==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION ADVISORY COMMITTEE ON THE CAPITAL FORMATION AND REGULATORY PROCESSES TERM SHEET FOR PILOT COMPANY REGISTRATION SYSTEM Goals The goals of the company registration system are to: (i) maintain and enhance the protection of investors in the primary markets; (ii) eliminate unnecessary regulatory costs and uncertainties that impede a company's access to capital; (iii) eliminate complexities arising from the need to distinguish between public and private, domestic and offshore, and issuer and non-issuer transactions; and (iv) enhance the level and reliability of disclosure provided to investors in the secondary markets on an ongoing basis, not just when the issuer conducts a public offering. Concept Registration is company, not transaction-based (except for IPOs and other specific transactions). Once meeting eligibility standards, companies register with the SEC and file periodic reports. Routine financings, as well as resales by affiliates and resales of what are currently known as restricted securities, could be consummated without the current SEC review and registration process. Information provided to investors in the marketing of these routine financings would be based on what the market demands and on company and transactional information required to be filed as part of the issuer's periodic reports. The principal distinctions currently existing between public and nonpublic offerings by registered companies (with the resultant formalities and restrictive concepts such as gun- jumping and integration) would be eliminated, because offers and sales by companies already registered with the SEC generally would not be subject to additional transactional registration requirements. ==========================================START OF PAGE 2====== Essential Elements of the Pilot System 1. Disclosure (a) Company Registration Statement An eligible company may file a Form C-1 registration statement disclosing plans to make offerings from time to time on a company-registered basis and registering all sales of all securities.-[1]- Form C-1 generically registers the types of securities and offerings (including resales by affiliates and statutory underwriters, see Section 1(e) below) that are contemplated and incorporates all existing and future periodic reports. Certain exemptions or exclusions from the registration form would be available (see Section 3(b) below). Amendments can be filed to reflect changed plans as appropriate (e.g., where a company changes the manner of financing or amends its charter to authorize a new class of securities). The Form C-1 registration statement also is updated automatically by each filing under the Exchange Act. Only a nominal registration fee would be paid at the time of filing, with the issuer undertaking to pay a fee upon the sale of securities (i.e., pay as you go).-[2]- ---------FOOTNOTES---------- -[1]- A company could effect its transition to the company registration system from the current system simply by electing to be governed under and complying with the company registration system requirements. To the extent the company currently has restricted securities outstanding, the company could elect, as part of its transition to a company registration system, to register any or all of its outstanding restricted securities for resale on the Form C-1 (and pay the applicable fee and execute a qualified indenture in the case of debt securities at that time) or merely allow the restricted securities to retain that status until the expiration of the Rule 144 restricted periods (three years, but recently proposed to be shortened to two years; limited resales allowed after two years, recently proposed to be shortened to one year). -[2]- There are various mechanisms to achieve this result within the current statutory framework: Once the Form C-1 has becomes effective, it could serve as an evergreen registration statement for offers and sales of securities. Alternatively, the effective date of the Form C-1 with respect to a specific offering could be delayed until an (continued...) ==========================================START OF PAGE 3====== (b) File and Go Sales could be consummated upon the filing with the Commission of disclosure regarding the specific offering of securities and the payment of a transaction-based fee. (Prospectus delivery requirements ---------FOOTNOTES---------- -[2]-(...continued) amendment is filed regarding that transaction. Another alternative would be to have the Form C-1 go effective upon filing, but require another abbreviated registration statement to be filed at the time of the transaction. In any case, the Form C-1 could serve as the basis for multiple offerings, applicable statutes of limitation periods would run commencing from the time of sales made under the form, and the fee would be paid at the time of the particular sale. ==========================================START OF PAGE 4====== are discussed below.) The transactional information would consist of the following, to the extent material and otherwise not previously disclosed: description of securities/pricing plan of distribution, experts, and underwriter information summary financial and dilution information/pro formas actual use of proceeds risk factors material changes Thus, at least the same level of public disclosure on file with the Commission concerning registered offerings that currently exists today for seasoned issuers would be maintained under a company registration scheme. The manner in which the transactional information could be filed with the Commission will depend on the nature of the offering. In equity offerings (including offerings of convertible debt and warrants) over the specified threshold (e.g., 3 percent of public float), the issuer would file a Form 8-K, which would be incorporated into the registration statement. The Committee recommends that this requirement apply to non-de minimis equity shelf offerings by non-company registrants as well. The purpose for the Form 8-K filing is to facilitate due diligence inquiries by underwriters and other offering participants, and to ensure full coverage of Section 11 statutory liability to this information, which would automatically be incorporated into the registration statement. The Form 8-K would be filed a reasonable time in advance of the offering (as specified by Commission rule, e.g., one to three business days), where necessary to provide the market with adequate notice of material developments. The transactional information need not be filed on a Form 8-K until the time of the offering. With respect to all other offerings, the issuer will have a choice regarding the manner in which the transactional disclosure will be filed with the Commission. The issuer could voluntarily file a Form 8-K, as described above; alternatively, the issuer could merely file the prospectus supplement containing the required information when that information is delivered to investors. The information contained in the prospectus supplement normally would not be part of the registration statement. This latter method of filing is consistent with practice under shelf registration today. Neither the Form 8-K nor the prospectus supplement normally would be subject to prereview prior to the commencement of the offering. ==========================================START OF PAGE 5====== Consistent with current practice relating to shelf offerings, information representing a fundamental change in the information regarding the issuer previously disclosed by the issuer would be made by an amendment the Form C-1 or by a Form 8-K or other Exchange Act filing; a prospectus supplement disclosing the fundamental change alone would not suffice. Other types of material developments, however, could be provided either in the Form 8-K Exchange Act filing prior to the offering or as part of the prospectus supplement, as described above. In either case, the issuer's public disclosures must be current at the time of the offering. (c) Auditor's Consent Consistent with current practice under the shelf registration system, an auditor's consent would not have to be filed with each sale or takedown off the company registration statement. An auditor's consent to the use of its report would be dated as of or shortly before the effective date of the registration statement (as updated for the filing of audited financial statements on Form 10-K or other fundamental changes) and would have to be on file at the time of the offering. The auditor could consent to incorporation of its audit report into the company registration statement at the time the Form 10-K containing its audit report is filed by including a currently dated consent in the Form 10-K. That consent (as of the registration statement's effective date), unless withdrawn by the auditor, would be applicable to all offerings pursuant to the Form C-1 until the issuance of a new set of audited financial statements or other fundamental changes that update the effective date of the registration statement. Alternatively, the consent could be filed and currently dated for a specific issuance of securities or conditions could be attached to its use. (d) Prospectus Delivery Delivery of the transactional information could be accomplished either by incorporation by reference or by actual delivery, depending on the size of the offering and other factors. The prospectus would not be subject to prior staff review except in the case of "extraordinary securities transactions," as defined below. These different levels of transactions essentially fall into three tiers: Tier One: In "routine" transactions, an issuer could incorporate information contained in the Form C-1 registration statement and filed reports, including the transactional information filed on a Form 8-K, into a document serving as the prospectus, such as the confirmation or selling materials, that is then distributed to investors, ==========================================START OF PAGE 6====== thereby satisfying in any of these cases the prospectus delivery requirement. Any material company developments to be incorporated must be filed on the Form 8-K a reasonable time prior to the dissemination of the prospectus incorporating the information (e.g., one to three business days) to provide the market an opportunity to absorb the information. Otherwise, as today, the information must be delivered physically as part of the formal prospectus, which is filed simultaneously with the Commission. Tier Two: In "nonroutine" transactions, the issuer would be required to prepare and deliver a formal prospectus containing transactional and, where appropriate to update disclosures, company information. The prospectus would be filed (in addition to or as part of the mandated Form 8-K in non-de minimis equity offerings) with, but would not be subject to registration or prior review by, the SEC.-[3]- Information previously provided in selling materials or in a formal prospectus need not be redelivered. Nonroutine transactions would consist of any single transaction increasing, or potentially increasing, the issuer's outstanding voting securities by more than 20%. The Commission could adopt a similar standard for offerings of other equity and senior securities. The offering of a new class of securities would require actual delivery of information specific to that security (e.g., terms and description of the security, investment risks specific to that security). Actual delivery of information generally of interest only to purchasers in the offering and not the market (such as underwriter discount information or security specific information) could be provided as part of the confirmation. ---------FOOTNOTES---------- -[3]- However, other than in the case of underwritten offerings for cash, exchange listing requirements would require shareholder approval of these offerings, thus creating an opportunity for SEC review of the disclosure materials under the proxy rules. ==========================================START OF PAGE 7====== In those cases where formal prospectus delivery is mandated, the prospectus must be delivered prior to the investors agreement to purchase. To the extent written selling materials that do not satisfy prospectus disclosure requirements are distributed to investors in the course of the offering, a prospectus containing the mandated information would have to be delivered prior to or simultaneous with the selling materials, consistent with current statutory and regulatory requirements. An issuer could avoid delivery of a statutory prospectus by either including or incorporating the required information into the selling materials and treating the selling materials as the statutory prospectus. That approach, however, would subject those materials to liability under Section 12(2) of the Act. Actual delivery of the prospectus information would not be required in the case of sales to accredited investor purchasers, with the expectation that these investors will demand the information they require. This would be consistent with the requirements under Regulation D and Rule 144A today. Tier Three: In "extraordinary transactions," a post- effective amendment to the Form C-1 would be required and would be subject to SEC staff review of the transactional information. The same prospectus delivery requirements as in Tier Two transactions would apply. These transactions would include any financing, merger, material acquisition or other restructuring transaction involving a company's issuance of securities that results in an increase, or potential increase, of at least 40% of the outstanding voting securities. (e) Affiliate and Underwriter Sales In cases where all sales by an issuer are registered on the Form C-1, there is a far reduced concern about the potential use of conduits as a means to distribute unregistered shares into the market. Accordingly, in the case where an issuer elects to cover all sales under the company registration statement, a more ==========================================START OF PAGE 8====== narrow application of the registration and resale requirements would apply.-[4]- The class of persons subject to the affiliate resale limitations would include only the CEO and inside directors and, as a rebuttable presumption, perhaps holders of 20% of the voting power, or 10% of the voting power with at least one director representative on the board, and any representatives of such holders. These affiliates could continue to sell without registration under the existing provisions in Rule 144 for affiliate sales. Sales by these affiliates exceeding the Rule 144 limits would be registered as resales under the Form C-1. An issuer could control the sales of affiliates by declining to file a prospectus supplement or a Form 8-K to complete the registration process at the time of the secondary offering (just as an issuer can refuse to grant registration rights under the current system). Significant shareholders could resell without restrictions if they can rebut the presumption of control arising from their holdings. Contractual resale restrictions also would provide a means for an issuer to control resale activities of its insiders and significant shareholders. Resales by statutory underwriters for issuers and affiliates would be registered under the Form C-1. A statutory underwriter for the purpose of offerings registered under the Form C-1 would consist of a person engaged in the business of a broker-dealer (regardless of whether or not registered as such) acting on behalf of an issuer or affiliate in a distribution. 2. Eligible companies The system would be phased in and made available on an experimental basis. The pilot would be voluntary; eligible companies could elect to opt in as desired. It would begin with larger, more seasoned issuers eligible to elect to be covered. Once the election is made, a company can opt out ---------FOOTNOTES---------- -[4]- An issuer also may elect to maintain the current private placement exemption for sales of equity securities (see Section 3(b)(iii) below). If an issuer elects to maintain such exemption, the current applicability of the affiliate and statutory underwriter resale limitations, as opposed to the narrower approach as described herein, would continue to apply. ==========================================START OF PAGE 9====== by withdrawing the Form C-1, but would not be eligible to use the Form again for a period of two years. During the pilot stage, eligibility would be limited to a senior class of S-3 companies-[5]- that have a (a) Public float of $75 million; (b) Reporting experience of two years; and (c) NYSE, Amex or NMS listings. This final requirement would provide the benefit: (i) of adding an overlay of listing standards, including the agreement to provide prompt disclosure of material developments; and (ii) of minimizing the amount of coordination with the states necessary to implement the pilot stage due to the common Blue Sky exemption for offerings by listed companies. These standards collectively reduce the number of companies eligible to use the Form C-1 during the pilot stage to approximately 30% of public companies. A subsidiary of an eligible company could issue debt that is guaranteed in full by the parent under the parent's Form C- 1. Closed-end investment companies would not be eligible. Foreign issuers would be eligible for the pilot if they undertake to file the same forms and meet the same requirements as domestic companies. The Commission should consider whether reconciled interim financials filed on Form 6-K on a semi-annual basis should suffice (this is the current practice for foreign issuers using the shelf on Form F-3). To be eligible, issuers must undertake to adopt measures that would enhance secondary market disclosure (as discussed below in Section 4). Noncompliance with the conditions as of the time of the Form 10-K update would result in the loss of eligibility (for two years) to make offerings pursuant to ---------FOOTNOTES---------- -[5]- S-3 companies generally include only those that have a $75 million public float; one-year reporting history; and are current with respect to their reporting requirements and certain fixed obligations. ==========================================START OF PAGE 10====== the Form C-1. In addition, the issuer must be current with respect to its Exchange Act filing obligations before commencing an offering off the Form C-1. Eventually, the system would be made available to all publicly held companies (that have engaged in an IPO), but with additional enhancements or conditions, including prospectus delivery, pre-sale notice or filing requirements, prereview annual financial information, etc. 3. Transactions Covered As noted, the Form C-1 registration statement would register all sales of all securities made by the issuer or its affiliates (subject to exceptions and exclusions as discussed below, see in particular Section 3(b) below).-[6]- Since sales made subject to the Form C-1 would be registered, the securities would be freely tradeable. Thus, under the proposed system, registered companies would waive transactional exemptions such as those for private offerings (4(2), and Reg. D (Rules 505 and 506)), intrastate offerings (3(a)(11) and Rule 147), issuer exchange offers (3(a)(9)), and transactions pursuant to fairness hearings (3(a)(10)).-[7]- The inclusive nature of the Form C-1 registration statement ensures that issuers could not use conduits to avoid liability that results from registration of securities. Treating all sales as registered generally eliminates the need for concepts of restricted securities, integration, general solicitation, flowback, etc., with respect to securities issued by companies opting into the system. Where an issuer is not prepared to disclose publicly a material development or other material information that would otherwise be required to be disclosed in a registered offering, the issuer still can sell pursuant to the Form C-1 by providing the information to the purchaser(s) on a ---------FOOTNOTES---------- -[6]- To the extent relevant during the transitional stages, secondary offerings of restricted securities by existing security holders could be made pursuant to the system as well. -[7]- It may be necessary to preserve the Section 3(a)(10) exemption for involuntary distributions pursuant to court orders, such as settlements of class actions. ==========================================START OF PAGE 11====== confidential basis with a lock-up agreement. The Commission would provide a full or partial exemption from its filing requirements for these limited placements if made to sophisticated investors, and accompanied by measures to ensure that those securities are not traded until full disclosure is provided to the public (as would be necessary under Rule 10b-5). In this manner, once the issuer makes public disclosure of the otherwise confidential information or the information is no longer material, the purchaser would have freely tradeable securities without any additional holding period or registration requirements. In addition, unlike an exempt offering, the liability provisions of the Securities Act would attach to the securities originally issued in the limited offerings. ==========================================START OF PAGE 12====== (a) Exclusions: (i) IPOs: Only companies that have conducted a registered public offering of debt or equity would be eligible to use the company registration form. (ii) Complex securities not valued on the basis of the issuing company's business and financial information, such as asset backed or special purpose issuers. Complex securities that are valued in part on the basis of the issuer's performance, such as structured securities or tracking securities (e.g., GM Series H) could be made eligible subject to special disclosure requirements. (iii) Exempt securities such as commercial paper and bank guaranteed debt. (b) Voluntary Exclusions: (i) Offshore offerings of any securities to non-U.S. persons could be excluded from the Form C-1. However, equity securities would be registered (and a fee paid with respect thereto) on the Form C-1 for purposes of any resales of the securities into the United States as a result of flowback transactions (the fee would be based upon the amount reasonably estimated to flow back into the United States; thus, U.S. purchasers of equity securities initially offered overseas would benefit from the statutory protections to the same extent as if the securities were initially sold in the United States. The statute of limitations would run from the time of the initial overseas sale by the issuer. (ii) Placements of non-convertible debt to institutional investors could be excluded from the Form C-1. (iii) Modified Company Registration -- "Company Lite" The issuer could elect a modified form of company registration that would continue to permit private placements of any of its securities, including equity securities, as well as reliance on the other transactional exemptions. So long as the issuer undertakes to adopt the enhanced disclosure practices, the issuer would ==========================================START OF PAGE 13====== have the benefits of the file and go registration process for its public offerings, the payment of filing fees at time of sale, and most of the other benefits of company registration. Exempt sales would not be integrated with registered sales made pursuant to the Form C-1. However, the securities sold in the private placement would be restricted securities subject to current holding periods and resale limitations. In addition, the new, limited application of affiliate resale restrictions would not apply to securities sold by that issuer -- the current restrictions on affiliate resales would continue to apply. Likewise, the statutory underwriter concept for resale purposes would not be limited to broker-dealer firms in connection with these private placements. This approach would permit issuers to weigh the benefits of registration of all equity sales against the benefits of a continued private placement exemption, including the absence of Section 11 liability for sales made pursuant to such exemption. 4. Disclosure Enhancements Complementing measures to ease issuer access to the market would be measures to improve the level and reliability of secondary market disclosure. The Commission, following the pilot stage, should consider reviewing the enhancements to determine whether it would be desirable to make them applicable to all issuers, or at least those issuers using the shelf registration procedure, rather than having separate requirements applicable only to registered companies. (a) Top Management Certifications Certification to the Commission (not a filed document) would be required of two of the following four officers that they have reviewed the Form 10-K, the Form 10-Qs and any Form 8-Ks reporting mandated events, but not for voluntarily filed 8-Ks, and are not aware of any misleading disclosures or omissions: the CEO, COO, CFO, or CAO. The attestation would be required upon the filing of each such document with the Commission. (b) Management Report to Audit Committee A report prepared by management and submitted to the audit committee describing procedures followed to ensure the integrity of periodic and current reports and, in light of the new narrow application of affiliate resale ==========================================START OF PAGE 14====== restrictions, procedures instituted to avoid potential insider trading abuses (e.g., any requirement that company insiders clear trades with the general counsel's office). This report would be made public as an exhibit to the Form 10-K; the report need not be resubmitted if the described procedures are unchanged. (c) Form 8-K Enhancements Expansion of current reporting obligation on Form 8-K under the Exchange Act to mandate disclosure of additional material developments: (i) Material modifications to rights of security holders (current Item 2 of Form 10-Q); (ii) Resignation or removal of any of top five executive officers; (iii) Defaults of senior securities (current Item 3 of Form 10-Q); (iv) Sales of significant percentage of the company's outstanding stock (whether in the form of common shares or convertible securities); (v) Issuer advised by independent auditor that reliance on audit report included in previous filings is no longer permissible because of auditor concerns over its report or issuer seeks to have a different auditor reaudit a period covered by a filed audit report. For the above items that are required now to be filed on a Form 10-Q, the information therefore would be provided on a current, rather than a quarterly, basis. Moreover, the period within which a Form 8-K must be filed following any mandatory event specified in that form would be accelerated from 15 calendar days to 5 business days. (d) Risk Factors Risk factor analysis disclosure requirements currently required in all Securities Act filings would be added to the Form 10-K (and would thereby be capable of being incorporated by reference). The caption could be modified to be "Significant Considerations in Connection with Investing in Company Securities," instead of "Risk Factors," when the analysis is presented in the Form 10-K. ==========================================START OF PAGE 15====== (e) Other Action (Voluntary) Companies under the company registration system also may voluntarily adopt measures such as the creation of a disclosure committee of outside directors, and the obtaining of SAS 71 reviews. Such measures would be included within the list of relevant factors for assessing the adequacy of due diligence in current Rule 176 (see below). ==========================================START OF PAGE 16====== 5. Liability Section 11 Liability The issuer would be subject to strict Section 11 liability to purchasers of securities sold under the company registration statement for materially false or misleading information in the Form C-1 (including all incorporated information such as transactional information filed as part of the Form 8-K). Officers, directors, experts and underwriters likewise would be liable for materially false or misleading statements in the Form C-1 (including the transactional and updating information filed on the Form 8-K and incorporated into the Form C-1) and any post-effective amendments thereto (with the due diligence defenses afforded under current law). This approach does not represent a change in the liability system for public offerings (with the exception of sales by persons who would no longer be subject to resale restrictions and thus who would not have liability under Section 11 for their resales), but represents an expansion of liability to the extent transactions that would otherwise be exempt private placements or flowback from overseas placements are covered by the Form C-1. In addition, because in many offerings the transactional information will be filed on a Form 8-K and made part of the registration statement, rather than merely part of a prospectus supplement as is the practice in shelf offerings today, Section 11 will apply to that disclosure when it has not been applicable under the current scheme. Similar to current law, the Section 11 remedy would extend to all purchasers of securities sold initially under the Form C-1 (subject to statute of limitations and the ability of purchasers to trace securities to the misleading registration statement). Thus, issuers and affiliates cannot avoid liability by placing securities with conduits for resale to the public. Indeed, sham transactions involving strawmen would be deemed registered issuer (or affiliate) sales. Section 12(2) Liability Rather than merely fraud liability, negligence liability for sellers in public offerings would apply to any selling materials serving as a statutory prospectus (i.e., no formal prospectus has been previously delivered) and incorporated documents (in addition to any Section 11 liability that might be applicable to those documents). Likewise, oral communications will continue to be subject to Section 12(2) liability. ==========================================START OF PAGE 17====== Exchange Act Liability Liability under Sections 18 and 10(b) of the Exchange Act and Rule 10b-5 thereunder, would remain applicable for material misstatements or omissions in filed reports or made in connection with the purchase or sale of securities. Due Diligence Guidance To provide incentives for the adoption of improved disclosure practices and to address the expanded Section 11 liability exposure of officers and directors of registered companies, guidance setting forth the criteria for evaluating the adequacy of a non-issuer defendant's Section 11 due diligence in connection with a particular offering would be provided. The goal is to enhance the quality of disclosure and to provide more meaningful guidance regarding the satisfaction by underwriters and directors of their ("reasonable investigation") due diligence responsibilities. Rule 176 currently specifies that a relevant factor is reasonable reliance on officers, employees and directors whose duties should have given them knowledge of the facts. Guidance would be provided to clarify as well the relevant factors that may be considered when such defendants attempt to establish a defense of "reasonable care" to a Section 12(2) negligence claim. (a) Both underwriters and outside directors could take into account (i) the certifications of senior management (e.g., CEO, COO, CAO and CFO) discussed above, and (ii) the Management Report to the Audit Committee discussed above. (b) Underwriters and outside directors also may consider whether other professionals have reviewed the documents, such as a review of the issuer's interim financial statements by the company's auditors in accordance with SAS 71 or other more detailed procedures, subsequent event reviews consistent with SAS 37, and a "comfort letter" under SAS 72, or whether the board or a committee of the board received a Rule 10b-5 opinion letter from counsel regarding non- financial and non-expertized portions of the periodic reports and Form C-1. Use of these measures by the issuer is voluntary and the fact that an issuer does not adopt such practices is not indicative of an inadequate review by offering participants. (c) Underwriters also may consider the extent of their access to analysts (either their own or outside ==========================================START OF PAGE 18====== analysts, and consistent with appropriate "chinese wall" procedures) that have followed the issuer for a significant period of time in determining how much additional due diligence must be performed by the underwriter in order to satisfy the applicable due diligence standard. (d) Underwriters also may consider whether a Disclosure Committee (see below) was established and may take into account the scope of the review engaged in by the Disclosure Committee. (e) These additional factors may be interpreted as indicia of "reasonable investigation"/"reasonable care," but such factors will be illustrative, not exhaustive or conclusive. The degree to which any of such factors will serve as indicators will depend upon the particular facts of the offering (including whether the offering is a routine financing). Need to Monitor Developments The Commission should solicit comment, and monitor developments regarding the due diligence practices of underwriters during the pilot stage, to determine if offering techniques developed under the company registration system adversely affect either investor protection or an underwriter's ability to perform due diligence or create an unreasonable risk of liability for underwriters. The Commission then could consider whether the proposed new rule could be strengthened consistent with the protection of investors, premised perhaps on the underwriter following specified procedures to identify disclosure problems. After experience with the company registration system, consideration could be given to whether the additional due diligence benefits under these provisions could be made available to all registered offerings, not just those made pursuant to the Form C-1. However, such benefits likely should be conditioned on adoption of the mandatory enhancements described in Section 4 above, and extension of liability as described above. Consequently, it is likely that these additional benefits would be applicable only to the company registration system. 6. Delegation to Disclosure Committee The Committee considered, in the course of its deliberations on the company registration model, a separate proposal to expand the role of the outside directors in ensuring the integrity of corporate disclosures. Although not an integral or necessary part of the company registration model developed by the Committee, the Committee determined to recommend that ==========================================START OF PAGE 19====== the Commission endorse a new procedure that would allow (but not require) outside directors to use the issuer's audit committee or a separate committee of one or more outside directors (a "Disclosure Committee") to conduct investigation of the issuer's disclosures. The Committee believes that this proposal has merit whether or not company registration is pursued by the Commission. The Disclosure Committee can perform the investigative function on behalf of all outside directors, so long as: (i) the delegating directors reasonably believe that the member(s) of the Disclosure Committee are sufficiently knowledgeable and capable of exercising the due diligence obligations on behalf of the outside directors (if necessary, with the assistance of their professional advisers) and with adequate resources, i.e., the delegation must be reasonable; (ii) the delegating directors maintain appropriate oversight of the Disclosure Committee (including by requiring the Disclosure Committee to report to the Board on the procedures followed to ensure the integrity of the disclosure) and reasonably believe that the Disclosure Committee's procedures are adequate and are being performed; and (iii) the delegating directors reasonably believe that the disclosure is not materially false or misleading. 7. Summary of Benefits of the Proposed Company Registration System (a) Benefits to Issuers and Affiliates Speed of access to market: market considerations, rather than regulatory concerns, will govern timing -- elimination of mandatory waiting period and Commission staff review that now add cost and uncertainty. Greater flexibility to go to market more often in lesser amounts, in light of lower transaction costs and less delay and uncertainty -- adoption of "just in time capital" techniques. Elimination of the potential negative price impact known as "market overhang," that may still result from registering equity securities on a universal shelf for many issuers. ==========================================START OF PAGE 20====== Greater flexibility in determining nature of marketing efforts -- timing and content of prospectus driven by informational needs of investors, not the need to prepare and deliver after-the-fact compliance documents determined by regulation. Elimination of a separate registration requirement for acquisitions. Payment of filing fees at time of sale, rather than in advance (as in the case of shelf offerings). Reduction or elimination of 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. Elimination of discount attaching to sale of restricted securities in private markets. Lower risk premiums paid on cost of capital as a result of enhanced disclosure practices. (b) Benefits to Investors Disclosure enhancements will result in better due diligence practices and raise level and reliability of corporate reporting, benefitting purchasers in both primary offerings and in the secondary market. Greater flexibility in negotiating transactions due to elimination of regulatory constraints (eliminates timing constraints, fungibility constraints, resale restrictions, etc.). Protection afforded by registration provisions, including statutory remedies, potentially extended to broader class of transactions that otherwise would be conducted outside those protections, such as private placements or flowback of securities from overseas offerings. Full liquidity for what otherwise would be privately placed securities. In contrast to the prospectus supplement procedure currently used in shelf offerings, transactional information and material development disclosures ==========================================START OF PAGE 21====== would be covered by Section 11 liability and provided to the trading markets in a more timely fashion. Lower costs of capital raising incurred by issuers will inure to the benefit of the issuer's shareholders through greater productivity and profits. Improved prospectus disclosure that permits issuers to prepare offering documents containing clear and concise information tailored to the needs of investors and the nature of the transaction. ==========================================START OF PAGE 22====== (c) Benefits to Underwriters, Officers, and Directors Elimination of registration requirements and resale restrictions with respect to most directors and officers that are imposed as a result of their status as "affiliates." Better opportunity to perform adequate due diligence due to Form 8-K filing requirements. Significantly better guidance as to what constitutes a reasonable investigation in the context of integrated disclosure and streamlined offering processes.