Speech by SEC Staff:
Opening Statement before the SEC Open Meeting
Senior Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
June 29, 2005
Today we recommend that the Commission adopt changes that will modify and advance significantly the communications, registration, and offering processes under the Securities Act.
The recommended rules address three main areas:
- Communications related to registered securities offerings;
- Timely delivery of information to investors without mandating unnecessary delays in the offering process; and
- Improving the registration and other procedures in the offering and capital formation process.
Our recommendations are premised on the view that the existing system of regulating capital formation in the registered offering market provides a number of advantages that should be retained in any reform effort. We are, therefore, recommending primarily constructive, incremental changes to the regulatory structure and the offering process. The recommended rules recognize the recent, significant enhancements to Exchange Act reporting and the important role those reports play in investment decision-making.
A concept that runs through the recommendations is the creation of a new class of issuers, called "well-known seasoned issuers," that is comprised of issuers that are presumptively the most widely followed in the marketplace by market participants, the media, and institutional investors.
A well-known seasoned issuer will be one that:
- has been reporting and is timely in its filings under the Exchange Act for one year, and
- either (1) has $700 million of world-wide public float or (2) has issued $1 billion in non-convertible securities, other than common equity, in registered offering for cash, not exchange, in the preceding three years. Issuers meeting this $1 billion threshold may register only non-convertible securities, other than common equity, unless they also have a $75 million public float.
We recommend that certain issuers - such as blank check companies, shell companies, and penny stock issuers - not be eligible to take advantage of the new rules. We also recommend that many of the new rules not be available to investment companies or business development companies, or in merger and acquisition transactions, because there are separate regulatory structures that apply to these types of issuers and transactions.
The first area of recommended reforms relates to permissible communications before and during a registered offering. The gun-jumping provisions of the Securities Act restrict any offers before a registration statement is filed and restrict written communications to the statutory prospectus, even after filing. The recommended rules will benefit investors and the market by permitting more communications while protecting investors through application of the appropriate liability standards under the Securities Act for materially deficient disclosures.
The cumulative effect of the rules relating to the Securities Act gun-jumping provisions will be the following:
- Well-known seasoned issuers will be permitted to engage at any time in all communications, including use at any time of a "free writing prospectus," subject to conditions (including, in some cases, filing with the Commission). A "free writing prospectus" is a written communication, including an electronic communication, that constitutes an offer outside the statutory prospectus;
- All reporting issuers, certain asset-backed issuers and well-known non-reporting foreign private issuers, will, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information;
- Non-reporting issuers will at any time be permitted to continue to publish factual business information that is regularly released and intended for use by persons other than in their capacity as investors or potential investors;
- Communications by issuers more than 30 days before filing a registration statement will be permitted without violating the gun-jumping provisions, so long as they do not reference a securities offering that is the subject of a registration statement;
- After the filing of a registration statement, all eligible issuers and other offering participants will be permitted to use a "free writing prospectus," subject to conditions. Ineligible issuers include those in bankruptcy and those who have violated the anti-fraud provisions of the federal securities laws.
- The conditions to use of a "free writing prospectus" include
- Filing of any issuer free writing prospectus, material information about the issuer or its securities provided by the issuer that is contained in any other person's free writing prospectus, any broadly disseminated underwriter or other offering participant free writing prospectus, and any description of final terms. The filing condition will not apply to other underwriter free writing prospectuses not used by the issuer.
- The definition of graphic communication excludes communications that are live and in real-time to a live audience, regardless of the means of transmission.
- Electronic road shows that are not live will be free writing prospectuses. Electronic road shows used in an IPO of common or convertible equity securities will not have to be filed if the issuer makes at least one version of a bona fide electronic road show readily available electronically to an unrestricted audience. Electronic road shows for other offerings will not have to be filed.
- A filed registration statement will be a condition to use of a free writing prospectus. In addition, for unseasoned or non-reporting issuers, the statutory prospectus will have to accompany or precede the free writing prospectus if an issuer or offering participant prepares or pays for the free writing prospectus.
- We recommend special provisions to accommodate media publications that are issuer and underwriter free writing prospectuses.
- Any free writing prospectus used or referred to by a person will be subject to liability under Section 12(a)(2) of the Securities Act and the anti-fraud provisions of the federal securities laws, whether or not filed. A free writing prospectus will not be part of the registration statement and therefore will not be subject to liability under Section 11. The rules address cross-liability issues among offering participants that may arise from the use of free writing prospectuses.
- Recommended changes to Rule 134 will allow issuers and offering participants to communicate a broader category of routine information that will be excluded from the definition of "prospectus."
- The rules also expand the exemptions for research reports used by brokers and dealers.
- We also recommend certain conforming changes to Regulation FD in light of the recommended communications rules.
With regard to liability timing issues, we recommend reaffirming the interpretation set forth in the proposing release that, for purposes of disclosure liability under Section 12(a)(2) and Section 17(a)(2) of the Securities Act, the assessment of whether a statement contains a material misstatement or omits to state a material fact necessary to make the statements, in light of the circumstances under which they were made, not misleading, will be made against information conveyed to an investor at the time of sale, and information conveyed only after that time will not be taken into account. There is no mandated method of delivering or conveying information and thus, we believe, no "speed bumps" or other unnecessary interference with the timing of capital raising. We are recommending that the Commission provide additional guidance on the standard of liability under Sections 12(a)(2) and 17(a)(2) and the interplay of contract provisions with the anti-waiver restrictions of the federal securities laws.
- The recommended rules also:
- ensure that prospectus supplements will be included in a registration statement for disclosure liability purposes; and
- establish a new effective date for each prospectus filing reflecting a takedown of securities off a shelf registration statement only for issuers and underwriters at that time. Filing a prospectus supplement for a takedown will not trigger a new effective date for officers, directors, or experts, including auditors.
We recommend that the Commission adopt rules modernizing the operation of the requirements for the shelf registration process under the Securities Act. For issuers eligible to use shelf registration, these rules:
- Codify in a single rule the information that may be omitted from a base prospectus in a shelf registration statement at effectiveness and included later.
- Replace the requirement that issuers register only securities they intend to offer within two years with a requirement that the issuer update the registration statement with a new registration statement that is filed every three years;
- Eliminate restrictions on "at-the-market" equity offerings for primary shelf eligible issuers;
- Permit immediate takedowns of securities off of shelf registration statements;
- Permit primary shelf eligible issuers to use prospectus supplements to make material changes to the plan of distribution described in the base prospectus; and
- For primary shelf eligible issuers, permit selling security holders to be identified in prospectus supplements, where the securities (or securities convertible into such securities) to be sold are outstanding when the registration statement is filed.
For offerings by well-known seasoned issuers, the recommended rules establish a significantly more flexible version of shelf registration, referred to as "automatic shelf registration." The automatic shelf registration process allows eligible well-known seasoned issuers to:
- Register unspecified amounts of specified types or classes of securities on immediately effective Form S-3 or Form F-3 registration statements without allocating between primary or secondary offerings;
- Exclude more information from the base prospectus than from a regular shelf registration statement, including a description of securities (other than identifying the type or class) and the plan of distribution;
- Allow issuers to elect to pay filing fees on a "pay-as-you-go" basis at the time of each takedown off the shelf registration statement; and
- Add additional classes of securities and eligible majority-owned subsidiaries after effectiveness.
We also recommend conditionally allowing reporting issuers to incorporate by reference previously filed Exchange Act reports into a Securities Act registration statement on Form S-1 or Form F-1 and, given these changes, we recommend that the Commission eliminate Securities Act registration statement Forms S-2 and F 2, as these little-used forms will be rendered unnecessary.
We recommend reforms to the requirements regarding prospectus delivery in registered offering. The recommendations create an "access equals delivery" model for final prospectuses. Under the rules, filing a final prospectus with the Commission and complying with other conditions will satisfy delivery requirements. A cure provision for inadvertent failures to file is included. The rules include a separate requirement to notify investors that they purchased securities in a registered offering.
Finally, we recommend that the Commission adopt rules requiring issuers to include the following in their Exchange Act periodic reports:
- for Form 10-K filers, disclosure of risk factors, where appropriate;
- disclosure regarding the issuer's status as a "voluntary" filer of Exchange Act reports; and
- for "accelerated filers" and well-known seasoned issuers, disclosure in their Exchange Act annual reports of written staff comments that were issued more than 180 days before the end of the fiscal year to which the annual report relates, where those comments remain unresolved at the time of filing the annual report and the issuer believes those comments to be material.
Thank you. We are happy to answer your questions.