June 17, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Jonathan J. Katz, Secretary
Re: File No. S7-30-98 – Securities Act Release No. 7606A (Nov. 13, 1998)
The Regulation of Securities Offerings
Dear Sirs and Mesdames:
Intel Corporation is pleased to submit this comment letter in response to Securities Act Release No. 7606A (the "Release") from the Securities and Exchange Commission ("SEC" or "Commission"). The Common Stock of Intel (SEC file No. 0-6217) is traded on the Nasdaq National Market, and its market cap is approximately $200 billion. Since Intel does not generally issue securities in capital-raising transactions, our comments focus on those aspects of the Release proposals which may affect Intel's activities as an investor and as a public reporting company.
As an investor in many start-up and other high technology companies, Intel is concerned that several of the proposals may adversely affect it and the companies in which it invests. If new rules preclude companies such as Intel from purchasing securities in certain transactions and make Intel's investments less liquid, such rules will increase Intel's costs and the cost of capital for the companies in which we invest. The Commission suggests that some of its other proposals, such as those relating to offerings to existing common stockholders and offerings to qualified institutional buyers ("QIBs), ameliorate these effects. For the reasons set forth below, we do not believe this to be the case.
Offerings to Qualified Institutional Buyers
One of the Commission's objectives, as stated in the Release, is to "apply the issuer advantages of offering securities in the private and Rule 144A markets...to the public market," so that more offerings will be registered. Accordingly, the Commission proposes to permit many issuers who do not meet the float test of Form B to use the form for registration of offerings to QIBs. The rationale is that "larger institutional investors, or QIBs...are presumed to be sophisticated securities investors" based on their investing experience and size.
The Release solicits specific comment on whether the eligibility standards for QIB status should be expanded. Intel has an active venture capital investment program and its portfolio of minority investments in non-affiliates currently exceeds $3 billion in market value. We believe the Commission should define a QIB solely by reference to the amount held of securities of non-affiliate issuers. From the standpoint of sophistication, we consider it irrelevant whether the investor is categorized as a financial institution or a manufacturer. We note, for example, that the National Securities Markets Improvement Act of 1996 defined a category of sophisticated investor for purposes of the Investment Company Act of 1940--qualified purchaser--to include natural persons, companies and trusts that own not less than $5 million in investments. We also note that in contrast to Rule 144A offerings, for which the QIB definition was developed, offerings on Form B will be registered and full company information will be incorporated by reference from Exchange Act reports. Accordingly, rather than considering "revising upward" the threshold for defining a QIB, the Commission should consider a simple dollar threshold for offerings to a class of sophisticated investors on Form B.
The Commission has long permitted short-form registration for secondary offerings by issuers who have not met the eligibility criteria for Form S-3 and its predecessor. When it previously proposed to restrict short-form registration of such offerings in 1981, commenters were highly critical, expressing concern that the proposal would adversely affect venture capital companies and their investors. The Release suggests that these concerns are addressed in the proposals by the availability of Form B for offerings by a company to venture capitalists who are existing common stockholders or for any offering to venture capitalists who are QIBs. However, our concerns extend to our ability to resell the securities we purchase from an issuer. The adoption of the Commission's proposal to narrow the definition of affiliate would be beneficial, but it would not cover those circumstances in which Intel acquires more than 10 percent of a company's stock.
While the Commission expresses concern about some companies being "particularly aggressive about casting what are actually primary distributions as secondary offerings by selling shareholders," we believe that the SEC can deal with this situation administratively on a case-by case basis rather than decreasing the liquidity of the securities markets. Accordingly, we believe that secondary offerings by both affiliates and non-affiliates should be added as a separate eligibility criterion on Form B.
Prospectus Delivery Requirements
The Release proposes expanded prospectus delivery requirements that would apply to registered secondary offerings made by selling security holders. We do not believe that it is appropriate to apply the same prospectus delivery requirements to selling security holders as to issuers engaging in capital-raising transactions. The prospectus delivery requirements are inappropriate in certain kinds of secondary offerings, such as those taking place on a non-underwritten basis in an existing market. From the perspective of the purchaser, he or she is purchasing securities in an ordinary market transaction and no prospectus is expected or necessary. From the viewpoint of the selling security holder, the expanded requirements may create significant timing difficulties and thus adversely affect our ability to sell securities when warranted by market conditions.
Presumption Regarding the Appropriate Form
The proposals would eliminate the current presumption that an effective Securities Act registration statement is on the appropriate form. We are concerned about this proposal because the consequences of using the wrong form could be severe, i.e. a violation of Section 5 of the Securities Act. Retroactive invalidation of the registration form is particularly inappropriate in the case of a selling security holder reselling restricted securities, since the seller is likely to have no knowledge of the facts disqualifying the registrant from use of the form.
Repeal of the Exxon Capital process
The Release indicates that if the proposals are adopted, the Division of Corporation Finance would repeal the line of interpretive letters concerning "Exxon Capital exchange offers," which have permitted issuers to sell certain types of securities in a private offering and shortly thereafter register an offering of substantially identical securities in exchange for those securities privately placed. Intel sees no reason for the Commission to do away with a procedure that has provided speed and flexibility to many smaller issuers without any diminution in investor protection. The Release mentions the need for additional protections for non-QIBs in offerings by smaller issuers, but cites no evidence of abuse.
Integration of Public and Private Offerings
The proposals would clarify the circumstances under which issuers may convert initiated private offerings to public offerings and vice versa and would codify the Commission's position on the use of lock-up agreements in business combinations. We generally endorse these proposals, but we do not believe that permissible lock-up agreements should be limited to holders of 5% or more of the voting equity securities of the company being acquired.
Periodic Reporting under the Exchange Act
Disclosure of Risk Factors
The proposals would require disclosure in Form 10-K of "the most significant factors with respect to the registrant's business, operations, industry, or financial position that may have a negative impact on the registrant's future financial performance." (emphasis added). In quarterly reports, companies would have to disclose any material disclosures regarding the risk factors that either were not included in the Form 10-K or had changed. We do not believe it appropriate to extend mandatory risk factor disclosure beyond the current requirements, as such an expansive requirement would be contrary to concepts of materiality and clarity in disclosure. We believe the proposal will result in duplicative and boilerplate disclosure and has the potential to unnecessarily increase the liability of public issuers.
The material portions of this information are already disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operation, which requires disclosure of known trends in liquidity, capital resources, sales, revenues, etc., or pursuant to other required line items. The proposed scope of the risk factor disclosure may also be contrary to the judgments made by Congress in the Private Securities Litigation Reform Act of 1995 (PSLRA). The safe harbor for forward looking information contained in that Act requires only that companies identify important factors that could cause actual results to differ. In fact, under this standard and the "bespeaks caution" doctrine, courts have found a company to be protected even where the factor(s) causing results to differ was not among the specific factors listed.
Accelerated Reporting of Financial Information
The Commission has proposed two alternative approaches to accelerate the reporting of financial results. The first approach would require companies to report summary financial information (in compliance with the selected financial data requirements of Item 301 of Regulation S-K) on a Form 8-K filed on the date that a company issues an earnings Press Release. Intel typically publishes an earnings Press Release at close of market on a Tuesday and files an 8-K on Wednesday with the historical financial information and forward-looking statements from the Press Release. It would not always be possible to prepare the 8-K and file on EDGAR the same day the Press Release is published, and we recommend that the "same day" proposal be made into a "next business day" rule. Companies should not be forced to publish their earnings releases at the open of market to meet the 8-K filing requirement.
The Commission also proposes accelerating the due dates of Forms 10-Q and 10-K. Intel believes that it reasonably may take more than the proposed 30 or 60 days to gather the information and prepare the disclosure for a Form 10-Q or 10-K. While it might be possible to accelerate the process relative to their current schedules, this could result in considerable additional expense to issuers. The timing problems would be exacerbated by the Commission's other proposals to require risk factor disclosure and to have 10-Q filings prepared in time to allow circulation to, and review and feedback by, a company's directors.
Management Report to Audit Committee
We believe this report to be a make-work project that would not provide real value to the reporting process. Similar to our views on related proposals from the Blue Ribbon Committee on Corporate Audit Committees, we recommend that Audit Committee and management retain the authority to establish their own procedures with regards to oversight and reporting at the board level.
Signature and Certification Requirements
We believe that the proposal that a majority of the board of directors sign the Form 10-Q is impractical from a logistical and timing perspective and becomes even more so if the Commission accelerates the due date for the Form 10-Q. We do not believe that such level of board involvement in the 10-Q process is needed to assure preparation of an accurate and useful document.
We appreciate your consideration of our views, which we would be pleased to discuss further at your convenience.
Very truly yours,
/s/ Cary Klafter
Director of Corporate Affairs and Senior Counsel
Legal Department, Intel Corporation