April 25, 1997
By Federal Express and Electronic Mail
Ladies and Gentlemen:
The Committee on Securities Regulation of the Business Law Section of the New York State Bar Association appreciates the opportunity to comment on Release No. 33-7393, dated February 20, 1997. The Release proposes certain amendments to Rule 430A under the Securities Act of 1933, as amended (the "Act") to permit certain small reporting companies to price securities on a delayed basis after effectiveness of a registration statement if they meet specified conditions.
The Committee on Securities Regulation is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among our members and the views expressed herein are generally consistent with those of the majority of our members who reviewed the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which our members are associated, the New York State Bar Association or its Business Law Section.
We agree with your conclusion that increased flexibility is needed to assist small companies in raising equity capital on more favorable terms or in obtaining lower interest rates on debt. The proposal to allow small companies to delay
pricing their securities and to omit such pricing information, as well as the name of the managing underwriter, if any, from the initial registration statement may be useful in enabling them to raise needed capital. The flexibility in timing an approach to the capital markets, freeing these companies from the confines of the 15 day window under the present rule, could make the difference in achieving the goals set for an offering. However, we do believe that there should be sufficient safeguards and disclosure requirements to prevent fraud and to protect investors. We recommend adopting the condition that qualifying issuers be required to be not only current, but also timely, in their reporting under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for a period of at least twelve months preceding the filing of their registration statements and to be in compliance with the EDGAR-related conditions of expanded Rule 430A. In addition, we recommend imposing certain qualitative conditions, such as a disqualification of an issuer that has been found responsible for securities law or related violations within the five years preceding the filing of the registration statement, in order to protect investors against fraud. Our more detailed comments are set forth below.
Reporting Requirements. The Committee supports the requirement that an issuer be current in its Exchange Act reporting during the twelve month period preceding the filing of its registration statement and at the time of offering and sale. The Committee, however, believes that the issuer should also be required to have been timely with its filings (including any extensions covered by a Rule 12b-25 filing) during such periods, unless such requirement is waived on a case by case basis by the staff of the Commission. Investor protection requires the issuer to demonstrate a history of providing both investors and the Commission with full disclosure on a timely basis.
Based on the need for full disclosure and prior experience with an issuer, the Committee believes that expanded Rule 430A should not be available for initial public offerings, or for foreign issuers unless they file the same Exchange Act reports and meet the same disclosure requirements as domestic issuers. Furthermore, since the dissemination of such disclosure is important for the protection of investors, we believe the EDGAR-related conditions under proposed Rule 430A should be adopted as proposed.
Certain Qualitative Conditions. The Committee believes that certain events which indicate past fraudulent or "bad boy" activity within the preceding five years should disqualify issuers from the use of expanded Rule 430A. Events which should disqualify an issuer include: (i) a court or administrative body finding the issuer, a majority shareholder, director or executive officer to have violated the federal or state securities laws; and (ii) the engagement of an underwriter that is, or was, subject to a permanent injunction for federal securities law violations. Furthermore, the Committee also recommends the disqualification of shell-companies since they frequently are associated with fraudulent activity.
The Committee, however, feels that events in the issuer's past history which may indicate impaired financial condition should not disqualify issuers from using proposed Rule 430A as long as full disclosure is provided to potential investors. Such events include: (i) failing to pay a dividend or sinking fund installment on preferred stock; (ii) defaulting on an installment or installments of indebtedness or any rental on one or more long-term leases; and (iii) receiving a "going concern" qualification to the opinion from its accountants. The primary purpose of expanded Rule 430A is to provide small issuers in need of capital easier access to the market. The small issuers who are in financial trouble are the ones who most need the flexibility of expanded Rule 430A. Therefore, indications of poor financial conditions should not disqualify issuers from the use of expanded Rule 430A.
Other Considerations. Although, with certain exceptions, private placements are normally precluded during the shelf period for shelf registrations under a Form S-3, the Committee strongly recommends that the Commission not place such restrictions on small issuers who register securities under expanded Rule 430A. In order for small issuers to benefit from the flexibility provided by expanded Rule 430A, they must have access to alternative methods of finance during the period the registered securities are on the shelf. Forcing them to choose between a shelf registration or a private placement would deny them the flexibility offered by the proposed rule.
It remains to be seen whether an amended Rule 430A would, in practice, have the beneficial effect intended, whether and to what extent underwriters will rise to the opportunities presented, and whether additional investor protective measures may be required. However, the Committee supports the proposal subject to the above observations.
We would again like to express our appreciation for the opportunity to provide these comments. We are available to discuss them further if you so desire.
Very truly yours,