Sec Publishes Comprehensive Changes To Securities Act Rules

Originally pulished August 2 2005

The Securities and Exchange Commission has published the text of extensive amendments to the rules for public securities offerings under the Securities Act of 1933. The adopting release, entitled "Securities Act Reform," which includes the text of the new regulations, is available at http://www.sec.gov/rules/final/33- 8591.pdf.

The new rules, which were proposed on November 3, 2004, and approved on June 29, 2005, liberalize to some extent the communications permitted before and during registered public offerings, although use of the liberalized provisions may be subject to new filing requirements. Registration procedures (especially for shelf offerings) have been amended in a manner intended to improve market access. Because the SEC has accepted an "access equals delivery" proposition, the requirement to deliver a final prospectus is effectively abolished for most types of offerings. The rules codify certain of the SEC’s views on civil liabilities under the Securities Act, an action that may increase exposure to private litigation and thereby limit the value of the new rules and that will require reexamination of practices for the delivery of information in public offerings. Amended rules under the Securities Exchange Act of 1934 add requirements to disclose risk factors and unresolved SEC staff comments in public companies’ annual reports.

The final rules are substantially the same as the proposals. In response to some criticisms received from more than 130 entities, several changes were made to the proposed version of the rules, but a number of important objections are not reflected in the final rules.

Although the amendments will affect all public companies, well-known seasoned issuers ("WKSIs"), a defined term including issuers with at least $700 million in market capitalization and issuers of at least $1 billion in debt securities under registration statements in the last three years, will realize the greatest benefits from the new rules. Investment companies and business development companies, which are subject to separate regulation under the Investment Company Act of 1940, are generally not permitted to take advantage of the new rules. The use of the new rules by issuers of asset-backed securities is limited, but similar benefits may be available under Regulation AB, which was approved in late 2004 and which comes fully into effect in 2006.

The amended rules will come into effect December 1, 2005. Voluntary compliance with the new rules will not be permitted before the effective date. The SEC has not yet provided any guidance on transition to the new system.

Highlights

Communications - The new rules affect the provisions of Section 5 under the Securities Act that forbid offers of securities before the filing of a registration statement and that limit written offers between the filing and effectiveness of a registration to the prospectus included in the registration statement. These liberalizations will allow public companies and underwriters of securities to communicate in writing more freely with the investing public without the risk of violating Section 5, but come at the price of possible liabilities under Section 12(a)(2) of the Securities Act. Although oral communication has always been permitted after filing a registration statement and subject to Section 12(a)(2), the use of written materials may present different evidentiary considerations and different questions concerning the standard of care in preparing the materials.

Companies making their initial public offerings will have the benefit of only some of the liberalizations. "Ineligible issuers," which include public companies delinquent in their SEC reports, shell companies and companies that have violated the anti-fraud provisions of the federal securities laws in the preceding three years (including companies that have settled government actions alleging such violations), are disqualified from using some of the new rules. The disqualification resulting from settlements of SEC actions, which could have deprived some of the largest and most widely held companies from the benefits designed for WKSIs, will apply only prospectively from December 1, 2005. A waiver mechanism is provided allowing affected companies to apply for a dispensation from the SEC.

• Most communications made by companies more than 30 days before the filing of a registration will be immunized from Section 5 liability.

• The regular release of factual business and forwardlooking information by reporting companies, including announcements made around the time of a public offering, will not be considered as impermissible offers of securities.

• Marginally more informative announcements of public offerings will be permitted.

• WKSIs will be permitted to make explicit offers of securities before filing a registration statement.

• "Free writing" prospectuses, which are offering documents outside the registration statement and prospectus (and therefore not subject to Section 11 exposure) that include information used for price discovery or otherwise not called for by the SEC’s rules, will be permitted, subject to certain filing requirements and other conditions; for certain issuers, these conditions may include delivery of the prospectus forming part of the registration statement.

• Restraints will be reduced for analyst research reports (now defined to include any information, opinions and recommendations) published by securities dealers that may participate in underwriting syndicates or selling groups.

• Limitations on electronic road shows for public offerings will be reduced.

• The new rules will rescind the blanket exemption for registered offerings from Regulation FD, the SEC’s rule forbidding certain selective disclosures.

Registration procedures - The changes to registration procedures effected by the new rules will improve market access for public companies. IPO companies and ineligible issuers will generally not be able to take advantage of streamlined registration procedures.

• WKSIs will be permitted to use "automatic" registration statements that become effective on filing without staff review, both on original filing and when amended posteffectively.

• Fees for automatic registration statements may be prepaid or paid as securities are sold from time to time.

• In shelf offerings, a broader range of information may be excluded from the registration statement as of its effective date.

• The rule limiting the amount of securities included on a Form S-3 shelf registration statement to the quantity a company believes that it will sell in the succeeding two years will be abolished, although the new rules will impose a maximum three-year life on most shelf registrations.

• The new rules will make greater use of incorporation by reference into offering documents from public companies’ periodic reports.

• Limitations on the amount of securities that a company eligible to use Form S-3 may sell on at-the-market terms will be eliminated in the new rules, together with the requirement to name an underwriter in the prospectus forming part of the registration statement.

Prospectus delivery - The new rules equate "access" to a prospectus, meaning its public availability through the SEC’s electronic filing system, with delivery to an investor. Therefore, except for offerings to employees and in business combinations, the requirement under the Securities Act to physically deliver a final prospectus with the confirmation of sale will effectively be abolished by the new rules. Confirmations of sales, which will be required to include notice to the purchaser when the securities are part of a registered public offering, may be sent to investors, provided the final prospectus is timely filed with the SEC.

Liability - The new rules codify SEC views on liability for misleading statements and omissions in a manner that may expand the exposure of public companies and underwriters to civil litigation.

• Liability under Section 12(a)(2) of the Securities Act for misstatements and omissions will be evaluated based on the information "conveyed" to investors only at the time the contract of sale is made, so that later disclosures will not be considered.

• A contract of sale will be deemed to have been made when an investor is committed to purchase the securities.

• Issuers will be deemed to be sellers within the meaning of Section 12(a)(2) of the statute and may be liable for communications made by them or on their behalf, according to the new rules, which appears to be contrary to the view taken by the courts in firm-commitment offerings.

• The rules effectively extend the statute of limitations for shelf offerings by providing that the time of each takedown will be treated as a new effective date of the registration statement, which will mean that the issuer (but not its directors, its officers who signed the registration statement or its auditors) and underwriters may have additional liability for each shelf takedown.

• Liabilities under Section 11 and 12(a)(2) may have different times of applicability.

The rule assessing liability based on "conveyed" information was heavily criticized by the public commentators for the ambiguity of the term. The SEC apparently disagreed and adopted the rule substantially as proposed. Although the new rule does not specify the method by which information must be "conveyed" to investors, the public remarks of the SEC’s senior staff strongly suggested that the term may mean that the information in question will be required in fact to be provided to buyers.

New disclosure requirements - Most public companies will be required to disclose in their annual reports on Form 10-K material unresolved staff comments received 180 days or more before the end of the fiscal year. The new rules require risk factor disclosure in annual reports on Form 10-K and 20-F.

Application to Asset-Backed Securities - Informational and computational material would be free writing prospectuses subject to compliance with the new rules.

Detailed Analysis

The new rules under the Securities Act are both substantively and procedurally complex. The rules differentiate among classes of public companies and among types of offerings. New definitions, many of which have no historical antecedents, are an important part of the reform measures. A review of these classifications and definitions is necessary to an understanding of the new rules as a whole.

Classifications of companies

The new rules recognize four categories of public companies—WKSIs, seasoned issuers, unseasoned reporting companies and non-reporting companies. Although not identified as such by the SEC, two other categories of companies—ineligible issuers and voluntary reporting companies—must be taken into account to determine where a company may fit under the new system.

WKSIs

A company is a WKSI if:

• it is current in its Exchange Act reports and has filed timely in the twelve months preceding the filing of a registration statement;

• it is eligible to use Form S-3 or F-3 to register a cash offering for its own account;

• as of a date within 60 days of the determination, either:

• the value of its common equity securities (whether or not voting) held worldwide by unaffiliated persons is at least $700 million; or

• it has issued in registered primary offerings at least $1 billion in non-convertible debt or preferred securities in the preceding three years; and

• it is not an ineligible issuer.

WKSIs that qualify based on the debt issuance test may not register offerings of common equity securities unless the market value of common equity held by unaffiliated persons is at least $75 million, which is the same test used to qualify companies to make primary offerings of securities on Form S-3.

The SEC commented that, according to its calculations, WKSIs constitute approximately 30% of all listed companies and that they account for approximately 95% of equity market capitalization and a higher percentage of registered debt offerings.

Majority-owned subsidiaries of WKSIs may qualify as WKSIs themselves based on the parent’s status if:

• the parent fully and unconditionally guarantees the subsidiary’s non-convertible debt securities;

• the subsidiary guarantees the debt securities of its parent or the non-convertible debt securities of another majority-owned subsidiary where such securities are supported by the parent’s full and unconditional guarantee; or

• the subsidiary’s debt is guaranteed by another majorityowned subsidiary of the same parent, where the guarantor subsidiary independently qualifies as a WKSI.

Issuers of asset-backed securities, which are subject to a separate registration system approved in late 2004 and becoming fully effective in 2006, and foreign government issuers are not eligible to be WKSIs. Investment companies and business development companies are likewise disqualified from WKSI status.

Seasoned reporting issuers

Seasoned issuers are those reporting companies not qualifying as WKSIs but eligible to make primary offerings of securities on Form S-3 or F-3. The criteria for use of this form are not changed by the new rules. The relevant form criteria for purposes of this category are that the company:

• is current in its Exchange Act reports and has filed timely in the twelve months preceding the filing of a registration statement;

• since the end of its most recent fiscal year, has not failed to make payments on preferred stock or defaulted on material capital obligations; and

• either:

• has common equity securities held worldwide by unaffiliated persons valued at least $75 million; or

• is issuing investment-grade non-convertible securities.

Unseasoned issuers

An unseasoned issuer is any reporting company that is ineligible to make primary offerings on Form S-3 or F-3. The SEC does not consider companies that file reports voluntarily to be reporting companies. Voluntary reporting companies are normally companies that, although their obligations to file periodic reports under Section 15(d) of the Exchange Act have lapsed because of the small number of their record holders, have continued to file reports because of indenture covenants requiring them to continue to file with the SEC. The SEC does not take the reporting histories of voluntary reporting companies into account for purposes of registration form eligibility.

Non-reporting issuers

Non-reporting issuers are companies that do not file periodic reports with the SEC, voluntarily or otherwise. Generally, this category covers companies filing their first registration statement with the SEC. Such a company becomes subject to Exchange Act reporting upon effectiveness of its registration statement.

Ineligible issuers

Ineligible issuers may not be WKSIs and certain other disabilities attach to companies classified in this category.

Ineligible issuers are:

• reporting companies with reporting delinquencies under the Exchange Act in the prior 12 months, except for certain current reports on Form 8-K;

• companies that are (or have been in the past three years) blank check companies, certain shell companies or penny stock issuers;

• limited partnerships in offerings that are not firmcommitment underwritings;

• companies filing for bankruptcy or insolvency in the preceding three years;

• companies that are (or have been in the past three years) subject to certain administrative proceedings under the Securities Act; and

• companies (here including subsidiaries) convicted of offenses specified under the Exchange Act or subject to a decree or order prohibiting conduct specified in the antifraud provisions of the federal securities laws issued in the past three years.

The disqualification for decrees and orders related to the antifraud provisions of the federal securities laws will include decrees and orders entered as part of settlements with the government, such as consent decrees, but will not apply to any settlement entered into before the effective date of the new rules. Disqualifications stemming from a subsidiary’s misconduct will only result if the issuer owned the subsidiary at the time of the actions in question, which will prevent a company acquiring a new subsidiary from becoming an ineligible issuer as the result of actions taken at a time the subsidiary was not owned.

In the case of asset-backed issuers, disqualifying reporting delinquencies will include filing failures by the depositor and any asset-backed issuer established by the depositor.

The SEC may determine, "upon a showing of good cause," that a company otherwise covered by the definition should not be considered an ineligible issuer. The new rules delegate authority to the staff under this provision to make the determination that an issuer need not be considered ineligible. The SEC’s commentary does not suggest standards for such a determination.

Other definitions

An understanding of three new definitions is necessary to the understanding of the new communications rules and the revised registration procedures.

Free writing prospectus

A free writing prospectus is a written communication offering for sale the securities covered by a registration statement, but does not include the prospectus forming part of the registration statement, certain materials permitted by the rules for issuers of asset-backed securities or sales literature used after the effective date of a registration statement that is accompanied or preceded by a prospectus satisfying Section 10(a) of the Securities Act.

Because the free writing prospectus is not a part of the registration statement, Section 11 does not apply. Material misstatements and omissions within a free writing prospectus are actionable under Section 12(a)(2). Misleading disclosure in a free writing prospectus may also lead to liability under Section 17(a) of the Securities Act, which is not enforceable by private litigants, and under Exchange Act Rule 10b-5.

Graphic communications

Graphic communications include "all forms of electronic media." These include audio and video tapes, fax transmissions, e-mail and Internet websites, among other things. The SEC’s commentary makes clear that "blast" voice mails, recorded voice messages transmitted to many telephones, are graphic communications under the new definition. Telephone conversations or conference calls and personal voice mail messages from live telephone calls would not be construed as graphic communications. An exception in the definition of graphic communications is made for live real-time transmissions of road show presentations to live audiences. When recorded and retransmitted through a company’s website, however, the communication would be considered graphic.

Written communications

In addition to written materials and radio or television presentations, all of which are covered in the statutory definition, "written communications" include all graphic communications. All radio and television presentations are deemed to be written communications, without regard to the manner of transmission.

Communications rules

Routine corporate announcements

Several new rules will prevent company announcements from being construed as offerings of securities before the filing of a registration statement, which are forbidden by Section 5(c) of the Securities Act, or as prospectuses not conforming to statutory standards, which are forbidden by Section 5(b)(1). The new rules are safe-harbor regulations, meaning that a departure from the rules’ conditions is not necessarily indicative of a Section 5 violation. In large part, the rules codify the SEC’s administrative practices and interpretations. Many of the safe-harbor rules, however, include additional requirements that appear not to have been part of the SEC’s historical practices and interpretations.

For many years, the SEC has held that circumstances surrounding a communication that does not even refer to an offering of securities might nevertheless cause the communication to constitute an offering. If, for example, a company about to register the initial public offering of its securities publishes an advertisement that, while making no reference to the offering itself, emphasized its financial performance or other investment characteristics, an illegal offering could be found. Most of the SEC’s official pronouncements have long recognized that, particularly for publicly traded companies filing periodic reports with the SEC, a finding of an illegal offering is abnormal. At the same time, the existence of this doctrine and the associated legal risk that an illegal offering might be found have been perceived by many commentators to be a deterrent to the free flow of useful information to public investors. The SEC’s intent is that the new rules should prevent unwarranted interference with the dissemination of such information.

New Rule 163A provides generally that communications by or on behalf of an issuer that do not refer to a securities offering and that are made more than 30 days before the filing of a registration statement will not be considered an offering of the securities to be registered in violation of Section 5(c) of the Securities Act. In recent practice, the SEC staff has abstained from raising questions concerning public communications made 45 days or more before the filing of a registration statement, so that Rule 163A increases the safe period by 15 days. A company relying on the Rule 163A safe harbor must, however, take "reasonable steps within its control to prevent further distribution or publication" of the communication. The rule and the SEC’s commentary in the adopting release do not suggest what such steps might be. The SEC did include one illustration: an earnings release made more than 30 days before filing but used during the offering would not be protected by Rule 163A and might be a free writing prospectus.

The rule is unavailable to certain types of offerings and certain categories of companies. The ineligible offerings are certain business combinations involving the issuance of securities, which will continue to be governed by Regulation M-A, and employee benefit offerings to be registered on Form S-8 for companies other than WKSIs. Rule 163A is not available for communications for any company that is, or that has been in the preceding three years, a blank check company, a shell company (excepting a business combination related shell, a newly defined term) or a penny stock company. The availability of the rule is also withheld from investment companies and business development companies.

New Rule 168 provides that ordinary course communications by or on behalf of an issuer of regularly released factual business information and forward-looking information will not be construed as offerings of securities for reporting companies and for foreign companies that, although not subject to SEC reporting requirements, would otherwise be eligible to register primary offerings of their own securities on Form S-3. The factual business information protected is defined circularly to include "factual information about the issuer, its business or financial developments, or other aspects of its business," and to include product or service advertisements and dividend announcements. "Forwardlooking information" is defined to include financial projections, statements of management plans and objectives, statements concerning future economic performance, and the assumptions underlying any of these. Eligible information does not include information about a registered offering.

Other conditions of Rule 168 are that the information be released in the ordinary course and that "the timing, manner, and form" of the release is materially consistent with the company’s historical practices for such releases. Investment companies and business development companies are not eligible to use Rule 168. A headnote provides that the rule is unavailable for technically compliant communications that are "part of a plan or scheme to evade the requirements of section 5." The SEC’s commentary in the adopting release does not suggest what may constitute such a plan or scheme.

New Rule 169 exempts regularly released factual business information, but not forward-looking information, from any issuer, including non-reporting companies, other than investment companies and business development companies, subject to a number of conditions. The "factual business information," as defined for purposes of Rule 169, does not include dividend announcements. Communications that include information concerning a registered securities offering are not covered by the rule. Conditions to the use of Rule 169 include the requirements that the information be released in the ordinary course of the company’s business and that the timing, manner and form of the release are materially consistent with historical practices. The release of the information must be intended for use "by persons, such as customers or suppliers, other than in their capacities as investors or potential investors." The release of the information must be "by the issuer’s employees or agents who historically have provided such information." Finally, Rule 169 includes a headnote rendering the benefit of the rule unavailable for technically compliant communications that are part of a scheme or plan to avoid the requirements of Section 5.

Company communications in connection with registered offerings

Offering announcements

Companies other than investment companies and business development companies may make somewhat more informative announcements of public offerings after the filing of the registration statement than formerly permitted under the terms of amended Rule 134. Notices complying with the rule are deemed not to be prospectuses under the statutory definition or under the new definition of free writing prospectuses. Among other things, the amended rule specifically permits additional information concerning the issuer (such as its address and telephone number) and the securities offered (such as designations and ranking, CUSIP number and listing information). The intended application of offering proceeds and type of underwriting may be included in the announcement, but only if the same information has been disclosed in the prospectus forming part of the registration statement. Issuers of asset-backed securities may identify parties such as the servicer, sponsor or depositor and may include information concerning the asset class of the transaction and any credit enhancement. The amended rule allows identification of underwriters in the syndicate generally, not merely the managers of the offering. The dates, times and locations of road shows may be included in the announcement. Offering procedures, such as subscription procedures in on-line offerings, are specifically permitted to be disclosed by the amended rule, although the SEC had long acquiesced to the inclusion of such information in no-action correspondence.

The availability of Rule 134 had historically been conditioned on the availability of a prospectus permitted by Section 10 of the Securities Act. In the SEC’s view, the prospectus for a company’s initial public offering is not such a prospectus unless it includes a bona fide estimate of the price to the public. While this view has not been changed, amended Rule 134, as interpreted by the SEC, may be used by an IPO company before an estimate of the pricing range if the communication relying on the rule does not include any other information that would be dependent on the public offering price. Such prohibited information is not confined to the price itself. In the case of fixed-income securities, such information includes final maturity, interest rate, yield and any rating assigned to the securities. As in the past, amended Rule 134 requires the inclusion of legends informing readers of the availability of the registration statement.

Because an announcement conforming to Rule 134 is defined not to be a prospectus, the civil liability provisions of Securities Act Sections 11 and 12(a)(2) do not apply to its contents.

Free writing prospectus rules

The new regulations concerning the free writing prospectus permit, for the first time since enactment of the Securities Act, the use of written offering materials in association with registered offerings before the effective date of the registration statement. Absent the amended rules, the use of written offering materials before the effective date and the delivery of a complete Section 10 prospectus is a violation of Section 5(b)(1), making the seller using the offering materials absolutely liable to its purchaser. The use of a free writing prospectus in accordance with the conditions of the new rules will not carry this legal risk.

WKSIs may make written offers of securities for capitalraising transactions before filing a registration statement pursuant to new Rule 163 without violating the prohibition against offering securities before the filing of a registration statement under Section 5(c) of the Securities Act. It is not necessary for the company to have decided that it will make a registered offering before relying on the rule. Two general conditions apply to communications under Rule 163. The communication relying on the rule, which will be deemed a free writing prospectus, must carry a notice to investors that the company may file a registration statement. The required legend also encourages investors to read the related prospectus before buying. If the company later files a registration statement, the Rule 163 communication must be filed with the SEC. Failure to observe the legend requirement of the rule will be excused if the failure was "immaterial or unintentional," if "a good faith and reasonable effort was made to comply," and if an amended free writing prospectus including the required legend is prepared "as soon as practicable" after the discovery of the omission. Rule 163 may not be used for business combination transactions in which securities will be issued. Investment companies and business development companies may not rely on Rule 163.

Under new Rule 164, a free writing prospectus used by the issuer or any offering participant after the filing of a registration statement is a prospectus permitted by Section 10(b), so that its use does not violate Section 5(b)(1). The rule also prescribes eligibility conditions and makes provisions for the cure of certain compliance failures, which are similar to the cure provisions in Rule 163. New Rule 433 sets out the filing, delivery, notice and recordkeeping conditions to the use of a free writing prospectus.

The free writing prospectus may be used by any issuer, with a number of exceptions. Investment companies and business development companies are wholly excluded from use of the free writing prospectus as are issuers that are, or have been in the past three years, blank check companies, certain shell companies and penny stock issuers. Other companies described in the definition of "ineligible issuer" may make limited use of the free writing prospectus. The limitations in these cases confine the permissible information to "only descriptions of the terms of the securities in the offering or the offering," or, for issuers of asset-backed securities, certain specified information from Regulation AB.

Six conditions may apply to the use of the free writing prospectus under Rule 433:

• Companies other than WKSIs must have filed with the SEC a registration statement that includes a prospectus satisfying Section 10 of the Securities Act;

• Unseasoned and non-reporting companies must make prior or contemporaneous delivery (which might be satisfied by hyperlink access) of the prospectus satisfying Section 10;

• Information in the free writing prospectus,"the substance of which is not included in the registration statement," may not "conflict" with information that is part of the registration statement, including Exchange Act reports incorporated by reference;

• The free writing prospectus must include a prescribed legend directing investors to the prospectus in the registration statement;

• Subject to exceptions, the free writing prospectus must be filed with the SEC, but not as part of the registration statement, by "means reasonably calculated to result in filing no later than the date of first use"; and

• Issuers and offering participants must retain copies of any free writing prospectus not filed with the SEC for a period of three years, dated from the first bona fide public offering of the securities.

The SEC’s commentary in the adopting release identifies a base prospectus for a shelf offering and a preliminary prospectus as types of prospectuses that satisfy Section 10. In the case of an IPO, it is clear that the SEC regards an estimated range of the public offering price as a necessary disclosure for satisfaction of Section 10.

The delivery requirement applicable to unseasoned and nonreporting companies generally calls for the use of the most recent prospectus satisfying Section 10. Once available, the final prospectus for such a company must accompany or precede any use of a free writing prospectus after effectiveness. If a free writing prospectus is delivered electronically, an active hyperlink to a prospectus satisfying Section 10 will discharge the delivery requirement.

The requirement that the information in the free writing prospectus may not "conflict" with statements in SEC filings may prove difficult to apply in practice. The limit of the SEC’s guidance is its comment in the adopting release that the prohibition will not prevent disclosure that is "different from or additional or supplemental to" the disclosures included in the registration statement. In the SEC’s view, the inclusion of disclaimers, such as a statement that the free writing prospectus is not a prospectus, would vitiate the protection of Rule 164. Statements disclaiming that the information is accurate and complete or requiring investors to acknowledge that they have understood the disclosures have historically been disfavored by the SEC and, if used, would prevent reliance on Rule 164.

The filing requirement normally applies to the issuer itself. If, however, the free writing prospectus was not prepared by or on behalf of the issuer and if the free writing prospectus does not otherwise include material information about the issuer or its securities provided by or on behalf of the issuer, the issuer would not be required to file. Information prepared by another party only on the basis of issuer information or derived from issuer information would not be required to be filed. However, any free writing prospectus used or referred to by an offering participant must be filed if it is distributed "in a manner reasonably designed to lead to its broad unrestricted dissemination." The SEC will not consider a dealer’s communications exclusively with its own customers as such a dissemination. The filing requirement applicable to offering participants is independent of the issuer’s obligation.

Rule 433(d)(5)(ii) requires the filing that describes the final terms of the offering within two days of the later of the establishment of final terms or the first use of the prospectus describing the final terms.

The exceptions to the filing requirement include provisions designed to prevent some substantively duplicative filings. A free writing prospectus including only provisional offering terms is not required to be filed. A free writing prospectus including final offering terms must be filed, but filing need not occur until two days after the later of the establishment of such terms or first use. A free writing prospectus for an issuer of asset-backed securities may also be subject to Regulation AB and associated rules. Similarly, any free writing prospectus used in securities offerings in business combinations may be filed under Rule 425.

Road shows transmitted electronically are included within the definition of written communications. As noted before, the SEC made an exception for live transmissions in real time of road shows to a live audience, which will be treated only as oral communications. Otherwise, an electronically transmitted road show is itself a type of free writing prospectus. A filing requirement for such a road show will apply only if the company is not required to file Exchange Act reports at the time the registration statement is filed and the issuer does not make at least one bona fide version of a road show, covering the same general areas regarding the issuer, its management, and the securities offered as other versions of the road show, available to any person without restriction through a graphic communication, such as openly accessible Internet posting.

Where the road show itself is not a written communication, written materials, such as Power Point presentations, are treated as oral communications rather than free writing prospectuses, and therefore not subject to Rule 164 or 433.

Rule 433(e)(1) provides that any information that is included on a company’s website or hyperlinked from a third-party website will be subject to the filing rules applicable to a free writing prospectus if the information constitutes an offer and if the information is not otherwise exempt from filing. Historical information concerning the company, specifically identified as such and segregated in a separate section of the website, will not be considered current offers of securities unless used in connection with a pending offering. As a result, a company that maintains a properly identified archive of press releases, for example, need not be concerned that the historical information included in the archive will be subject to the free writing prospectus rules.

Publications and broadcasts concerning a registered offering that constitute offers will be considered a form of free writing prospectus under Rule 433(f) if the issuer or an offering participant "provided, authorized, or approved information" to a publisher or broadcaster of the information. Covered media communications would be subject to a filing requirement within four days after the issuer or offering participant becomes aware of the dissemination of the communication. The legending requirement of the rule would be satisfied through inclusion of the prescribed notice on the filed document.

Rule 433(f) normally requires that the publisher or broadcaster of the information must be independent of the issuer and any other person participating in the distribution. An exception is made for issuers in the business of publishing or broadcasting whose publications may include business and financial news. To rely on Rule 433, such a company must have established policies and procedures making editorial content of its publications and broadcasts independent of securities offering activities and any publication or broadcast relying on the rule must have been made in the ordinary course.

A note following Rule 433 basically states that it does not affect the use of sales literature, i.e., written offering materials used after the effective date of a registration statement. Subject to the prior or contemporaneous delivery of a prospectus satisfying Section 10(a), such materials are not considered to be any type of prospectus under the statutory definition of the term.

Research reports

Recommendations and other reports published by brokers and dealers can raise issues under Section 5 of the Securities Act when published around the time of a registered securities offering. Rules 137, 138 and 139 have historically immunized certain recommendations and reports from characterization as illegal offerings or as impermissible types of prospectuses. The amended versions of the rules generally expand the range of protected communications. All three rules are safe-harbor regulations. Communications not conforming to the rules are not necessarily a violation of Section 5.

The proposed versions of amended Rules 137, 138 and 139 had provoked significant concerns. Before the amendments, any "information, opinions and recommendations" published by a broker or dealer satisfying the conditions of the relevant rule had the benefit of the rules’ protections. The rules did not impose any requirements or restraints on the content of the information, opinion or recommendation. In the proposal stage, the SEC considered borrowing the definition of "research report" from Regulation AC, a set of rules applicable to securities analysts required under the Sarbanes-Oxley Act of 2002. Under Regulation AC, a covered report "provides information reasonably sufficient upon which to base an investment decision." Importing this definition into Rules 137, 138 and 139 would have reduced the usefulness of the rules by leaving unprotected communications that might be construed as offers of the registered securities but that did not satisfy the reasonable sufficiency test. The SEC heeded the objections of many public commentators and adopted a final definition of "research report" that covers any "information, opinions, or recommendations," or, in other words, the same types of communications covered by the rules before the amendments. The final definition, in fact, notes specifically that it applies to a communication,"whether or not it provides information reasonably sufficient" to allow an investment decision.

Rule 137 covers any broker or dealer communications when the broker or dealer has not participated and does not participate in a registered securities distribution and does not propose to do so. The broker or dealer may not have received, directly or indirectly, any compensation for the publication or distribution of the report from any person with an interest or participation in the issuer’s securities offering or in its securities. The amendment clarifies the types of payments that are permitted and forbidden by the rule. The communication in question must have been made in the ordinary course of the broker’s or dealer’s business. The rule is available for reports concerning any issuer other than a company that is, or has been in the past three years, a blank check or shell company or a penny stock issuer. Before the amendments, only information concerning reporting companies was covered by Rule 137, a condition that effectively prevented research on initial public offerings. The amended version of the rule will permit the publication of such research by disinterested parties. Distribution of independent research by an offering participant, however, is not permitted.

Rule 138 provides a dispensation from Section 5 for participants in a distribution of securities who have published research in certain circumstances. What the rule contemplates is a mismatch between the securities that are the subject of the distribution and the securities that are the subject of the research. To illustrate, if a dealer has published a report concerning a company’s non-convertible debt securities or preferred stock, the report will not be construed as an offering before filing of a registration statement or as an illegal form of prospectus if the dealer then participates in the registered distribution of the company’s common stock. To rely on the rule, the broker or dealer must have published reports on the type of security in the past, although it need not have reported on the company’s securities. The company in question must be current in its periodic reports with the SEC, although the rule will also allow reports for certain large foreign companies whose securities are widely traded to satisfy this requirement. The rule is unavailable for the securities of any company that is or has been within the past three years a blank check company, a shell company or a penny stock issuer.

Two wholly new provisions in amended Rule 138 hold that reports allowed by the rule will not be considered forms of communications that could jeopardize reliance on the exemptions for unregistered sales exclusively to certain institutional purchasers under Rule 144A, or exclusively outside the United States under Regulation S. An unfortunate consequence of the reference to Rule 144A is its implication that a general solicitation of investors might jeopardize reliance on the rule. By its terms, Rule 144A includes no communications restraints.

Rule 139 covers the publication of both company and industry research reports. Subject to satisfaction of the rule’s conditions, a broker or dealer may participate in a company’s registered offering even though it has recently published research on the issuer or on the issuer’s industry. The research will not be considered as a prospectus or an offering of the company’s securities before the filing of a registration statement. In simplified terms, issuer-specific reports will be covered by Rule 139(a)(1) if the issuer is either a company eligible to make primary offerings on Form S-3 or F-3 or a foreign private issuer that would be eligible to make an offering on Form F-3 except for the Exchange Act reporting requirement of the form. The method for identifying eligible issuers is complex. For the first category of issuers, the time for determination is the later of the date the company most recently filed a registration statement on Form S-3 or F-3 and the date of the most recent amendment filed for the purpose of satisfying Section 10(a)(3), which specifies the maximum age of information permitted in a prospectus. Because the staff of the SEC construes a company’s filing of its annual report on Form 10-K or 20-F to be the equivalent of the filing of such an amendment,we believe that the 10-K or 20- F filing date will be used for purposes of this determination. As of this date, the company’s common equity held by unaffiliated persons must have been at least $75 million or the company must have been offering investment grade securities. "As of the date of reliance" on Rule 139, which appears to mean any date a report concerning the company is used, the issuer must have filed all Exchange Act reports on Form 10-K or 10-Q or, for foreign companies, Form 20-F. The rule will not become unavailable for delinquencies in filing current reports on Form 8-K.

For non-reporting foreign private issuers, the company must satisfy either the $75 million market capitalization test or the investment grade securities test. Equity securities of a qualifying foreign issuer must be traded on a "designated offshore securities market" (a listing of important foreign exchanges included in Securities Act Regulation S) or the worldwide market value of the company’s common equity securities held by unaffiliated persons must be at least $700 million. These tests must be applied as of the date of reliance.

Rule 139 is not available for issuer-specific reports concerning any company that is or that has been in the past three years a blank check company, a shell company or a penny stock issuer. The report relying on Rule 139(a)(1) must have been published in the regular course of business by the broker or dealer. Although Rule 139 as amended abolishes the requirement that the report must have been published with "reasonable regularity," the rule will not be available for the initiation (or reinitiation following a discontinuation in coverage) of research. At least one previous report must have been published before Rule 139 will be available. Neither the rule nor the SEC’s commentary suggests what would constitute a "discontinuation" in coverage. Rule 139a, a parallel rule for research concerning issuers of asset-backed securities, was also amended to delete the "reasonable regularity" condition. The amended rule abolishes the requirement that the recommendation in a report be no more favorable than prior reports.

Industry reports are covered by Rule 139(b). The inclusion of a reference to a company or its securities in a report including "similar information with respect to a substantial number of issuers in the issuer’s industry" or a "comprehensive list of securities currently recommended by the broker or dealer" will not be construed as an illegal offer or prospectus, subject to a number of conditions. The issuer in question must either be a company required to file Exchange Act reports or a foreign private issuer described in Rule 139(a). The disqualifications of blank check companies, shell companies, and penny stock issuers apply to the same extent as under Rule 139(a). The company under consideration or its securities must be "given no materially greater space or prominence" compared to other companies or securities included in the report. The protected report must be published in the regular course of business and may not be the first such report by the broker or dealer or the first report following discontinuation of similar reports. Rule 139(b) does not specify the date as of which its conditions must be satisfied. Like Rule 138, Rule 139 has been amended to provide that reports permitted by the rule will not be considered improper communications under Rule 144A or Regulation S.

Electronic road shows

Electronic road shows, sales presentations for securities offerings transmitted by means of the Internet, have become commonplace since the SEC first acquiesced to the practice in no-action correspondence beginning in 1997. The noaction letters and other published interpretations allowing electronic road shows included a number of conditions, such as limitations on the audience allowed to view the presentation and a requirement that the electronic road show be the transmission or unedited retransmission of a live presentation to an audience. Strictures against multiple viewings and versions of the road show also applied. Users of the permitted procedures were required to take steps to prevent the presentation from being copied or downloaded.

The new rules retract the conditions included in the noaction correspondence. In most cases, an electronic road show will be subject to the rules for free writing prospectuses, as explained above. Electronic road shows for reporting companies are entirely exempt from the filing requirements of Rule 433. A conditional exemption from filing under Rule 433 applies to electronic road shows for the IPO of common equity or convertible equity securities if the company makes at least one bona fide version of the presentation openly available to any investor by electronic means, as, for example, through an internet posting. The removal of the conditions imposed by the no-action correspondence and the limited filing requirements appear to be designed to encourage open access for investors to electronic road shows.

The SEC noted in its comments that, whether treated as an oral or written communication and whether or not required to be filed, an electronic road show will be subject to Section 12(a)(2).

Regulation FD

As originally adopted, Regulation FD, forbidding certain selective private disclosures of material information, included a complete exemption for disclosures made in connection with most forms of registered public offerings of securities. The new rules limit this exemption. The limited exemption will be available only for registered offerings for capital-raising purposes, which may be combined with offerings for the account of selling security holders. A covered selective disclosure made in connection with a business combination involving a registered offering of securities would remain subject to Regulation FD. As amended in the new rules, selective disclosures of material information made in connection with an eligible registered offering will be exempt from Regulation FD only if the disclosure is made in:

• a filed registration statement (including the prospectus);

• a free writing prospectus used after the filing of a registration statement or in sales literature permitted after the effectiveness of the registration statement;

• any other prospectus permitted by Section 10;

• a notice conforming to Rule 135;

• a notice conforming to Rule 134; or

• an oral communication made after the filing of the registration statement.

The exemption as amended does not apply where the registration statement is filed for the purpose of evading Regulation FD, a practically improbable circumstance. The regulatory reasons for limiting the exemption and for the particulars of the revisions to the exemption are not clear. It appears, however, that the limitations may have little effect on everyday conduct after the amended rules come into force.

Registration procedures

WKSIs receive the most attractive benefits of the amended rules for registration procedures through the creation of the automatic registration statements and new rules for registration fee payments. Larger, more mature companies, including both WKSIs and issuers eligible to make primary offerings on Form S-3 or F-3, may also benefit from changes to procedures for shelf registration statements allowing the omission of certain information as of the effective date and removing certain limitations on the quantity of securities registered for delayed sale. Other companies may benefit from slightly liberalized rules permitting prospectus incorporation by reference.

Automatic shelf registration statements

Various amendments to the rules and forms under the Securities Act together are designed to permit WKSIs to file what the SEC calls "automatic shelf registration statements." Taken together with amendments to the communications rules that permit WKSIs to make offerings of securities before the filing of a registration statement, the automatic shelf registration statement rules will permit WKSIs to file the registration statement at the time of sale. Effectiveness will occur immediately on filing. Automatic shelf registration statements will not be subject to prior review by the SEC staff. Additional filing requirements apply at the time sales are made under the shelf registration. An automatic shelf registration statement may cover both primary and secondary offerings.

The automatic shelf registration is created through new General Instruction I.D. of Form S-3 and in a parallel provision of Form F-3. These new instructions basically state that an automatic shelf registration statement may be filed by any issuer that is a WKSI as of the date of filing. WKSI status would be subject to reevaluation at the time the registration statement is updated for purposes of Section 10(a)(3), which, in the view of the SEC staff, is the date the annual report on Form 10-K or 20-F is filed. A WKSI holding the status solely on the basis of debt or preferred stock issuances would be limited to the sale of non-convertible debt or preferred securities unless its common equity securities held by unaffiliated persons had a market value of at least $75 million. The instructions specify subsidiaries of WKSIs that may be included on automatic shelf registration statements. Forms S-3 and F-3 are the only forms of registration allowing the use of the automatic shelf technique.

Contents of automatic shelf registration statements

The contents of an automatic shelf registration statement may be extremely limited. New General Instruction II.F. of Form S-3 requires the automatic shelf registration statement to include only the information required (or, more accurately, not authorized to be omitted) by Rule 430A and new Rule 430B, described below. Taken together with an amendment to Item 12 of the form allowing incorporation by reference from Exchange Act periodic reports of most items of prescribed prospectus disclosure, the prospectus forming part of the automatic shelf registration would be permitted merely to identify the WKSI and the types of its securities to be sold and to incorporate by reference its recent and future Exchange Act filings. An automatic shelf registration statement need not specify whether it covers a primary or secondary offering. When filed, the automatic shelf registration statement would otherwise consist only of the facing sheet (identifying the form of registration, the company, and the types of securities included), a single-page prospectus including the disclosures just described, a signature page and any required exhibits.

Fees for automatic shelf registration statements

A WKSI filing an automatic shelf registration statement has the option to pay the registration fee for the entire amount of securities it expects eventually to sell under the registration statement or to pay only at the time the securities are sold, which the SEC calls pay-as-you-go registration fees. Both methods may be used at once. A WKSI may elect to prepay fees for some future offerings while deferring fees for others. Because registration fees for shelf offerings can be very large, the option to defer payment is attractive. For continuous offering programs, such as medium-term note facilities, companies may want to consider use of the lock box account offered by the SEC.

When prepayments are made, the fee table in the registration statement need only state the amount of the fee, calculated on the value of all securities proposed to be sold, and the classes of securities covered by the registration statement. No allocation of the fee among the included classes or specification of the amount of each class proposed to be sold is required.

If a WKSI defers fees for an automatic shelf registration statement, the fee table must identify the classes of securities covered by the registration statement and note reliance on Rules 456(b) and Rule 457(r), the enabling rules for pay-as-you-go fees. New Rule 456(b) specifies additional procedures for deferred fees. Deferred fees must be paid, calculated on the basis of the rates in effect as of the date of filing, not later than the date the prospectus relating to the securities must be filed under Rule 424(b). Good-faith failures to file will be deemed to have been timely if paid within four days of the original due date. At the time of the deferred payment, the issuer must update the fee table either in its Rule 424(b) prospectus supplement filing or in a posteffective amendment to the automatic shelf registration statement.

Post-effective registration

New Rule 413(b) and General Instruction IV.B. permit a WKSI to add securities to an automatic shelf registration statement by means of a post-effective amendment, an action not technically possible before the new rules. In addition to its own securities, a WKSI may add the securities of a qualifying majority-owned subsidiary, whether or not the subsidiary had previously been a party to the registration statement. Such a post-effective amendment will be effective on filing.

Other changes to shelf registration rules

The rules for delayed offerings as they apply both to WKSIs and to companies eligible to register primary offerings on Form S-3 or F-3 have been amended in a number of noteworthy ways.

Registration of unlimited quantities of securities

For delayed primary offerings, the new rules abolish the rule limiting the securities on a shelf registration statement to the amount the issuer reasonably believed would be sold in the succeeding two years. The limitation remains in force for acquisition shelf registration statements and certain continuous offerings, such as best-efforts offerings for unseasoned issuers.

Maximum three-year life for shelf registration statements

Shelf registration statements for mortgage-backed securities, certain continuous offerings and delayed primary offerings will be subject to a three-year limitation. In general, to be permitted to make further sales, the issuer will be required to file a new shelf registration statement on the third anniversary of the effective date of the older shelf registration statement. Automatic registration statements become effective on filing, so that the SEC anticipates there should be no interruption in market access for WKSIs. To provide some assurance to other companies that market access will continue in the period during which their new registration statements may be reviewed by the SEC staff, sales of securities under old shelf registration statements other than the automated shelf registration will be permitted for an additional six months. Fees from any securities unsold under registration statements subject to the three-year rule will be applied to the new registration statements.

Shelf registration contents

Registration statements for mortgage-backed and for delayed primary offerings are required to include only limited disclosures at the time of filing. Through existing Rule 430A, new Rule 430B and General Instruction II.F. of Form S-3 (and parallel provisions in Form F-3), the registration statement need consist only of the facing page, a prospectus identifying the company and incorporating its Exchange Act filings by reference, a signature page and any required exhibits. Business and financial information will generally be included through the incorporated Exchange Act reports.

Transactional and other disclosures otherwise required must be provided at the time of sale through a Rule 424(b) prospectus that is deemed to be a part of the registration statement, an Exchange Act filing incorporated by reference, or a post-effective amendment to the registration statement. A filing supplying the information omitted in reliance on Rule 430B will be deemed to be a new effective date of the registration statement, a matter of significance for liability issues, including the statute of limitations.

At-the-market offerings

The new rules abolish the requirements of Rule 415(a)(4) that have prevented at-the-market offerings of common stock unless the offering involved no more than 10% of the issuer’s voting equity held by unaffiliated persons and unless the underwriter for the offering was named as part of the prospectus within the registration statement. As a result of the changes, at-the-market offerings in any amount without the services of an underwriter are possible under the SEC’s rules. The only condition to use of the rule is that the company be eligible to make a primary offering on Form S-3 or F-3 at the time the registration statement is filed or updated to satisfy Section 10(a)(3).

Immediate offerings from shelf registration statements

The so-called "convenience shelf " problem has been eliminated by an amendment to Rule 415 authorizing an immediate takedown after effectiveness. The view of the staff had historically been that the immediate takedown would not be permitted without the use of a pricing amendment or the procedures associated with Rule 430A.

Identification of selling security holders

The view of the SEC staff has been that selling security holders must be identified at the time of effectiveness for a registration statement covering a secondary offering of securities or, if the sellers are unknown, by means of a posteffective amendment prior to sale by the previously unnamed persons. New General Instruction II.G. of Form S-3 conditionally modifies the required procedure, but only for companies eligible to make primary offerings on the form. These companies may supply the names of selling security holders by the filing after effectiveness in a prospectus filed under Rule 424(b) deemed to be a part of the registration statement, in an Exchange Act report incorporated by reference, or in a post-effective amendment. The use of the Rule 424 filing will be the recommended procedure in almost all cases.

Companies ineligible to register primary offerings on Form S-3 will remain subject to the post-effective amendment procedure for naming selling security holders not identified at the time of effectiveness. Because these post-effective amendments will not be automatically effective, there will be a delay in their use.

Incorporation by reference by unseasoned issuers

The new rules abolish Form S-2, a form that largely had fallen into disuse since the adoption of Regulation S-B and associated forms. At the same time, the new rules amend Form S-1 to permit incorporation by reference of Exchange Act reports by reporting companies ineligible to use Form S-3. New General Instruction VII to Form S-1 permits a company that has been reporting under the Exchange Act for at least twelve months and that has filed its annual report on Form 10-K for its most recent fiscal year to incorporate by reference most of the business and financial information required within the prospectus from its periodic report. The incorporation by reference is permitted only for historical reports. Unlike Form S-3, future periodic reports will not be incorporated by reference as they are filed.

Prospectus delivery

The new rules effectively abolish the requirement for delivery of the final prospectus from Section 5(b)(2) of the Securities Act in most cases. Noting the more widespread use of the Internet, the SEC has accepted the proposition that the accessibility by electronic means to the disclosure documents required by the Securities Act should be treated as the equivalent of delivery to investors. The SEC’s acceptance of the access-equals-delivery model is limited. It does not extend to all registered offerings or to all types of documents required to be delivered to investors under the federal securities laws.

Under new Rule 172, a prospectus meeting the requirements of Section 10(a) will be deemed to accompany or precede the delivery of a security sold under a registration statement if such a prospectus is timely filed in EDGAR, the SEC’s electronic filing system. Failed attempts to file made in good faith and with reasonable efforts will be deemed to satisfy the rule if the company files the prospectus as soon as practicable.

Rule 172 expressly permits sending confirmations under Exchange Act Rule 10b-10 and notices of allocations of sale before the prospectus is filed.

The SEC specifically noted that the relief provided by Rule 172 would extend to the market-making prospectus, the offering document required when a dealer makes a market in securities of an affiliate, provided only that a current final prospectus is filed with the SEC.

A dealer’s obligation to deliver a preliminary prospectus to investors in IPOs, which is required by Exchange Act Rule 15c2-8, may not be discharged through Rule 172. It is also important to note that, except for WKSIs and seasoned issuers, actual delivery of a prospectus permitted by Section 10 (or, at least, provision of a live hyperlink) will be required as a condition to use of a free writing prospectus.

Rule 172 is unavailable for investment companies and business development companies. The rule also does not affect prospectus delivery requirements in business combinations and exchange offerings or in employee benefit plan offerings registered on Form S-8.

A disclosure duty is created by new Rule 173. In any transaction covered by Section 5(b)(2) of the Securities Act, which includes all registered sales by issuers and underwriters and, in IPOs, by dealers in the 25 to 40 days following the offering, a notice to investors that the securities originated in a registration statement must be delivered to investors within two days of sale. The notice may be provided in the Rule 10b-10 confirmation. Alternatively, the final prospectus may be delivered. A person required to provide notice under Rule 173 must honor any request from its purchasers for a copy of the final prospectus. In such a case, settlement may still proceed before delivery of the final prospectus.

Rules 172 and 173 are independent, which is to say that compliance with Rule 173 is not necessary to establish the exemption from prospectus delivery. Interdealer transactions and transactions ineligible under Rule 172 are not subject to Rule 173.

An amendment to Rule 153 provides relief from the prospectus delivery for sales to brokers and dealers in transactions effected on national securities exchanges, on NASDAQ, or through alternative trading systems. The conditions to the rule are that the related registration statement is effective, that the SEC has not taken certain administrative actions in respect of the offering under Section 8 or 8A of the Securities Act (such as a stop order), and that the prospectus satisfying Section 10(a) is filed in fact with the SEC. No filing with the exchange or other market is required. In view of the adoption of Rule 172, the amendment to Rule 153 appears to be superfluous for practical purposes.

Liability matters

Private rights of action for sales of securities by means of defective information are provided in Sections 11 and 12(a)(2) of the Securities Act. Section 11 makes the issuer, certain of its officers and directors, underwriters and certain experts liable in damages for material misstatements and omissions of fact in the registration statement as of its effective date. An affirmative defense of due diligence is available to all defendants except the issuer. Section 12(a)(2) provides a similar cause of action against sellers of securities by means of misrepresentations and omissions in a prospectus (any written offering material) or in an oral statement. A defendant under Section 12(a)(2) may avoid liability by proving that the misstatement or omission could not have been discovered in the exercise of reasonable care. The SEC does not have standing to sue under either Section 11 or 12(a)(2).

The SEC may enforce the prohibitions of material misstatements and omissions of fact in connection with the offer or sale of securities under Section 17 of the Securities Act and Section 10(b) and Rule 10b-5 under the Exchange Act. The courts have found an implied civil right of action in favor of investors under Rule 10b-5.

The amended rules under the Securities Act codify the SEC’s views on a number of liability issues, including some questions that are strictly relevant only under Sections 11 and 12(a)(2). The new rules concerning liability are, for the most part, unfavorable to prospective defendants. The SEC’s authority to promulgate rules that would control a federal court’s decisions on some of the liability issues may be subject to question in some cases.

The SEC’s commentary does include two interpretations of Section 12(a)(2) that may be helpful to defendants. One is that Section 12(a)(2) does not require every communication to include all information required by SEC rules or all material information. The second is an acknowledgement that the standards of investigation and due care necessary to establish an affirmative defense under Section 12(a)(2) are lower than those required by Section 11(b).

Information "conveyed" at time of sale

New Rule 159 codifies the SEC’s interpretation of Sections 12(a)(2) and 17(a)(2) to the effect that liability under those provisions should be evaluated based on the information "conveyed" to investors at the time of sale. Under Rule 159, the question of material misstatement or omission is to be evaluated only on the basis of information "conveyed" to purchasers up to the point of sale. "Sale," as construed by the SEC here, is the point at which an investor becomes committed to purchase the securities offered, not at closing or when payment is made. The SEC believes that the term "contract of sale" used in Section 2(a)(3) of the Securities Act, defining "sale," has a federal meaning that may be independent of state commercial law.

The SEC’s interpretation in Rule 159 does not apply to Section 11, which judges only the information included in the registration statement as of the effective date. The SEC’s other actions multiplying the number of events deemed to be the effective date lessen the value of the distinction.

Rule 159 provides that, for purposes of Section 12(a)(2), only information known to the investor at the time of sale should be taken into account. Information later provided should not be considered, in the SEC’s view.

Rule 159 creates serious liability concerns for companies of all kinds in the situation where material developments may occur around the time of sale but have not yet been reflected in SEC filings. The problem of Rule 159 may be most acute for issuers of asset-backed securities and for structured corporate securities. In offerings of asset-backed securities, the exact composition of the portfolio of pooled assets may not be known until closing. As a result, Rule 159 may present difficult evaluations of the disclosures made before the portfolio was formed. Similarly, the terms of complex structures securities are frequently not finalized until shortly before closing.

Rule 159 does not define the term "conveyed." The commentary of the SEC and its senior staff suggests that an investor may have to have been made actually aware of a new disclosure before it would be deemed to have been adequately "conveyed." The SEC’s commentary also suggests that, in some cases, delivery of a new disclosure included in filed documents might not suffice unless investors otherwise have been made aware of the filing.

Based on the anti-waiver provision provided by Section 14 of the Securities Act, the SEC does not believe that its intent for Rule 159 might be avoided by drafting documents so that a final contract would not exist until the final prospectus had been filed. Conceding that Rule 159 may provide reason to invalidate enforceable contracts to purchase securities, the SEC notes its view that renegotiation of such contracts may also involve anti-waiver issues unless purchasers are given "adequate disclosure" of their contractual rights and of the new disclosure in question and the "meaningful ability to elect" whether to terminate the old contact and to enter into a new contract.

Issuer as Section 12(a)(2) seller

Liability under Section 12(a)(2) attaches to any person who "offers or sells" by means of a materially misleading prospectus or oral communication. Although privity of contract between plaintiff and defendant is not necessary, the courts have found that, to hold persons other than immediate sellers liable, the person in question must have been an active participant in creating the defective disclosure. In direct offerings and in best-efforts underwritings, the issuer is, of course, a seller within the meaning of Section 12(a)(2). Most courts that have considered the question have found that, in the case of a firmcommitment underwriting, where sales are made by the underwriters who have taken title to the securities from the issuer, the company does not become a seller through its customary participation in the preparation and filing of the registration statement.

Claiming to believe that "there is unwarranted uncertainty" concerning the question, the SEC has adopted Rule 159A to provide that an issuer is generally a seller of securities for purposes of Section 12(a)(2), without regard to the form of underwriting agreement. The purport of Rule 159A is to make the issuer a person selling "by means of " any of the following communications that include an actionable misstatement or omission:

• any preliminary prospectus or prospectus of the issuer required to be filed under Rule 424;

• any free writing prospectus prepared by or on behalf of the issuer or used or referred to by it;

• any part of any other free writing prospectus including material information about the issuer or its securities and furnished by or on behalf of the issuer; or

• any other communication constituting an offering made by the issuer to the plaintiff.

Effective dates of registration statements

The effective date of a registration statement is highly significant for purposes of Section 11 under the Securities Act. Liability under Section 11 applies only to information within the registration statement as of its effective date. Historically, the effective date meant only the date of the SEC’s order of effectiveness under Section 8(a) or 8(c). In practice under the integrated disclosure system, where incorporated Exchange Act annual reports stand in the place of post-effective amendments updating the registration contents, the filing date of a report on Form 10-K or 20-F may be construed as an effective date.

Some commentators have noted that it is unclear whether Section 11 applies to Exchange Act reports filed after the effective date of a shelf registration statement and have speculated that issuers, because of the statutory reference to the effective date, might not have liability for such reports but that underwriters might not have the benefit of the same rule and have responsibility under Section 11 for the same reports. Apparently accepting this hypothesis, the SEC has defined "effective date" in Rule 430B to include, not only the original effective date under Section 8(a) and the effective date of a required post-effective amendment, but also the earlier of the date of filing of a prospectus required under Rule 424 deemed to be a part of the registration statement or the first sale. Prospectuses of this type are generally the supplements used to supply the detailed information concerning the terms of the offering, the securities offered and the plan of distribution, whose omission from the original form of prospectus is authorized by Rules 430A and 430B.

The consequences of the SEC’s action are that issuers may be liable for certain information for which they previously were not responsible under Section 11 and that underwriters, who formerly only might have been liable for such information under Section 11, now are clearly exposed to liability for misstatements and omissions in Exchange Act reports filed after the statutory effective date. The action, however, does not extend to other prospective defendants. Officers and directors signing the registration statement and the auditors, with any other experts, will not be affected by the new deemed effective dates under Rule 430B. Because of this exclusion, new auditors’ consents will not be required at the time of the filing under Rule 424.

New Exchange Act disclosure requirements Risk Factors

Forms 10 and 10-K have been amended to add a requirement to include the risk factor disclosure described in Item 503(c) of Regulation S-K, "where appropriate." Only material changes to risk factors previously reported must be included in reports on Form 10-Q. The SEC commentary suggests that the need to update risk factors in quarterly reports should be rare in practice. Issuers of asset-backed securities are not subject to the requirement.

Unresolved staff comments

Amendments to Forms 10-K and 20-F add the requirement to disclose the substance of any unresolved staff comments concerning the company’s Exchange Act reports that the company believes to be material. The comments in question must have been received by the company in writing not less than 180 days before the end of its fiscal year. This requirement applies only to WKSIs and other accelerated filers, which are, in most cases, the same companies eligible to make primary offerings on Form S-3. The new disclosure item explicitly permits the company to state its own position concerning the issue raised by the staff ’s comment.

Voluntary filer stats

The facing sheets for Forms 10-K and 20-F have been amended to add a requirement for the company to state whether it is required to file reports pursuant to the Exchange Act. The effect of the requirement will be that companies who file reports as technical volunteers will identify themselves as such. Most voluntary filers are obligors on debt securities. Because many issues of debt securities are held of record by less than 300 persons, the obligor’s reporting obligation under Section 15(d) automatically falls into suspense after the fiscal year in which the associated registration statement became effective. Voluntary filers of this type generally report to comply with indenture covenants to continue reporting, notwithstanding the suspension of the statutory duty. The SEC believes that investors should be aware that voluntary filers may, at least under the Exchange Act, stop reporting at any time.

Asset-backed securities

The new rules apply to issuers of asset-backed securities in addition to Regulation AB, the system of rules and forms designed for ABS and approved by the SEC in 2004.

For purposes of classification, a qualifying issuer of assetbacked securities will be a seasoned issuer, but cannot be a WKSI.

Concerning the new communications rules, the SEC’s commentary notes that static pool data could qualify as "regularly released" information. The result is that the publication of such data may be made without raising questions under Section 5.

Informational and computational materials used in connection with the sale of asset-backed securities are free writing prospectuses within the meaning of Rule 405 and so are subject to new Rules 164 and 433. Detailed term sheets likewise are subject to the new rules. As construed by the SEC, an underwriter may prepare a free writing prospectus on the basis of issuer pool data without becoming subject to the requirement of filing. A free writing prospectus including the data would be an issuer free writing prospectus and thus subject to filing.

This article has been prepared by Sidley Austin Brown & Wood LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.