==========================================START OF PAGE 1====== COMMITTEE MEMBERS The Honorable Steven M.H. Wallman, Committee Chairman SEC Commissioner; former partner, Covington & Burling Professor John C. Coffee, Jr. Adolf A. Berle Professor of Law, Columbia University Law School The Honorable Barber B. Conable, Jr. Corporate director; former President, World Bank; former member, U.S. House of Representatives; and former New York Stock Exchange director Robert K. Elliott Partner, KPMG Peat Marwick LLP; Chair, AICPA Special Committee on Assurance Services, and Member, AICPA's Board of Directors and Governing Council Edward F. Greene Partner, Cleary, Gottlieb, Steen & Hamilton; former SEC General Counsel; and former Director, SEC Division of Corporation Finance Dr. George N. Hatsopoulos Chairman of the Board and President, Thermo Electron Corporation; and former Chairman, Federal Reserve Bank of Boston A. Bart Holaday Managing Partner, Private Markets Group and Member of the Board of Directors, Brinson Partners, Inc.; and member of the board, National Venture Capital Association Paul Kolton Corporate and fund director; former President and Chairman of the American Stock Exchange; former Chairman, Financial Accounting Standards Board's Advisory Council Roland M. Machold Director, New Jersey Division of Investment; former Vice President, Morgan Stanley & Co. Dr. Burton G. Malkiel Professor of Economics, Princeton University and corporate and fund director; former Dean, Yale School of Management; former member, President's Council of Economic Advisers. Claudine B. Malone President of Financial & Management Consulting, Inc., and corporate director; former Professor, Harvard Graduate School of Business Administration Charles Miller ==========================================START OF PAGE 2====== Chairman, Medallion Investment Management Company and Meridian Advisors, Ltd.; corporate director; former Chief Investment Officer, Transamerica Asset Management Group Karen M. O'Brien General Counsel, North American Securities Administrators Association Lawrence W. Sonsini Partner, Wilson, Sonsini, Goodrich & Rosati; corporate director COMMITTEE STAFF David A. Sirignano, Committee Staff Director Associate Director Division of Corporation Finance Dr. Robert Comment Deputy Chief Economist Office of Economic Analysis Catherine T. Dixon Chief, Office of Mergers and Acquisitions Division of Corporation Finance Meridith Mitchell Assistant General Counsel Office of the General Counsel Luise M. Welby Special Counsel Office of International Corporate Finance Division of Corporation Finance. ==========================================START OF PAGE i====== I. INTRODUCTION AND SUMMARY A. Findings and Recommendations of the Committee In February 1995, the Securities and Exchange Commission (the "Commission" or "SEC") established the Advisory Committee on the Capital Formation and Regulatory Processes (the "Committee"). Commissioner Steven M.H. Wallman was appointed by SEC Chairman Arthur Levitt as the Committee's Chairman. The Committee was authorized to advise the Commission on, among other things, the current regulatory process and the disclosure and reporting requirements relating to public offerings of securities, as well as secondary market trading, and to identify and develop means to minimize the costs imposed by existing regulatory programs.-[1]- The Committee determined to focus specifically on the regulatory framework for securities offerings and continuing disclosure by corporate issuers. Early in its deliberations, the Committee concluded that the current procedures under the Securities Act of 1933 (the "Securities Act")-[2]- are well suited for companies that are engaging in an initial public offering, i.e., a transaction in which a company is publicly offering its securities for the first time. The Committee determined, however, that the capital-raising activities of ---------FOOTNOTES---------- -[1]- Copies of the Committee's original Charter and renewal Charter are attached in Appendix D. -[2]- 15 U.S.C. 77a et seq. ==========================================START OF PAGE ii====== companies that have already offered their securities to the public and are currently filing periodic reports with the Commission pursuant to the Securities Exchange Act of 1934 (the "Exchange Act")-[3]- have changed dramatically and fundamentally over the last half century. Consequently, the Committee primarily focused its attention on identifying issues and crafting solutions related to those activities. The Committee initially identified certain aspects of the current transactional registration approach of the Securities Act that, at least as applied to reporting companies, may adversely affect investor protection and the capital formation process. The Committee then explored alternative regulatory strategies that would: (i) enhance investor protection by extending and reinforcing the protections of the Securities Act; (ii) improve the efficiency of access by such companies to the U.S. capital markets; (iii) eliminate unnecessary regulatory costs and uncertainties for issuers; and (iv) enhance the quality and integrity of disclosures provided to investors in both the primary offering and secondary trading markets.-[4]- The Committee generally concluded that, in order to achieve these ---------FOOTNOTES---------- -[3]- 15 U.S.C. 78a et seq. -[4]- The Committee staff also examined foreign regulatory schemes relating to public offerings of securities for guidance with respect to possible alternative regulatory approaches, particularly with respect to offerings by seasoned issuers. See Documents for Advisory Committee Meeting, June 15, 1995, Tab F (the Committee staff's study of certain foreign regulatory schemes). ==========================================START OF PAGE iii====== goals, the focus of the regulatory process in the post-initial public offering context should be shifted from registering transactions to registering companies, with a corresponding emphasis on better ensuring the accuracy and integrity of continuing disclosures. As a consequence of this conceptual shift, once a company is registered and filing the required public reports, all the securities that the company or its affiliates sell thereafter would be deemed registered for purposes of the Securities Act, investors would be more fully protected in more transactions, and the issuer would be able to offer and sell its securities without any regulatory delay in virtually all cases. The Committee next developed a package of concepts -- under the label "company registration" -- to accomplish this shift in regulatory focus. At the request of the Committee, the Committee staff created a working "Term Sheet" describing possible company registration models to be implemented on an experimental or "pilot" basis, which the Committee used as an evolving framework for consideration and discussions at Committee meetings.-[5]- The model includes measures designed both to streamline the offering and disclosure processes, and to improve the timeliness, quality, reliability and integrity of information provided to investors and other participants in the securities ---------FOOTNOTES---------- -[5]- The most recent Term Sheet outlining a model for a pilot program to test the company registration concept is attached as Appendix C to this Report. ==========================================START OF PAGE iv====== markets. Based upon Committee deliberations, as well as Committee and staff consultations with representatives of the investor, issuer, underwriter, legal, accounting and academic communities, the Committee concluded that the proposed company registration system would reduce substantially unnecessary regulatory costs and burdens for issuers while enhancing investor protection. As discussed more fully in the balance of this Report, the Committee determined that a pilot company registration program would be the most appropriate way to begin the transition. The pilot would be available initially only to issuers that meet certain criteria, such as having a specified minimum public float and reporting history. Because these issuers generally are more sophisticated with respect to financial reporting and other disclosure requirements and are more widely followed by the markets, the Committee concluded that permitting these types of issuers to opt into the pilot program would provide the best test of the advantages of the company registration system as compared to the current system. If the pilot is successful, the Committee believes that the Commission should extend the benefits of company registration, perhaps with additional conditions, to smaller public companies and their investors as soon as possible. The streamlining of the offering process will result from the adoption of a new registration procedure under which the company would register to enter into the system (on a new Form C- 1 registration statement). Thereafter, each issuance by the ==========================================START OF PAGE v====== registered company of its securities would be deemed registered under the Securities Act, including securities issued in acquisitions and securities initially sold offshore that flow back into the United States, with all the protections and remedies that currently adhere to a registered transaction. A registration fee would be paid to the Commission at the time of each sale of securities, rather than at the time of filing of the Form C-1 (thereby creating a "pay-as-you-go" system). As a result, the current limitations of the shelf registration system on the amount of securities that could be registered would be eliminated, as would the need to file a new registration statement to register additional securities. This process also would eliminate the uncertainties and delay in the offering process resulting from the potential for Commission staff review prior to a registration statement being declared effective. Such uncertainty and delay has already been eliminated in the context of takedowns from an already effective shelf registration statement, but not with respect to the initial effectiveness of the shelf registration statement. Under company registration, the nature and amount of information about the company and its securities required to be on file with the Commission at the time of sale would be at least as extensive as that now required under the current Securities Act registration forms. Provided all mandated information has been disclosed to the markets, issuers in routine transactions would be permitted to tailor the disclosure physically delivered ==========================================START OF PAGE vi====== to investors in a prospectus as necessary to meet the informational demands of investors in light of the nature of the transaction, as assessed by the issuer and underwriter in marketing the securities. Consequently, the information provided to investors should be both more readable (in plainer English) and more useful (because it is tailored to the investors' needs). Moreover, under a "full" company registration system where all securities are registered, a reduction in the scope of the resale restrictions applicable to affiliates is possible and desirable because subjecting these holders to resale restrictions would serve no purpose since all the securities are already registered. As a result, most directors and officers will no longer be subject to resale restrictions. The investor protection improvements of the company registration system will deliver benefits both at the time of the offering and on an ongoing basis. In most equity offerings, information regarding the specific transaction and any material developments will be filed with the Commission, and therefore made available to all investors and the markets, no later than the date of first sale (material developments will have to be on file in sufficient time for the market to absorb the information before the sale is made), rather than as late as two days after the delivery of the prospectus as permitted under the current shelf registration system. This reform will serve a number of beneficial purposes. First, it ensures that the market receives timely notice of material developments, thereby providing the ==========================================START OF PAGE vii====== market sufficient opportunity to react to the information prior to investors making an investment decision. Second, it will assist underwriters and others with due diligence responsibilities to focus on the information important to the offering and help ensure that it is fully and accurately disclosed. Third, it will extend full coverage of the statutory liability provisions to this important information. In addition, in those large offerings where issuers will be required under the model to deliver a formal prospectus, the prospectus must be delivered to a potential investor in time to inform the investment decision. Under current procedures, the prospectus can be delivered with the confirmation, well after an investor has already made an investment decision. Various measures designed to improve the quality and integrity of a registered company's disclosure on an ongoing basis are part of the recommended company registration system. These measures include improved procedures to focus the attention of management and the board of directors on the periodic and other reports prepared and filed by the company, and to provide for more timely disclosure of material developments. For the first time, risk factor disclosure will be provided to investors in the secondary trading markets through the company's annual report on Form 10-K filed with the Commission. In addition, the company registration system will create incentives for the reordering and rationalization of "information monitoring" or "gatekeeping" functions to provide greater oversight of the ======================================START OF PAGE viii====== issuer's disclosures on an ongoing basis. The system does so by, among other things, specifying additional factors that may be taken into consideration in satisfying the due diligence and reasonable care defenses of certain gatekeepers or monitors under Sections 11 and 12(a)(2) of the Securities Act. By enhancing the quality and integrity of disclosure and thereby reducing the likelihood of material misstatements and omissions by the issuer and others engaged in a public offering, the model also should operate, as a practical matter, to decrease the liability exposure of these parties. In connection with its deliberations on company registration, the Committee also examined the concept of encouraging a company's board of directors to adopt a board "disclosure committee" (which could be the audit committee). This concept has as its goal enhancing the reliability and integrity of an issuer's public disclosures, by promoting better and more intensive due diligence on the part of outside directors on an ongoing basis. This separate recommendation of the Committee, which could be effectuated regardless of whether company registration is adopted (and, conversely, company registration could be adopted regardless of whether the disclosure committee concept is embraced), also is discussed in this Report. B. The Work of the Committee and Structure of the Report The Committee held eight public meetings. The Committee and its staff also met with numerous groups and individuals concerned ==========================================START OF PAGE ix====== with or affected by the Commission's regulation of the capital formation process. The Committee wishes to acknowledge with deep appreciation the thoughtful comments and insights provided by these groups and individuals. The letters and articles submitted by commenters for the benefit of the Committee are available from the SEC Public Reference Room, File No. 265-20. Except with respect to certain recommendations to improve the quality and integrity of periodic reporting under the Exchange Act, the Committee determined not to address specific line-item requirements prescribing the content and manner of presentation of disclosure documents filed with the Commission. An internal Commission task force, known as the Task Force on Disclosure Simplification, has reviewed these requirements, and recently published a report recommending that the Commission eliminate 91 rules and 22 forms, and modify dozens of others.-[6]- Separately, the Commission also initiated rulemaking addressing several issues raised by Committee members in the course of the Committee's deliberations.-[7]- The ---------FOOTNOTES---------- -[6]- See Report of the Task Force on Disclosure Simplification to the Securities and Exchange Commission (March 5, 1996). -[7]- For example, improving the safe-harbor for forward-looking statements was a significant concern of some members of the Committee, a matter which already was under consideration by both the Commission and Congress during the deliberations on the Private Securities Litigation Reform Act of 1995, enacted in late 1995 (Pub. L. No. 104-67 (December 22, 1995)); see also Safe Harbor For Forward-Looking Statements, Securities Act Rel. 7101 (October 13, 1994)[59 FR 52723 (October 19, (continued...) ==========================================START OF PAGE x====== Committee also determined at the outset of its deliberations to focus on issues regarding the application of the Securities Act to companies that are reporting under the Exchange Act. The Commission already was pursuing many issues affecting non- reporting companies that access the securities markets for capital pursuant to various Securities Act exemptions.-[8]- Consequently, these specific issues and policies are not addressed in this Report. The Committee's recommendations are presented in two main parts in this Report. Section IIA of the Report contains a ---------FOOTNOTES---------- -[7]-(...continued) 1994)]. Various Committee members also were critical of the Commission's rules under the Securities Act requiring the disclosure of financial and other business information about material acquisitions or dispositions. The Commission has now proposed conforming those rules under the Securities Act to the requirements under the Exchange Act. See Streamlining Disclosure Requirements Relating to Significant Business Acquisitions and Requiring Quarterly Reporting of Unregistered Equity Sales, Securities Act Rel. 7189 (June 27, 1995)[60 FR 35656 (July 10, 1995)]. -[8]- For example, numerous Committee members suggested that the Commission seek ways to facilitate capital formation by small businesses. In June 1995, the Commission issued a proposal regarding a "test the waters" provision with respect to initial public offerings to allow private companies contemplating a public offering to ascertain whether their securities are marketable before preparing expensive registration documentation. See Solicitations of Interest Prior to an Initial Public Offering, Securities Act Rel. 7188 (June 27, 1995)[60 FR 35648 (July 10, 1995)]; see also the recently adopted Exemption for Certain California Limited Issues, Securities Act Rel. 7285 (May 1, 1996)[61 FR 21356 (May 9, 1996)]. ==========================================START OF PAGE xi====== general discussion of the Committee's recommendation that the Commission shift its regulatory focus from the registration of securities transactions to the registration of companies, and the reasoning underlying that recommendation. Appendix A to the Report provides more detailed support for the Committee's recommendations. It also includes data and empirical research on the effects of the current regulatory scheme governing public offerings on investor protection and capital formation in the U.S. markets. In addition, Appendix A discusses the various costs and uncertainties of the current transactional process for Exchange Act reporting companies. It reviews the increasingly complex and technical regulatory concepts that have become necessary to protect the current transaction-based paradigm in light of significant shifts in investor demographics, market structure and communications technology, and describes how these concepts may no longer be achieving their intended goals of protecting investors. Appendix A concludes with a discussion of the blurring among and between the public, private and offshore markets, and the fundamental changes in both the composition of these markets and their participants since the enactment of the federal securities laws more than sixty years ago. Section IIB of the Report includes a summary description of the recommended terms of the company registration system and the suggested pilot project, as well as the Disclosure Committee proposal. Appendix B to the Report, in turn, describes in more detail each of the essential elements of the company registration ==========================================START OF PAGE xii====== system -- with respect both to the recommended pilot and full company registration system -- and explores further the support, reasoning and rationale underlying each recommended element. Finally, a concurring statement by Committee members John C. Coffee, Jr., Edward F. Greene, and Lawrence W. Sonsini is set forth in Section IV of the Report. ======================================START OF PAGE xiii====== COMPANY REGISTRATION PILOT AT A GLANCE Essential Elements A. Offering Process -- Further liberalization of shelf registration process; pay upon issuance fee system; no limit as to number or dollar amount of securities registered; available for acquisitions; prospectus delivery simplified. B. Disclosure Enhancements -- Improve level and reliability of information provided to primary and secondary trading markets through (i) measures such as senior management review of disclosure and management reports on procedures for disclosure preparation; (ii) more current disclosure of significant developments; and (iii) earlier filing of transactional information than under current requirements. C. Enhanced Monitor or Gatekeeper Functions -- Maintain current liability scheme while providing additional guidance regarding due diligence obligation to emphasize roles of parties involved with the company on a continuous basis and to facilitate greater involvement by certain "gatekeepers" or "monitors" in disclosure oversight. ==========================================START OF PAGE xiv====== D. Enhanced Investor Protections -- In addition to B and C above, extend statutory liability to documents and transactions that currently lack such protections. E. Scope -- Voluntary system available to seasoned issuers during initial pilot; covers all offerings of nonexempt securities, eliminating need for the concept of "restricted" securities and limiting application of resale restrictions to a narrower subset of affiliates, and permitting narrower application of the statutory underwriter concept; issuers can elect less comprehensive pilot system preserving exemption for private placements, but then apply current restrictions on resales of privately placed securities, including current broader application of affiliate and statutory underwriter requirements. Goals, Benefits, and Effects A. Eliminate unnecessary regulatory costs and uncertainties that impede access to capital; instead, market considerations, rather than regulatory concerns, will govern timing of offering; eliminate mandatory waiting period and potential for prior SEC staff review of routine transactions that now add cost and uncertainty. ==========================================START OF PAGE xv====== Greater flexibility to go to market more often in lesser amounts in light of lower transaction costs and less delay and uncertainty -- will facilitate adoption of "just-in-time capital" techniques; alleviate market overhang effect that may still result from placing equity on a universal shelf; elimination of a separate registration requirement for acquisitions. Greater flexibility in defining nature of marketing efforts: timing and content of prospectus disclosure delivered to investors driven primarily by informational needs of investors, rather than need to prepare and deliver after- the-fact compliance documents; more flexibility in negotiating transactions because regulatory constraints significantly diminished. B. Reduce complexities and pricing discounts arising from the need to distinguish between public and private, domestic and offshore, and issuer and non-issuer transactions, including concerns regarding gun-jumping, integration, general solicitation, restricted securities, and other constructs developed over the years to maintain the separation of the public and private markets. C. Maintain and enhance the protection of investors in the primary and secondary trading markets with disclosure ==========================================START OF PAGE xvi====== enhancements resulting in better due diligence practices and heightened level and reliability of corporate reporting; statutory remedies extended to more disclosure and to a broader class of transactions. D. Eliminate affiliate-type resale requirements for most officers and directors; provide additional guidance as to what constitutes "reasonable investigation" and "reasonable care" in context of the integrated disclosure and streamlined offering process.