United States: The SEC Adopts Securities Offering Reform

The Securities and Exchange Commission (the "SEC") today adopted final rules relating to the most sweeping liberalization and modernization of the registered offering process under the Securities Act of 1933, as amended (the "Securities Act") in several decades. The SEC indicated that the final rules were adopted in substantially the form proposed in November 2004, although the actual text of the rules, including changes and modifications from the proposed rules, will not be available until early to mid-July.

The following discussion summarizes the key areas that we expect to be addressed by the final rules; we will be issuing a full analysis of the final rules when they become available. Please note that the following discussion may be subject to change depending on the actual text of the final rules.

The application of the final rules to a particular issuer will depend, in large part, on the status of the issuer under the final rules. In this regard, the status of an issuer will be determined by reference to one of four categories of issuers:

• Non-Reporting Issuer. This category includes issuers that are not required to file periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

• Unseasoned Issuer. This category includes issuers that are required to file periodic reports under the Exchange Act, but that do not otherwise satisfy the issuer eligibility requirements of Form S-3 or Form F-3 for a primary offering of securities.

• Seasoned Issuer. This category includes issuers that are required to file periodic reports under the Exchange Act and that do satisfy the issuer eligibility requirements of Form S-3 or Form F-3 for a primary offering of securities.

• "Well-Known Seasoned Issuer" ("WKSI"). This new category includes seasoned issuers that also have (i) a minimum of $700 million of common equity market capitalization held by non-affiliates, or (ii) issued $1 billion aggregate amount of debt securities in registered offerings during the past three years and that register only debt securities. However, "ineligible issuers", as defined by the SEC, will be unable to avail themselves of this category.

While the most significant reforms being implemented by the final rules will apply only to WKSIs, many other reforms apply all issuers, including non-reporting issuers.

The principle behind the communication reforms is the recognition of the value of ongoing communications to investors and the importance of avoiding unnecessary restrictions on communications, including offers, during a registered offering.

The following is a summary of the primary communication reforms:

• Significant Liberalization for WKSIs. WKSIs will be permitted to engage at any time in oral and written communications, including use at any time of a freewriting prospectus, including during the 30 days prior to the filing of a registration statement with the SEC, subject to certain enumerated conditions to be specified in the final rules, including filing with the SEC in some cases.

• Regularly Released Communications by Reporting Issuers. All reporting issuers will, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information.

• Regularly Released Communications by Non-Reporting Issuers. Non-reporting issuers will, at any time, be permitted to continue to publish factual business information that is regularly released to persons other than in their capacity as investors or potential investors.

• Pre-Filing Communications. Communications by issuers more than 30 days before the filing of a registration statement with the SEC will not be considered prohibited offers (i.e., will not constitute gun-jumping) so long as such communications did not reference a securities offering.

• Post-Filing Communications. Issuers and other offering participants will be permitted to use "free writing prospectuses" after the filing of a registration statement with the SEC, subject to certain enumerated conditions to be specified in the final rules, including filing with the SEC in some cases.

• Other Communications. A broader category of routine communications regarding issuers, offering and procedural matters, such as communications about the schedule for an offering or about account-opening procedures, will be excluded from the definition of "prospectus" and, therefore, permitted. In general, the final rules make clear that limitations on communications will be substantially reduced, and that the parameters giving rise to concerns relating to prohibited communications, such as gun-jumping concerns, will be significantly more identifiable.

Generally, the enhanced requirements for reporting under the Exchange Act and the improved quality and currency of periodic reports filed under the Exchange Act, together with technological advances, provide the basis for the SEC’s registration reforms. In this regard, the reforms seek to streamline the registration process for most types of reporting issuers.

The following is a summary of the primary registration reforms:

• Information to be Included in Shelf Registration Statement. The final rules will codify, in a single rule, the information that may be omitted from a base prospectus at effectiveness and to be included in a prospectus supplement, periodic report under the Exchange Act or post-effective amendment. Also, seasoned issuers will be permitted to identify selling security holders in a prospectus supplement rather than in a post-effective amendment so long as the securities to be sold by such security holders were outstanding when the registration statement was first filed. In addition, material changes in the plan of distribution, which currently requires a post-effective amendment, could be provided in periodic reports under the Exchange Act or a prospectus supplement.

• "Automatic Shelf Registration". WKSIs will be permitted to register unspecified amounts of different securities on automatically effective Form S-3 or Form F-3 registration statements. In addition, the automatic shelf registration process will allow WKSIs to add additional classes of securities and eligible majority-owned subsidiaries as additional registrants after the effective date of the shelf registration statement. The final rules will provide additional flexibility for WKSIs so as to permit them to (i) conduct both primary and secondary offerings using an automatic shelf registration statement, (ii) pay filing fees in advance or on a "pay-as-you-go" basis, and (iii) omit certain additional information from the shelf registration statement, which would be filed later in the related prospectus supplement.

• Elimination of Restrictions on "At-the-Market" Offerings. The final rules will eliminate restrictions currently placed on at-the-market offerings.

• Expanded Use of Incorporation by Reference. Certain issuers that have filed at least one annual report and which are otherwise current in their reporting obligations under the Exchange Act will be permitted to incorporate by reference from previously filed Exchange Act reports into a Form S-1 or Form F-1.

The SEC indicated that it is initiating liability reforms to address what it perceives as discrepancies in the time between the time of the contract of sale for securities (i.e., when the investor makes the investment decision to purchase securities), on the one hand, and the later availability of a final prospectus (and perhaps other supplemental information), on the other hand. In this regard, the SEC has stated that it believes materially accurate and complete information should be available to investors when they make their investment decisions and, therefore, liability for the accuracy and completeness of such information should be assessed at that time.

The following is a summary of the primary liability reforms:

• Liability Assessed at Time of Investment Decision. Disclosure liability under Section 12(a)(2) and Section 17(a)(2) of the Securities Act will be assessed (i.e., the determination of whether a material misstatement or material omission exists) at the time of an investor’s investment decision, and information conveyed to the investor after that time will not be taken into account.

• Prospectus Supplement Liability. The final rules will make clear that prospectus supplements would, in all case, be considered part of and included in registration statements for purposes of Section 11 liability under the Securities Act.

• New Effective Dates for Shelf Registration Statements. In order to harmonize the date at which disclosure is evaluated for Section 11 liability under the Securities Act between an issuer and any underwriters (but not others), the final rules will provide that a shelf registration statement will have a new effective date in connection with a takedown.

The final rules will make incremental modifications to research rules under the Securities Act so as to permit research to continue during a securities offering to a larger degree than in the past.

The final rules will eliminate the prospectus delivery requirement now imposed on an issuer and replace it with an "access-equals-delivery" model (i.e., a hard-copy final prospectus will no longer need to be delivered with every confirmation of a sale of a security on the theory that investors have access to the internet and, therefore, the issuer’s filings) so long as the final prospectus is filed with the SEC within the time required by Rule 424 under the Securities Act, subject to a cure period, and other requirements are satisfied. However, purchasers of securities must be given notice that they have purchased securities in a registered transaction and they must be given the right to request delivery of a final prospectus in hard-copy.

The final rules incorporate the following disclosure reforms:

• Risk Factor Disclosure. The final rules will require that risk factor disclosure be included in annual reports on Form 10-K, with updated risk factor disclosure in quarterly reports on form 10-Q. Risk factor disclosure is already required for annual reports on Form 20-F.

• Disclosure of Unresolved Comments. The final rules will require that accelerated filers disclose in their annual reports on Form 10-K and Form 20-F SEC staff comments that (i) were issued more than 180 days before the end of the fiscal year to which the annual report relates, (ii) were made in connection with the review of periodic reports filed under the Exchange Act, (iii) are believed to material by the issuer, and (iv) remain unresolved as of the date of the filing of the Form 10-K or Form 20-F.

• Voluntary Filer Status. The final rules will revise Form 10-K, Form 10-KSB and Form 20-F to include a box to be checked indicating whether an issuer is filing periodic reports under the Exchange Act voluntarily.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.