whether the underwriter received a letter from the company's auditors providing assurances that particular figures disclosed in the registration statement are accurate;

  • whether the underwriter received a favorable opinion from its counsel and the company's counsel; and

  • whether the underwriter employed and consulted a research analyst that follows the company or its industry.

We do not suggest that these proposed due diligence practices are mandatory. We also are not suggesting that some or all of the practices are the exclusive way to establish adequate due diligence, even in an expedited offering. Courts should not consider dispositive the absence of one or more of the practices, other than the underwriter's review of the registration statement and inquiry.

2. Investment Grade Debt Offerings

Companies that offer investment grade debt under a medium term note program may conduct frequent offerings. Consequently, underwriters usually perform due diligence periodically rather than with each offering of investment grade debt. Since underwriters would not normally complete periodic due diligence under the same time pressures associated with an expedited offering of equity or non-investment grade debt securities, we would not apply the proposed guidance to offerings of investment grade debt.

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VI. Proposals Relating to Exchange Act Periodic Disclosure

A public company must file periodic reports with the SEC to update information about the company. These include annual reports, quarterly reports (for U.S. companies), and reports that must be filed when one of a list of material events occurs.

A. Goals of the Exchange Act Proposals

Our Exchange Act proposals would expedite the reporting of information and require companies to report additional material events. These changes should provide better and more timely disclosure. The changes should also help minimize selective disclosure. That would result, in part, because there should be less time between when the company is aware of the information and when the company reports the information to the public.

B. Implementing the Goals Through Exchange Act Rules

1. Annual and Quarterly Reports

We propose to require disclosure of risk factors in Exchange Act registration statements and periodic reports of all companies. Risk factors, which companies currently disclose in Securities Act registration statements, are significant factors that may have a negative impact on a company's future financial performance. Investors in the markets make investment decisions concerning the purchase of a company's securities continuously throughout the year, not just when the company registers a new offering. Risk factor disclosure is subject to change periodically and is a significant consideration when making an investment decision. We therefore believe that companies should update this disclosure on a regular basis, rather than disclose the information only when registering an offering of securities, which can be an infrequent event.

We also propose to require foreign companies to file their annual reports within five months after their fiscal years end rather than the current six months. We believe that foreign companies could meet a shorter deadline without significant additional cost and that the deadline generally would not be earlier than they report annual information in their home countries.

2. Material Event Reports on Form 8-K

a. Timely Disclosure of Annual and Quarterly Results

Many public companies currently make press releases (and sometimes call analysts and selected investors) to report quarterly and annual financial results significantly earlier than they file their annual or quarterly reports. Some do not. We propose to require domestic companies to report selected financial data to the SEC earlier than when quarterly and annual reports are due. By requiring companies to file this information, we would promote comparable disclosure among public companies. Also, the information would be more likely to reach all investors at the same time, rather than being selectively disclosed.

The report would be due on the earlier of:

  • the date the company issues a press release containing earnings information; or

  • 30 days after the end of the first three fiscal quarters or 60 days after the end of its fiscal year.

As an alternative to this proposal, we also asked whether we should accelerate the due dates of annual and quarterly reports, for example to 60 and 30 days, respectively.

b. Expanding Disclosure; Shortening Due Dates

In an effort to provide additional material information to investors in a timely manner, we propose to expand the material events that a company must disclose on Form 8-K to include:

  • the departure of a CEO, CFO, COO or President and the reason for the departure;

  • a change in the company's name;

  • material modifications to the rights of security holders;

  • material defaults on senior securities; and

  • notification that reliance on a prior audit is no longer permissible, or that the auditor will not consent to the use of its report in a Securities Act filing.

We also propose to shorten the general Form 8-K due date from 15 calendar days to five. We propose an even shorter due date (one business day) for reports when:

  • a company materially defaults on its senior securities;

  • a company's independent auditor resigns, declines to stand for reelection or is replaced;

  • a company's independent auditor notifies it that it may no longer rely on a prior audit, or that the auditor will not consent to the use of its report in a company filing; or

  • any of the company's directors resigns.

3. Signatures

In a further effort to improve the quality of disclosure to investors, we would expand the number of people signing Exchange Act reports. We propose to require the principal executive officers of the company and a majority of the board of directors of the company to sign annual and quarterly reports and Exchange Act registration statements. Today, officers and directors of domestic companies need to do so only in the annual report and Securities Act registration statements.

We also would like to encourage those persons signing registration statements and Exchange Act reports to pay close attention to the disclosure in those documents. We therefore propose to mandate that the persons who sign Exchange Act reports and registration statements and Securities Act registration statements certify that they have read the report or registration statement and that they know of no material misstatement or material omission.

We are not proposing these signatures for material event reports. We do, however, propose to require the person signing for the company to certify that he or she provided a copy of the material event reports to the board of directors.

4. Plain English in Exchange Act reports

Finally, we are soliciting comment regarding whether to apply the Commission's plain English disclosure requirements to Exchange Act reports.

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VII. Integration of Registered Offerings
and Unregistered Offerings

Integration means treating transactions that companies structure as separate offerings as a single offering. This doctrine prevents companies from evading the limitations of exemptions from registration by splitting up an offering so it appears to comply. It also prevents companies from evading the conditions applicable to registered offerings by treating part of an offering as an exempt offering while registering the rest.

Companies have experienced difficulty in applying the integration doctrine where offering securities in a public offering shortly after offering securities in a private offering. The same is true when a company starts a private offering shortly after offering securities in a public offering. Today, companies may choose to wait six months between attempted offerings in order to avoid integration concerns. We propose safe harbor rules that would describe circumstances when integration would not apply, whether the company completed or abandoned the first offering. Under the safe harbors, companies beginning bona fide private or registered offerings would not have to build in delays or worry about integration when switching from one to the other. We designed conditions to the safe harbors to discourage companies from abusing them.

The safe harbor would be particularly useful under volatile market conditions when a company begins one offering and determines that the demand for the securities is not what it anticipated. For example, a company could abandon an offering that began as a private offering and finish it as a registered public offering. The rules would allow Form A companies and small business issuers to "test the waters." In addition, the proposed rules would allow companies faced with a soft public market to raise capital when it finds private investors.


1 Public float is the dollar amount of a company's equity securities held by the public.

2 This estimate is based on 1997 market capitalizations and reporting and trading histories.

3 As proposed, the "offering period" would begin 15 days before the first offer (in the contractual sense) is made and would end when the offering is completed.

4 A company may notify the public of a proposed offering but the contents of the notice are strictly limited.

5 Companies would not have to file as free writing any information in the registration statement, factual business communications, research reports, or limited notices of proposed offerings.

http://www.sec.gov/divisions/corpfin/offref.htm


Modified:06/10/1999