Memorandum. SEC Adopts Dramatic Reforms to the Public Offering Process

Transcription

1 Memorandum T o O u r F r i e n d s a n d C l i e n t s SEC Adopts Dramatic Reforms to the Public Offering Process August 22, 2005 The SEC has adopted a wide-ranging package of rules which will have a significant impact on the U.S. public offering process. 1 The new SEC rules broaden the amount of communications permissible before and during an offering, liberalize the rules governing shelf registration statements, eliminate the need to physically deliver final prospectuses in most cases, clarify and in some cases increase the liability for material misstatements in prospectuses, and require additional disclosures in periodic reports. Almost all of the SEC s rules are deregulatory in nature and allow issuers, underwriters and other offering participants to take actions that are currently prohibited or restricted, particularly in the areas of written offering communications, research reports and prospectus delivery requirements. A new category of well-known seasoned issuers will particularly benefit from flexible automatic shelf registration procedures without having to worry about potential staff review and relaxed communication rules in the period prior to filing a registration statement. On the other hand, several of the new rules and interpretations regarding securities law liability will increase the liability of issuers, underwriters and other offering participants compared to prior law. The rules will become effective on December 1, In general, the new rules cover the following key areas: Communications in Connection with a Public Offering New Safe Harbors to Avoid Gunjumping Concerns. Several new safe harbors will make it easier for companies to communicate with investors in the period prior to and during a public offering, although some communications will need to be filed with the SEC. Regularly Released Factual Information. Regularly released factual information may be released at any time by all issuers, so long as the timing, manner and form of release is materially consistent with similar past disclosures, with certain limitations for nonreporting issuers. 1 See Release No (July 19, 2005) (adopting release) and Release No (November 3, 2004) (proposing release). Copyright 2005Fried Frank Harris Shriver & Jacobson LLP August 22, 2005

2 Regularly Released Forward Looking Information. Regularly released forward-looking information may be released at any time by reporting issuers (not IPO issuers), so long as the timing, manner and form of release is materially consistent with similar past disclosures. Communications More Than 30 Days Before Filing. Any communications made more than 30 days before the date of filing a registration statement which do not reference a securities offering will be permitted so long as reasonable steps are taken to prevent republication during the 30 days before filing. Communications Within 30 Days Before Filing. Well-known seasoned issuers (a new category of Form S-3/F-3 issuers with more than $700 million of public equity held by nonaffiliates or which have issued at least $1 billion of nonconvertible securities (other than equity) in registered offerings during the past three years) can make oral or written communications within 30 days before the date of filing a registration statement. Any written communication made under this exemption will need to be filed with the SEC upon the filing of the registration statement. Free Writing Prospectuses. Free writing prospectuses (generally any writing other than a statutory prospectus) can be used by all issuers and other offering participants (such as underwriters) after a registration statement is filed. For this purpose, most forms of electronic communication (such as , video, web postings, audiotapes and blast voic s) are considered to be writings. Free writing prospectuses used or prepared by or referred to by an issuer will need to be filed with the SEC, but those prepared by underwriters will not need to be filed so long as they are not designed to achieve broad unrestricted dissemination. For example, an from an underwriter to all of its clients will not need to be filed. Also, information disseminated to brokers or within a selling group will not have to be filed. Nonreporting issuers and unseasoned issuers, including voluntary filers (such as high yield issuers when their Section 15(d) obligations are suspended), can use free writing prospectuses only if they are accompanied or preceded by a statutory prospectus, which could be accomplished by hyperlink (and additional free writing materials can be distributed without an accompanying prospectus so long as there has been no material change made to the statutory prospectus); in contrast, seasoned issuers can use free writing prospectuses as long as a statutory prospectus is on file with the SEC. Electronic Road Shows. Whereas live, in real time road shows (and related slides and other visual aids) will not be deemed free writing prospectuses, electronic road shows will be considered free writing prospectuses and will need to comply with the conditions applicable to free writing prospectuses. However, electronic road shows are not required to be filed with the SEC, with one exception. The electronic road show is required to be filed in the case of a road show for an offering of common equity or convertible equity securities by an issuer that is a nonreporting issuer at the time of the filing of the registration statement for the offering, unless the issuer makes at least one version of a bona fide electronic road show available without restriction electronically to any person, including any potential investor in the securities. Rule 134 Notices (e.g., Press Releases Announcing an Upcoming Offering). The categories of information that may be included in Rule 134 releases will be expanded to include, for example, the schedule for the offering, account opening procedures, the exchange and ticker symbol of the securities and anticipated securities ratings. Rule 134 releases do not need to be filed with the SEC. Research Reports. The safe harbors in Rules 137, 138 and 139 of the Securities Act governing the issuance of research reports generally will be extended to more issuers and will contain fewer restrictions. Also, Rules 138 and 139 will be amended to specify that if the conditions of the rule are satisfied, the publication or dissemination of research will not (1) be considered an offer or general solicitation or general advertising in connection with a Rule 144A offering or (2) constitute directed selling efforts for Regulation S offerings or be inconsistent with the offshore transaction requirement under Regulation S. 2

3 Shelf Registration Statements Automatic Shelf Registration. Well-known seasoned issuers will be able to file shelf registration statements which will become effective immediately without SEC review, could cover primary and secondary securities without allocation, will allow the addition of new securities and issuers on automatically effective post-effective amendments, and will have the benefit of a pay-as-you-go registration fee mechanism. Immediate Takedowns. Immediate takedowns from a shelf registration statement will be permitted. Base Prospectuses. The base prospectus of shelf registration statements on Forms S-3 and F-3 will be able to incorporate by reference virtually all information from Exchange Act reports, or such information could be included in prospectus supplements, rather than in a post-effective amendment. Material Changes to the Plan of Distribution. Material changes to the plan of distribution on Forms S-3 and F-3 can be reflected in the prospectus supplement or reports incorporated by reference, rather than in a post-effective amendment as previously required. Selling Shareholders. Issuers eligible to use Forms S-3 and F-3 for primary offerings will be able to add the names of selling shareholders to shelf registration statements after effectiveness in prospectus supplements, rather than in post-effective amendments as previously required, subject to certain requirements. Three Year Shelf Period. Primary shelf registration statements on Forms S-3 and F-3 will no longer be limited to the amount which is reasonably expected to be offered and sold within two years. Instead, the shelf registration statement can be used for three years after effectiveness, and thereafter can be used for an additional 180 days in order to allow the issuer to file a new registration statement which will need to be reviewed and declared effective by the SEC. At the Market Offerings. The new rules eliminate restrictions on at the market offerings offerings into an existing trading market at other than a fixed price such as the requirement to name an underwriter in the prospectus and the 10% volume limitation. Prospectus Delivery Access Equals Delivery. Issuers, underwriters and dealers will not need to deliver physically final prospectuses in most cases if a statutory prospectus is filed with the SEC. However, preliminary prospectuses will still need to be delivered in IPO s pursuant to Rule 15c2-8, and investors will have the right to request physical delivery of a final prospectus in any offering. Written Confirmations/Notices of Allocation. Underwriters, brokers and dealers will be able to deliver written confirmations and notices of allocation after effectiveness of a registration statement without an accompanying final prospectus, as long as a statutory prospectus is filed with the SEC. Notice of Registration. Underwriters participating in a registered offering will be required to provide purchasers either a final prospectus or a notice stating that the sale was made pursuant to a registered offering. 3

4 Liability Provisions Information Delivered After Investment Decision. Information delivered to an investor after the investor has made his or her investment decision will not be taken into account in determining whether the investor has received all material information for purposes of liability under Sections 12(a)(2) and 17(a)(2) of the Securities Act. Accordingly, information included in a final prospectus after pricing will not be taken into account in determining whether all material information was delivered to investors. Issuers as Sellers. Issuers will generally be deemed to be sellers for purposes of Section 12(a)(2) liability, which imposes liability on sellers of securities. This rule change is significant because a number of courts had found that issuers in firm commitment underwritings were not necessarily sellers to the ultimate purchasers of the securities. Prospectus Supplements. Information in prospectus supplements will be deemed part of shelf registration statements and, therefore, subject to Section 11 liability. Shelf Takedown Effective Date. Each takedown from a shelf registration statement will have its own effective date for Section 11 liability purposes for issuers and underwriters, which will be the earlier of the date the prospectus supplement is first used or the date and time of the first contract of sale to which the supplement relates. As a result, issuers and underwriters will be subject to liability on the same date. Free Writing Prospectuses. The free writing prospectus (including, for example, electronic road shows) will not be subject to Section 11 liability but will be subject to liability under Section 12(a)(2) and the antifraud provisions of the securities laws. Underwriters will not have cross-liability under Section 12(a)(2) for free writing prospectuses of others that they do not use or refer to. Other New Rules Form S-1/F-1 Incorporation by Reference. Issuers who have filed at least one annual report and have filed all required periodic reports in the prior 12 months now will be allowed to incorporate by reference their prior periodic reports into Forms S-1 and F-1. Elimination of Form S-2/F-2. Forms S-2 and F-2 are eliminated. Additional Disclosures. Annual reports will need to include disclosure of risk factor, where appropriate, material unresolved staff comments (only by accelerated filers and well-known seasoned issuers), and whether or not the issuer is a voluntary filer or a well-known seasoned issuer. 4

5 Attached as Appendix A is a chart which summarizes the impact of the communications rules on various different types of companies. Attached as Appendix B is a more detailed description and discussion of the new rules. If you wish to discuss the new rules, please call your regular Fried Frank contact or any of the following Fried Frank attorneys. New York London Jeffrey Bagner Robert P. Mollen Kenneth R. Blackman Timothy E. Peterson Daniel J. Bursky Justin T. Spendlove Jessica Forbes Karen C. Wiedemann Stuart H. Gelfond Sian Withey Stephanie J. Goldstein David C. Golay Paris Jean E. Hanson Eric Cafritz Lois F. Herzeca Patrick Jais Valerie Ford Jacob Michael A. Levitt Frankfurt Kenneth I. Rosh Sven Schulte-Hillen Steven Scheinfeld Juergen van Kann Paul Tropp Gregg L. Weiner Washington, D.C. Lawrence R. Bard Mark J. Dorsey Karl A. Groskaufmanis Dixie L. Johnson Richard A. Steinwurtzel Vasiliki B. Tsaganos Andrew P. Varney

6 Appendix A Overview of New SEC Communications Rules Regularly released factual information in accordance with past practice Regularly released forward-looking information in accordance with past practice Communications more than 30 days before a filing, so long as an offering is not discussed Communications within the 30 days before a filing (a quiet period ) Rule 134 Notices, which have been expanded to include additional information such as offering procedures Free Writing Prospectuses After SEC Filing Free Writing After Effectiveness Nonreporting Issuer (e.g., IPO s) * Any time, but only to persons other than in their capacities as investors. Unseasoned Reporting Issuer ** Seasoned Issuer *** Well-Known Seasoned Issuer **** Any time Any time Any time No safe harbor Any time Any time Any time Permitted Permitted Permitted Permitted No additional safe harbor other than Rule 135 Permitted, but pricing and ratings information can be included only if the prospectus contains a price range. Permitted, but only if accompanied or preceded by a Section 10(b) prospectus Permitted, and not deemed a prospectus if accompanied or preceded by a Section 10(a) prospectus No additional safe harbor other than Rule 135 No additional safe harbor other than Rule 135 Safe harbor for any oral or written communication Permitted Permitted Permitted Permitted, but only if accompanied or preceded by a Section 10(b) prospectus Permitted, and not deemed a prospectus if accompanied or preceded by a Section 10(a) prospectus Permitted, but only if a Section 10(b) prospectus is on file with the SEC. Permitted, and not deemed a prospectus if accompanied or preceded by a Section 10(a) prospectus Permitted, but only if a Section 10(b) prospectus is on file with the SEC. Permitted, and not deemed a prospectus if accompanied or preceded by a Section 10(a) prospectus * Nonreporting issuers are issuers that are not required to report with the SEC, whether or not the issuer is filing voluntarily. ** Reporting unseasoned issuers are issuers that are required to report with the SEC but are not qualified to make primary offerings on Forms S-3 or F-3. *** Seasoned issuers are issuers eligible to use Form S-3 or F-3 for primary offerings of securities. **** Well-known seasoned issuers, among other things, either have more than $700 million of common equity held by nonaffiliates or have issued at least $1 billion of non-convertible securities in registered offerings during the past three years. 6

7 Appendix B I. Modifications to Gunjumping Rules Detailed Description of the New Rules A. Overview of the New Communications Rules Communications before, during and after a securities offering are currently severely restricted by Section 5 of the Securities Act and the SEC s gunjumping interpretations. The SEC s new rules, as summarized in the chart in Appendix A, significantly clarify which communications are permitted and allow greater communication prior to and during a public offering. Pre-Filing Period. Before a registration statement is filed, Section 5(c) of the Securities Act prohibits all oral and written offers. The term offer includes any attempt or offer to dispose of a security for value, but the SEC also interprets the term broadly to include the publication of information and publicity efforts made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or its securities. The new rules clarify that during this period (1) regularly released factual information may be issued by reporting issuers and nonreporting issuers, (2) regularly released forward-looking information may be issued by reporting issuers, (3) any statement by any issuer made more than 30 days prior to filing a registration statement is not a prohibited offer so long as it does not refer to a securities offering and the issuer takes reasonable steps to prevent further distribution during the 30 days prior to the filing of a registration statement and (4) well-known seasoned issuers can make any oral or written statement within the 30 days prior to filing a registration statement (but written statements would need to be filed with the SEC). Pre-Effective Period. After a registration statement is filed but before it is declared effective, under current SEC rules oral offers are permitted, but written offers (including offers made in writing, by , over the Internet, by radio or on television) can only be made pursuant to a statutory prospectus that meets the requirements of Section 10 of the Securities Act. The only written materials that can be used during this period are preliminary prospectuses filed with the SEC and Rule 134 notices that contain limited information about the offering. The new rules (1) clarify that during this period regularly released factual information may be issued by reporting issuers and nonreporting issuers, (2) clarify that during this period regularly released forward-looking information may be issued by reporting issuers, (3) broaden the categories of information that may be disclosed under Rule 134 and (4) permit the use of free writing prospectuses (generally any writing other than a statutory prospectus), subject to satisfaction of various requirements including in many cases filing with the SEC. Post-Effective Period. After a registration statement is declared effective, under current SEC rules written offers can only be made with a statutory prospectus. However, under Section 2(a)(10) of the Securities Act, additional written offering materials may also be distributed if a final prospectus that meets the requirements of Section 10(a) of the Securities Act (a standard final prospectus) is sent or given prior to or with those additional materials. The new rules (1) clarify that during this period regularly released factual information may be issued by reporting issuers and nonreporting issuers, (2) clarify that during this period regularly released forward-looking information may be issued by reporting issuers and (3) for seasoned 7

8 issuers, broaden the use of free writing prospectuses which are not accompanied or preceded by a statutory prospectus. Violations of Section 5 of the Securities Act and the SEC s gunjumping rules and interpretations can have severe consequences for an issuer and related offering participants. The SEC may delay an offering, require additional disclosures to be added to the prospectus, or bring an enforcement action against the violator. In addition, under Section 12(a)(1) of the Securities Act, any purchaser of securities issued in violation of Section 5 of the Securities Act can bring a rescission action against the issuer and require the issuer to repurchase the securities at the price at which they were sold. The SEC in turn may require an issuer to disclose in its prospectus the existence of these rescission rights. The new rules provide clearer answers to issues raised in the communications area and will make compliance with Section 5 before an offering more certain for most companies. B. Regularly Released Factual Business Information While the SEC has long taken the position that companies are permitted to issue ordinary course press releases if an offering is contemplated or ongoing, there has been concern that release of positive information might be deemed by the SEC to be conditioning of the market for an offering. Although companies may want to release material information to the public for public relations purposes or may believe that the securities laws require the release of such information, because of concern that the SEC might delay an offering, some companies may elect not to release information or may narrow the type of information released. In order to address these uncertainties, the new rules contain a safe harbor that provides that communications containing factual business information issued by or on behalf of a reporting issuer are permitted at any time, are not deemed an offer under Section 5(c) and are not deemed a prospectus under Section 2(a)(10). 2 The release of such information will not constitute an offer of a security which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective. Specifically, new Rule 168 provides a gunjumping safe harbor for regularly released factual business information subject to the following conditions: Required to file reports. The issuer is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act and is not a voluntary filer (e.g., a filer that is not required to file reports with the SEC but does so voluntarily, typically as a result of a contractual requirement), a registered investment company or a business development company; 3 Factual information. The information includes some or all of the following, including without limitation such information contained in reports or other materials filed with, furnished to or submitted to the SEC: (i) factual information about the issuer, its business or financial developments, or other aspects of its business, (ii) advertisements of, or other information about, the issuer s products or services, and/or (iiii) dividend notices (only for reporting issuers); By or on behalf of the issuer. The communication is released by or on behalf of the issuer (a communication is released by or on behalf of an issuer if the issuer or an agent or representative 2 Since it would not be an offer under Section 5(c), dissemination of such information would be permitted in the prefiling period. Since it would not be a prospectus under Section 2(a)(10), dissemination of such information without an accompanying statutory prospectus would be permitted in the post-filing and post-effective periods. 3 The exemption is also available to a non-reporting foreign private issuer that (1) meets all of the registrant requirements of Form F-3 other than the reporting history provisions, (2) either satisfies the public float threshold (in General Instruction I.B.1. of Form F-3) or is issuing non-convertible investment grade securities (in accordance with General Instruction I.B.2. of Form F-3) and (3) either has equity securities trading on a designated offshore securities market and has had them so traded for at least 12 months, or has a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more. 8

9 of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves such release or dissemination before it is made); 4 Not about the offering. The communication may not contain information about the registered offering or be released as part of the offering activities in the registered offering (in the adopting release the SEC declined to define part of the offering activities ); 5 Ordinary course. The issuer has previously released or disseminated information of this type in the ordinary course of its business (although there is no particular length of time requirement); 6 and Similar timing, manner and form. the timing, manner, and form in which the information is released is consistent in material respects with similar past releases or disseminations. The SEC s adopting release discussed a number of concerns raised by commenters: Non-scheduled releases of information. Several commenters were concerned about the availability of the safe harbor for non-scheduled releases of information. In response, the SEC stated in its adopting release that there are circumstances in which communications made outside a predetermined schedule or not at regular intervals would be covered by the safe harbor. The Rule is not intended to cover only scheduled releases of information but also could cover communications, such as product advertising and product release information or earnings guidance changes, that are made on an unscheduled or episodic basis, provided that the issuer has previously provided such communications containing factual business and forward-looking information in that manner. Thus, for unscheduled or episodic releases, the nature of the event triggering the communication would be taken into account in determining whether the regularly released condition is satisfied. For example, if an issuer only gives guidance upon the occurrence of certain types of developments, a release of guidance when a materially similar event occurs 4 The SEC s adopting release states that [we] have not taken the suggestions that the Rule provide that issuers are responsible only for communications made by authorized or approved speakers. The circumstances under which issuers are responsible for the acts of individuals may be determined in accordance with principles not addressed in today s rules. In addition, we have not defined further who may be considered an agent or representative of the issuer, other than to specifically exclude offering participants who are underwriters and dealers. The definition could cover legitimate representatives or agents of the issuer such as, for example, advertising agencies and public relations companies who normally release or disseminate product advertising or promotional communications containing such information on behalf of an issuer. We have also modified the definition to provide that the communication does not have to be both approved and authorized for it to be considered to be made by or on behalf of the issuer. 5 Information about the registered offering is limited to statements allowed under Rule 134, Rule 135, or another exemption, or contained in a permitted free writing prospectus. The SEC s adopting release states with respect to the safe harbors for factual information and forward looking information that while the safe harbor could be available for factual business information contained in an Exchange Act report at the time it is initially filed, the safe harbor will not be available for the distribution of that information to investors or potential investors as part of offering activities, such as incorporation by reference into a prospectus that is part of a registration statement, disclosure at a road show, or disclosure in a free writing prospectus. As another example, as permitted by the regularly released condition, an issuer could rely on the safe harbor for the publication of an earnings release consistent with past practice, including the posting of and maintaining the release on an issuer s web site, whether or not located in a separate section of the web site for historical information. The distribution of that earnings release, however, as part of the marketing activities to potential investors will be outside the scope of the safe harbor. 6 The SEC s adopting release states: While the Rule does not establish or require any minimum time period to satisfy the regularly released element, the safe harbor requires the issuer to have some track record of releasing the particular type of information. One prior release or dissemination could establish this track record. Issuers should consider the frequency and regularity with which they have released the same type of information. For example, an issuer s release of new types of financial information or projections just before or during a registered offering will likely prevent a conclusion that the issuer regularly released that type of forward-looking or financial information in the ordinary course of its business. 9

10 could be materially consistent, even if not done at regular intervals. As another example, if an issuer launches a product only episodically, disclosure or advertising of a product launch still could be materially consistent. New or different technologies. Other commenters questioned whether information distributed using new or different technologies could qualify for the safe harbor. In response, the SEC stated in the adopting release that [m]erely using new or different technologies will not be necessarily inconsistent in material respects under the conditions of the Rule. An issuer will have to determine whether its use of new or different technologies to release information falls within the safe harbor, including whether the release or dissemination is consistent in material respects with how the issuer is already releasing or disseminating its communications containing factual business or forward-looking information using analogous methods. For example, whether the new or different technology makes a material difference in terms of the breadth of dissemination to investors or other reach of the communication to investors is relevant in determining whether manner or form is consistent in material respects. Offshore communications. Other commenters questioned how the safe harbor would apply to offshore communications. In response, the SEC stated in the adopting release that [c]ommunications that are considered not to be offers because they are made offshore and meet other criteria we have previously discussed would be treated in the same manner as they are today. 7 Applies to communications, not information. Also in response to comments, the safe harbors for factual business information and forward-looking information now clarify that if an issuer relies on the exemption for a particular communication, and then uses the same information a second time in an offering-related manner, use of the information as part of the offering activities will not affect the ability of the issuer to rely on the safe harbor for the initial protected communication. A similar new rule also allows non-reporting issuers (including voluntary filers) to regularly release factual business information. 8 However, new Rule 169 specifies that, in the case of non-reporting issuers, the information must be released or disseminated for intended use by persons, such as customers and suppliers, other than in their capacities as investors or potential investors in the issuer s securities, by the issuer s employees or agents who historically have provided such information. The fact that a customer also may be a potential investor in the issuer s securities, or that the information may be received by other persons, does not affect the availability of the safe harbor if the conditions are otherwise satisfied. 9 The new rules allowing factual information and forward-looking information are only non-exclusive safe harbors, and communications that do not meet the safe harbor criteria may still be permissible under Section 5. The SEC s adopting release states that attempted reliance on one of the exemptive rules will not preclude reliance on 7 The SEC cited Statement of the Commission Regarding Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions or Advertise Investment Services Offshore, Release No (Mar. 27, 1998) and Offshore Press Conferences, Meetings with Company Representatives Conducted Offshore and Press-Related Materials Released Offshore, Release No (Oct. 17, 1997). 8 New rule 169 actually applies to all issuers. However, since Rule 168 is more flexible and applies mainly to reporting issuers and also to some non-reporting foreign private issuers and asset backed issuers, it is expected that Rule 169 will be primarily useful for non-reporting issuers. 9 The adopting release states that the rule is aimed at assuring that the communication is intended for use by an audience that is other than an investor audience, not at ensuring that the communication is not received by or available to an investor or potential investor.... For example, a widely disseminated communication (such as a press release) intended for use by a non-investor audience and otherwise meeting the conditions of the safe harbor will not lose protection if it is available to or received by investors or potential investors. 10

11 another available exemption or exclusion. In particular, it will not preclude reliance on the argument that under general securities law principles and our earlier interpretative guidance the communication in question is not an offer under Securities Act Section 2(a)(3). 10 The new safe harbor provides an exemption only from Section 5 of the Securities Act. Factual business information will continue to be subject to the provisions of Regulation FD (prohibiting selective disclosure of material information), Regulation G (governing use of non-gaap measures in any context), Item 10 of Regulation S-K (governing use of non-gaap measures in SEC filings) and Item 2.02 of Form 8-K (covering disclosure of earnings information for a completed fiscal period). C. Regularly Released Forward-Looking Information As with the release of factual information, companies have long been concerned that the release of earnings guidance or expectations information at the time of a potential offering could be viewed by the SEC as conditioning the market for the offering. Not only might the SEC delay an offering, but the SEC might also require the projections information to be included in the registration statement, a result that might be an anathema to companies, their officers and directors and underwriters. In order to address this concern, the SEC s new rules provide that forward-looking information issued by or on behalf of a reporting issuer is permitted at any time, will not be deemed an offer under Section 5(c) and will not be deemed a prospectus under Section 2(a)(10). The release of such information will not constitute an offer of a security which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective. Specifically, new Rule 168 provides a gunjumping safe harbor for regularly released forward-looking information subject to the following conditions: the issuer is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act and is not a voluntary filer, a registered investment company or a business development company; the information includes some or all of the following, including without limitation such forward-looking information contained in reports or other materials filed with, furnished to or submitted to the SEC: (i) projections of the issuer s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items (including, for example, earnings expectations and guidance information), (ii) statements about management s plans and objectives for future operations, (iii) statements about the issuer s future economic performance, including statements of the type contemplated by MD&A and/or (iv) assumptions underlying or relating to any of the foregoing; The adopting release states: In general, as we recognized many years ago, ordinary factual business communications that an issuer regularly releases are not considered an offer of securities. See, e.g., the guidelines contained in [Use of Electronic Media, Release No (Apr. 28, 2000)], at Section II.B.2; Guidelines for the Release of Information by Issuers Whose Securities are in Registration, Release No (Aug. 16, 1971); Publication of Information Prior to or After the Filing and Effective Date of a Registration Statement Under the Securities Act of 1933, Release No (Oct. 7, 1969); Offers and Sales by Underwriters and Dealers, Release No (May 28, 1964); and Publication of Information Prior to or After the Effective Date of a Registration Statement, Release No (Oct. 8, 1957). The non-exclusive safe harbors we are adopting today will not affect in any way the Securities Act analysis regarding ordinary course business communications that are not within the safe harbors and we have made that clear in the Preliminary Note to the Rule. Such communications will not be presumed to be offers, and whether they are offers will depend on the facts and circumstances. 11 An issuer s communications of forward-looking information made in reliance on the gunjumping safe harbor would still have to satisfy the conditions of Section 27A of the Securities Act (a safe harbor from liability for the substance of forward looking statements) if the issuer wished to rely on the statutory safe harbor for the content of the information. Section 27A provides a safe harbor from liability for forward-looking statements if (1) the forwardlooking statement is identified as a forward-looking statement and is accompanied by meaningful cautionary 11

12 the communication is issued by or on behalf of the issuer (information is released by or on behalf of an issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves such release or dissemination before it is made); the communication may not contain information about the registered offering or be released as part of the offering activities in the registered offering; the issuer has previously released or disseminated information of this type in the ordinary course of its business (although there is no particular length of time requirement); and the timing, manner, and form in which the information is released is consistent in material respects with similar past releases or disseminations. 12 Unlike the rules for factual business information, there is no similar safe-harbor for non-reporting issuers (for example, in the case of an IPO). Issuers in IPO s will not be permitted to make forward looking statements without a detailed analysis of whether the statement constitutes an offer in violation of Section 5 of the Securities Act. In the proposing release the SEC acknowledged issuer concerns about whether the SEC staff would require disclosure of forward-looking information in a registration statement if such information was provided publicly in accordance with the safe harbor. The SEC s proposing release stated that [p]ublic statements by issuers would not necessarily require that the disclosed information be included in registration statements. However, citing Rule under the Securities Act and Rule 12b-20 under the Exchange Act, the SEC also said in the proposing release that [t]he information may be required to be included in the registration statement pursuant to some other disclosure obligation. The new safe harbor only provides an exemption from Section 5 of the Securities Act. Regularly-released forward looking information continues to be subject to the provisions of Regulation FD, Regulation G, Item 10 of Regulation S-K and Item 2.02 of Form 8-K. D. Communications More than 30 Days Prior to Filing a Registration Statement While it has long been clear that offers are not permitted prior to filing a registration statement, there has not been a clear rule as to when such restricted period commences. In order to address this uncertainty, the SEC s new rules provide that any communication made by or on behalf of an issuer more than 30 days before the date of the filing of the registration statement will not be prohibited by the gunjumping rules and will not be deemed an offer under Section 5(c) of the Securities Act. statements identifying important factors that could cause actual results to differ materially from those in the forwardlooking statement, (2) the forward-looking statement is immaterial, or (3) the plaintiff fails to prove that the forwardlooking statement (a) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading or (b) if made by a business entity, was made by or with the approval of an executive officer of that entity and made or approved by such officer with actual knowledge by that officer that the statement was false or misleading. 12 The SEC s proposing release stated that if an issuer has consistently released certain forward-looking information on a quarterly basis through ordinary course press releases, it could not satisfy the condition if it instituted a stepped-up media campaign just before or during an offering to release that type of forward-looking information on a different basis or with different timing. 13 Rule 408 under the Securities Act provides that [i]n addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. Rule 12b-20 under the Exchange Act is similar. 12

13 Specifically, the 30-day safe harbor contained in new Rule 163A is subject to the following conditions: the communication must be made by or on behalf of the issuer (even an IPO issuer), not other offering participants such as underwriters or dealers; the communication cannot reference a securities offering that is or will be the subject of a registration statement; and the issuer is required to take reasonable steps within its control to prevent further distribution or publication of the communication during the 30 days immediately preceding the date of filing the registration statement. The SEC declined to provide bright lines as to when an issuer will be considered to have taken reasonable steps within its control to prevent further dissemination of communications. However, with respect to information posted on web sites prior to 30 days before the filing of the registration statement, the SEC adopting release states that we do not expect that an issuer will necessarily remove the information from the web site and, provided that the information is appropriately dated, otherwise identified as historical material, and not referred to as part of the offering activities, we will not object to an issuer maintaining the information on the web site. The SEC adopting release also states that [w]hile we do not expect an issuer to be able to control the republication or accessing of previously published press releases, we would expect issuers and persons acting on their behalf to be able to control their own involvement in any subsequent redistribution or publication and, therefore, believe that it is an appropriate condition to the ability to rely on the exclusion. For example, if an issuer or its representative gives an interview to the press prior to the 30-day period, it will not be able to rely on the exclusion if the interview is published during the 30-day period. The 30-day exemption is a non-exclusive safe harbor. The issuer also may claim the availability of any other applicable exemption, and reliance on the 30-day exemption does not affect the availability of any exemption or exclusion from the requirements of Section 5 of the Securities Act. In addition, statements made in reliance on the 30-day exemption are still subject to Regulation FD, as well as the antifraud provisions of the securities laws. 14 E. Pre-Filing Communications by Well-Known Seasoned Issuers The new rules further loosen the gunjumping prohibitions with respect to a category of large issuers called well-known seasoned issuers. 15 Like other issuers, well-known seasoned issuers will benefit from the safe harbors for regularly-released factual information and regularly-released forward-looking information, as well as the safe harbor for communications made more than 30 days prior to filing a registration statement. However, the SEC rules also provide a safe harbor for these issuers for all pre-filing communications within the 30 days prior to filing a registration statement, subject to satisfaction of various conditions. 1. Definition of Well-Known Seasoned Issuer 14 The 30-day safe harbor is not applicable to (1) communications relating to business combination transactions that are subject to Rule 165 or Rule 166 (Rule 166 provides an exemption from Section 5(c) of the Securities Act for certain communications in connection with business combination transactions before the first public announcement of the offering), (2) communications made in connection with offerings registered on Form S-8 (the registration form for employee benefit plans), other than by well-known seasoned issuers, (3) communications in offerings of securities of an issuer that is, or during the past three years was (or any of whose predecessors during the last three years was) a blank check company, a shell company other than a business combination related shell company, or an issuer for an offering of penny stock or (4) communications made by an issuer that is a registered investment company or a business development company. 15 The SEC calculated that in 2004 well-known seasoned issuers represented approximately 30% of listed issuers but accounted for about 95% of U.S. equity market capitalization and more than 96% of the total debt raised in registered offerings over the past eight years by issuers listed on a major exchange or equity market. 13

14 As adopted, a well-known seasoned issuer is any company that meets all of the following criteria as of the most recent eligibility determination date: It meets the registrant requirements under Form S-3 or F-3, including with respect to Form S-3 the following: Required to File Reports. It has a class of securities registered pursuant to Exchange Act Section 12(b) or a class of equity securities registered pursuant to Exchange Act Section 12(g) or is required to file reports pursuant to Exchange Act Section 15(d). Filers who voluntarily file reports with the SEC are not able to satisfy this criteria and thus cannot be well-known seasoned issuers although they could elect to become reporting issuers by registering under Section 12(g). Current. It has been subject to Section 12 or 15(d) of the Exchange Act and has filed all material required to be filed for at least 12 calendar months preceding the filing of the registration statement. Timely. It has timely filed all reports required to be filed in the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement, other than reports required pursuant to Item 1.01 (material agreements), 1.02 (termination of a material agreement), 2.03 (creation of a direct financial obligation), 2.04 (acceleration or increase of a direct financial obligation), 2.05 (costs associated with an exit or disposal plan), 2.06 (impairment of assets) and 4.02(a) (non-reliance on audited financial statements) of Form 8-K. (Form F-3 does not have the exception for specified Forms 8-K.) No Material Defaults. It and its subsidiaries have not, since the end of the last fiscal year for which financial statements were included, failed to pay any dividend on preferred stock, or defaulted on any installment of debt for borrowed money or on any rental on one or more long term leases, which defaults in the aggregate are material to the financial position of the registrant and its subsidiaries taken as a whole. It meets one of the following two tests: $700 Million Common Equity. As of a date within 60 days of the determination date, the worldwide market value of the issuer s outstanding voting and nonvoting common equity held by nonaffiliates is U.S.$700 million or more The SEC s adopting release includes guidance regarding how to calculate a company s public float. (a) Public float will be calculated in the same manner that it is calculated for purposes of determining Form S-3 or F- 3 eligibility. (b) The determination of public float is based on a public trading market. Therefore, an entity with $700 million of common equity securities outstanding but not trading in any public trading market would not be a well-known seasoned issuer based on market capitalization. (c) In response to comments, the final rule clarifies that public float is calculated on a worldwide basis, not solely on a U.S. basis. (d) In response to comments, the SEC stated in the adopting release that, for purposes of calculating the public float of a non-u.s. issuer, the SEC will interpret common equity as including a class of participating voting or nonvoting preferred stock of a foreign issuer where the issuance of the preferred stock results from requirements of the applicable foreign jurisdiction or market and where the class of preferred stock has liquidation or dividend preferences and other terms that cause it to be the substantial economic equivalent of a class of common stock. 14

15 $1 billion of Non-Convertible Securities, Other Than Common Equity. As of a date within 60 days of the determination date, the issuer has issued during the last three years at least U.S.$1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash registered under the Securities Act, not including exchange offers. The issuer satisfying the $1 billion test may register only non-convertible securities, other than common equity, and full and unconditional guarantees, unless at the determination date the issuer also is eligible to register a primary offering of its securities under Form S-3 or F-3 because it has a public float of $75 million or more. As originally proposed, the $1 billion test only counted debt securities. As adopted, the test counts any non-convertible securities (such as non-convertible preferred stock), other than common equity. The adopting release states that the non-convertible security may be registered on any form (other than Form S-4 or F-4) and the security need not be investment grade. Debt securities issued pursuant to Rule 144A, Section 4(2) of the Securities Act or pursuant to another private placement exemption, or issued in connection with registered exchange offers, such as an Exxon-Capital exchange offer, will not count toward the $1 billion threshold. The SEC s adopting release states that this reflects a specific policy preference for registered offerings rather than offerings made pursuant to Rule 144A with an accompanying registered exchange offer. For purposes of calculating the $1 billion amount, a parent issuer may include the aggregate principal amount of non-convertible securities, other than common equity, of its majority-owned subsidiaries issued in registered primary offerings for cash, not in exchange offers, that it has fully and unconditionally guaranteed in the last three years. 17 It is not an ineligible issuer (discussed in the following section). It is not a voluntary filer. Voluntary filers are not required to file reports and therefore cannot be a seasoned issuer or a well-known seasoned issuer. In addition, voluntary filers will not be treated as reporting issuers, for example, for purposes of the safe harbors contained in Rule 138 (certain research reports), Rule 168 (regularly released factual business information) or Rule 433 (free writing prospectuses). This reflects the SEC s view that these issuers should be required to register under the Exchange Act if they wish to avail themselves of the benefits accorded seasoned issuers. As proposed, voluntary filers would have been treated as unseasoned reporting issuers. It is not an asset-backed issuer. It is not a registered investment company or a business development company. It is not a Schedule B issuer (a foreign government or a political division of a foreign government). The SEC specifically rejected comments that WKSI status be extended to Schedule B issuers, stating that we expect that the staff will continue to consider disclosure and other shelf issues affecting Schedule B issuers in the same manner that they do today. 17 The SEC adopting release states that in calculating the $1 billion amount, issuers generally may include the principal amount of any debt and the greater of liquidation preference or par value of any non-convertible preferred stock that were issued in primary registered offerings for cash. In response to comments which questioned how to value debt issuances involving original issue discount or debt issued in foreign currency denominations, the adopting release states that issuers should use the same calculation that they use to determine the dollar amount of securities that they are registering for purposes of determining their filing fees. 15

16 A majority-owned subsidiary of a parent that is a well-known seasoned issuer can also be a well-known seasoned issuer if one of three conditions is met: (1) the subsidiary s securities are non-convertible securities, other than common equity, and its well-known seasoned issuer parent has provided a full and unconditional guarantee of the payment obligations on the subsidiary s securities; 18 (2) the subsidiary s securities are guarantees of (A) non-convertible securities, other than common equity, of its parent being registered or (B) non-convertible securities, other than common equity, of another majority-owned subsidiary being registered where there is a full and unconditional guarantee of such non-convertible securities by the parent; or (3) the subsidiary s nonconvertible securities are investment-grade securities offered for cash (where at least one nationally recognized statistical rating organization has rated the security in one of its generic rating categories which signifies investment grade). Unless the majority owned subsidiary is itself a well-known seasoned issuer, it can only register securities on its parent s automatic shelf registration statement. The SEC s adopting release states that, in general, well-known seasoned issuer status will be determined on an approximately annual basis. The determination date as to whether an issuer is a well-known seasoned issuer is the latest of (i) (ii) (iii) the time of filing of its most recent shelf registration statement, the time of its most recent amendment (by post-effective amendment, incorporated Exchange Act report or form of prospectus) to a shelf registration statement for purposes of complying with section 10(a)(3) of the Securities Act, which typically occurs when the issuer files its annual report on Form 10-K or Form 20-F 19 or if the issuer has not filed a shelf registration or amended a shelf registration statement for purposes of complying with section 10(a)(3) for 16 months, the time of filing of the issuer s most recent annual report on Form 10-K or Form 20-F (or, if no such report has been filed by its due date, such due date). 20 An issuer that meets the definition of well-known seasoned issuer based on the $700 million public float test can use an automatic shelf registration statement to register any offering of securities, other than those for business combination transactions. An issuer that satisfies the $1 billion non-convertible securities test, and is eligible to register a primary offering of its securities on Form S-3 or F-3 because it has a public float of at least $75 million, can register any offering of securities using automatic shelf registration, other than those for business combination transactions. An issuer that satisfies the $1 billion non-convertible securities test, but does not have a public float of at least $75 million, can use automatic shelf registration only to register offerings for cash of nonconvertible securities, other than common equity. 18 The SEC s adopting release states that (1) whether a guarantee is full and unconditional is analyzed under the same principles as those used under Rule 3-10 of Regulation S-X and that (2) the guarantee may only be of securities that have a limited duration and are not perpetual. The SEC has interpreted the phrase full and unconditional for purposes of Rule 3-10 of Regulation S-X in Release No (August 4, 2000) ( Financial Statements and Periodic Reports for Related Issuers and Guarantors ). Among other things, according to the release, (1) a guarantee is not full and unconditional when it is not operative until some time after default, (2) a guarantee can be full and unconditional even if it has a fraudulent conveyance savings clause, and (3) a guarantee can be full and unconditional even if it has different subordination terms than the guaranteed securities. 19 The SEC s adopting release states that the Section 10(a)(3) update generally occurs with respect to Form S-3 and Form F-3 when the issuer files its annual report on Form 10-K or Form 20-F containing the issuer s audited financial statement for its most recently completed fiscal year by the due date of such annual report. 20 In response to comments that sought greater certainty for market participants as to whether a particular company was a well-known seasoned issuer, the final rules as adopted will also require issuers to indicate by checkmark on the front cover of their Form 10-K or Form 20-F whether or not they are a well-known seasoned issuer. 16

17 In response to comments regarding the threshold amounts of $700 million and $1 billion, the SEC directed the SEC staff to undertake a study in three years after full implementation of the rules to evaluate the operation of the definition of well-known seasoned issuer and any material changes in the data upon which the thresholds are based. The SEC staff was directed, as part of that study, to recommend any potential changes to the thresholds based on such new data. 2. Definition of Ineligible Issuer Under the new rules, status as an ineligible issuer has two main consequences: the issuer cannot be characterized as a well-known seasoned issuer (and thus cannot use automatic shelf registration) and cannot use free writing prospectuses (other than for descriptions of the terms of the securities). An ineligible issuer includes: (1) any issuer that is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act that has not filed all reports and other materials required to be filed during the preceding 12 months (or such shorter period that such issuer was required to file such reports), other than reports on Form 8-K required pursuant to Items 1.01 (material agreements), 1.02 (termination of a material agreement), 2.03 (creation of a direct financial obligation), 2.04 (acceleration or increase of a direct financial obligation), 2.05 (costs associated with an exit or disposal plan), 2.06 (impairment of assets), and 4.02(a) (non-reliance on audited financial statements) (the rule requires issuers to be current, but not necessarily timely); 21 (2) any issuer that is (or was, or any of its predecessors was, during the past three years) a blank check company, an issuer in an offering of penny stock, or a shell company 22 (a company with no or nominal operations and with either no or nominal assets or assets consisting only of cash, or assets consisting of any amount of cash and cash equivalents and nominal other assets) other than a business combination related shell company, or an issuer in an offering of penny stock; (3) a limited partnership that is offering and selling securities other than through a firm commitment underwriting; (4) an issuer if a bankruptcy petition was filed by or against the issuer within the past three years, unless subsequent to such event the company filed an annual report with audited financial statements (in the case of involuntary bankruptcy, ineligibility commences on the earlier to occur of 90 days following the date of the filing and conversion of the case to a voluntary bankruptcy); (5) an issuer if, during the past three years, the issuer or any entity that at the time was a subsidiary of the issuer has been convicted of certain felonies or misdemeanors described in Section 15(b)(4)(B) of the Exchange Act such as forgery, extortion or embezzlement (the final rules clarify that a subsidiary is covered only if the conviction occurred at the time it was a subsidiary of the issuer pre-acquisition convictions in acquired entities will not disqualify the acquiring issuer); 21 The failure to file these specified Form 8-K s will still be relevant to status as a well-known seasoned issuer because of the requirement that the well-known seasoned issuer be eligible for Form S See Use of Form S-8, Form 8-K and Form 20-F by Shell Companies, Release No (July 15, 2005). A shell company is defined as a company, other than an asset-backed issuer, with no or nominal operations and either no or nominal assets or assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. In addition, a business combination related shell company is a shell company formed by an entity that is not a shell company solely for the purpose of changing that entity s domicile solely within the United States, or a shell company formed by an entity that is not a shell company solely for the purposes of completing a business combination transaction among one or more entities other than the sell company, none of which is a shell company. 17

18 (6) an issuer if, during the past three years, the issuer or any entity that at the time was a subsidiary of the issuer was made the subject of any judicial or administrative decree or order (in the case of a settlement, entered into after December 1, 2005) arising out of a governmental action that prohibits certain conduct or activities regarding the anti-fraud provisions of the federal securities laws, requires that the person cease and desist from violating the anti-fraud provisions of the federal securities laws, or determines that the person violated the anti-fraud provisions of the federal securities laws (this includes settlements in which the issuer or its subsidiary neither admits nor denies that it violated the anti-fraud provisions of the securities laws) (the rules as proposed would have covered any violation of the securities laws, not just the anti-fraud provisions); and (7) an issuer that has filed a registration statement that is the subject of any pending proceeding or examination under Section 8 of the Securities Act or has been the subject of any refusal order or stop order under Section 8 within the past three years, or an issuer that is the subject of any pending proceeding under Section 8A of the Securities Act in connection with an offering. The SEC may determine, upon a showing of good cause, that it is not necessary under the circumstances that a particular issuer be considered an ineligible issuer. The date of determination of whether or not an issuer is an ineligible issuer will vary depending on whether the determination relates to the issuer s status as a well-known seasoned issuer or whether it relates to an issuer or offering participant s ability to use free writing prospectuses. For determinations of ineligibility with respect to status as a well-known seasoned issuer, the determination will be made at the time of determination of well-known seasoned issuer status the later of the time of filing its most recent shelf registration statement, the time of its most recent amendment to the shelf to comply with Section 10(a)(3) of the Securities Act (which may be accomplished at the time of filing its annual report which is incorporated by reference into the registration statement), or (if the issuer has not filed a shelf) the time of filing of the issuer s latest Form 10-K or Form 20-F. For determinations of ineligibility with respect to use of free writing prospectuses, the determination will be made at the time of filing the registration statement covering the offering or, with respect to a shelf registration, the earliest time after the filing of the registration statement at which the issuer or another offering participant makes a bona fide offer in the offering. Offering participants only are required to have a reasonable belief that the issuer is an eligible issuer on the date of determination. 3. Oral or Written Offers Made by Well-Known Seasoned Issuers Within 30 Days of Filing a Registration Statement The new SEC rules provide a safe harbor for all pre-filing communications by well-known seasoned issuers in connection with the prohibition in Securities Act Section 5(c) on offers before a registration statement has been filed. 23 This safe harbor, contained in new Rule 163, is subject to satisfaction of the following criteria: By or on Behalf of the Issuer. The safe harbor only applies to offers by or on behalf of the issuer (the issuer, or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it is made). 23 The SEC s adopting release states that because well-known seasoned issuers usually will have a registration statement on file that they can use for any of their registered offerings, it will be rare for these issuers to make offers prior to the filing of a registration statement. 18

19 Intended to be Registered. The safe harbor applies to an offering by or on behalf of a well-known seasoned issuer that will be or is at the time intended to be registered under the Securities Act. Filing. Every written communication that is an offer made in reliance on this safe harbor must be filed by the issuer with the SEC promptly upon the filing of the registration statement (if one is filed) or an amendment (if one is filed) covering the securities that have been offered in reliance on this provision. The condition that an issuer file a free writing prospectus with the SEC under this provision does not apply with respect to any communication that has previously been filed with, or furnished to, the SEC or that the issuer would not be required to file with the SEC pursuant to the conditions of Rule 433 (the free writing prospectus rule) if the communication was a free writing prospectus used after the filing of the registration statement. The condition that the issuer file a free writing prospectus with the SEC under this provision will be satisfied if the issuer satisfies the filing conditions (other than timing of filing which is provided in this provision) that would apply under Rule 433 if the communication was a free writing prospectus used after the filing of the registration statement. An immaterial or unintentional failure to file or delay in filing the communication will not result in a Section 5(c) violation or loss of the safe harbor if a good faith and reasonable effort was made to comply and the document is filed as soon as practicable after discovery of the failure to file. Legend. Any written communication that is an offer made in reliance on this safe harbor must contain substantially the following legend: The issuer may file a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at Alternatively, the company will arrange to send you the prospectus after filing if you request it by calling toll-free 1-8[xx-xxx-xxx]. The legend also may provide an address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer s web site, and provide the Internet address and the particular location of the documents on the web site. Curing Failure to Include the Legend. An immaterial or unintentional failure to include the specified legend will not result in a violation of Section 5(c) or the loss of the ability to utilize the safe harbor if (A) a good faith and reasonable effort was made to comply with the specified legend condition, (B) the document is amended to include the specified legend as soon as practicable after discovery of the omitted or incorrect legend, and (C) if the document was transmitted without the specified legend, it is retransmitted with the legend by substantially the same means as the original document, and directed to substantially the same prospective purchasers to whom the free writing prospectus was originally transmitted. Liability. Any written communication that is an offer made in reliance on the safe harbor will be deemed a prospectus under Section 2(a)(10) of the Securities Act relating to a public offering of the securities to be covered by the registration statement to be filed. The SEC s adopting release states that all oral communications that are offers and all prospectuses will be subject to liability under Securities Act Section 12(a)(2). The communications also will be subject to other provisions addressing deficient disclosure, including Securities Act Section 17(a), Exchange Act Section 10(b) and Exchange Act Rule 10b-5. Excluded Communications. This exemption is not available to (1) communications relating to business combination transactions that are subject to Rule 165 or Rule 166 or (2) communications by an issuer that is a registered investment company or a business development company. Subject to Regulation FD. Communications made in reliance on this rule are subject to Regulation FD and cannot rely on the exclusion in Regulation FD for statements made in connection with a registered securities offering. 19

20 The safe harbor contained in new Rule 163 which allows use of a free writing prospectus prior to filing the registration statement only applies to a well-known seasoned issuer and not to other offering participants. This contrasts with the safe harbor contained in Rules 164 and 433 for free writing prospectuses used after filing the registration statement, which would apply to all offering participants. Rule 163 is a non-exclusive safe harbor. The issuer also may claim the availability of any other applicable exemption, and reliance on the Rule 163 exemption does not affect the availability of any other exemption from the requirements of Section 5 of the Securities Act. F. Expansion of the Rule 134 Safe Harbor for Limited Releases of Information After a Registration Statement is Filed Rule 134 is a limited communications safe harbor which issuers may use after a registration statement is filed. The safe harbor generally provides that a communication may include only specified categories of information, such as the name of the issuer, the title of the security, a brief indication of the general type of business of the issuer, the price of the security, and the names of the managing underwriters. The communication must include a specified SEC legend and the name and address of a person or persons from whom a prospectus may be obtained. Any communication which satisfies these criteria is not deemed to be a prospectus or a free writing prospectus and thus can be distributed after a registration statement is filed. As amended, communications issued pursuant to Rule 134 can include additional categories of information. The additional information includes: not just the title of the security, but also a designation as to whether the securities are convertible, exercisable, or exchangeable, and as to the ranking of the securities; the segments in which the company conducts business; the address, phone number and address of the issuer s principal offices and contact for investors, the issuer s country of organization and the geographic areas in which it conducts business; in the case of a fixed income security, not just the yield or probable yield range, but also the final maturity and interest rate provisions, the probable final maturity or interest rate provisions, and the yield of securities with comparable maturities and security ratings (the adopting release also states that yield disclosure may include disclosure of the anticipated spread over a benchmark); 24 a brief description of the intended use of proceeds of the offering, if then disclosed in the prospectus that is part of the filed registration statement; not just the name and address of the sender of the communication, but also the phone number and address as well; the type of underwriting, if then included in the disclosure in the prospectus that is part of the filed registration statement; not just the names of managing underwriters, but also the names of underwriters participating in the offering of the securities and their additional roles, if any, within the underwriting syndicate; not just the approximate date upon which the proposed sale to the public will begin, but also the anticipated schedule for the offering and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them); a description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with the issuer or an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy, but not written notices of allocations of securities), and procedures regarding directed share plans and other participation in offerings by officers, directors and employees of the issuer; the permissibility or status of the investment under ERISA; not just the actual ratings assigned to the securities, but any rating reasonably expected to be assigned ; 24 Rule 134 could still not be used to deliver a detailed description of the securities being offered, such as a term sheet. However, term sheets could be distributed subject to compliance with the new free writing prospectus rules. 20

21 the names of selling security holders, if then disclosed in the prospectus that is part of the filed registration statement; the names of securities exchanges where any class of the issuer s securities are, or will be, listed; the ticker symbols, or proposed ticker symbols, of the issuer s securities; the CUSIP number assigned to the securities being offered; and information disclosed in order to correct inaccuracies previously contained in a communication permissibly made pursuant to Rule Rule 134 applies only after the filing of a registration statement which includes a prospectus satisfying the requirements of section 10 of the Securities Act. The SEC s proposing release provided that Rule 134 was available only if the prospectus included a pricing range where required. This requirement would have made Rule 134 unavailable in connection with IPO s, which typically do not include a pricing range in the initial registration statement, until a subsequent preliminary prospectus is filed with a pricing range. In response to comments, the final rules provide that Rule 134 in general is available even if the prospectus does not include a price range otherwise required by rule. However, information related to the pricing, final maturity, interest rate, yield and rating of the security can be provided in a Rule 134 release only if a price range is included where required. Rule 134 notices are not required to be filed with the SEC. Because they are not deemed to be prospectuses, they are not subject to Section 12(a)(2) or Section 11 liability. However, they are still subject to antifraud liability under Exchange Act Section 10 and Rule 10b-5 enacted thereunder. G. Modifications to Regulation FD Regulation FD, which prohibits the selective disclosure of material information to certain institutional investors and shareholders, contains an exemption for disclosures made in connection with a securities offering registered under the Securities Act, other than secondary shelf offerings and certain other shelf offerings. Under the new rules, the exemption from Regulation FD for disclosures made in connection with a registered securities offering will be limited to the following circumstances: a registration statement filed under the Securities Act; a free writing prospectus used after filing of the registration statement for the offering; any free writing communication which is used after a registration statement is declared effective and which is accompanied or preceded by a Section 10(a) statutory prospectus; any other Section 10(b) prospectus (such as a preliminary prospectus); a notice permitted by Rule 135 under the Securities Act (notices of a proposed registered public offering); a communication permitted by Rule 134 under the Securities Act; or an oral communication made in connection with the registered securities offering after filing of the registration statement for the offering. Also, under the new rules, Regulation FD continues to apply to secondary shelf offerings and certain other shelf offerings, except for offerings involving a registered offering for capital formation purposes for the account of the issuer, whether or not underwritten, unless the issuer s offering is included for the purpose of evading Regulation FD. This provision will cover the situation, for example, where a de minimis issuer participation is included in what is otherwise entirely a selling security holder offering for the purpose of excluding communications in the offering from the application of Regulation FD. 25 The new rule also (1) eliminates the requirement to disclose whether the issue represents new financing or refunding or both and (2) shortens the required SEC legend by deleting the statement about compliance with state securities law. 21

22 II. Free Writing Prospectuses Used after Filing a Registration Statement Prior to adoption of the new rules, after a registration statement was filed but before it became effective, in general the only writing related to an offering that could be distributed was a prospectus that complied with Section 10 of the Securities Act. Further, after a registration statement became effective, written offers other than a statutory prospectus could be made only if prior to or at the same time as the written offer a final prospectus meeting the requirements of Section 10(a) of the Securities Act was sent or given. The new SEC rules significantly relax these restrictions. Under the new rules, after a registration statement is filed, all issuers and other offering participants are permitted to distribute free writing prospectuses (generally any writing other than a prospectus which satisfies the requirements of Section 10(a)) so long as various conditions are satisfied. New Rule 146 provides that in connection with a registered offering of most issuers, a free writing prospectus of the issuer or any other offering participant, including any underwriter or dealer, after the filing of the registration statement, will be deemed a section 10(b) prospectus for purposes of Section 5(b)(1) of the Securities Act, provided that the conditions of Rule 433 are satisfied. In addition, well-known seasoned issuers can use free writing prospectuses even before a registration statement is filed (in accordance with new Rule 163). Rule 164 is only a non-exclusive safe harbor. Anyone relying on the rule also may claim the availability of any other applicable exemption or exclusion. Reliance on the rule does not affect the availability of any other exemption or exclusion from the requirements of Section 5 of the Securities Act. A. Definition of Free Writing Prospectus A free writing prospectus is defined as any written communication that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed (or, in the case of a well known seasoned issuer, whether or not such registration statement is filed). 26 Although a free writing prospectus will not be deemed a part of a registration statement, it will still be considered to relate to a registered public offering of securities that is or will be the subject of a registration statement, regardless of the method of its use or distribution. A communication is a free writing prospectus only where it constitutes an offer of securities. Whether a communication is an offer must be determined based on the particular facts and circumstances. 27 Communications 26 The term free writing prospectus includes all writings other than (1) a prospectus which satisfies the requirements of Section 10(a) of the Securities Act (a standard final prospectus), (2) a prospectus used prior to effectiveness in accordance with Rule 430 (a standard preliminary prospectus), (3) a prospectus in a registration statement at the time of effectiveness pursuant to Rule 430A (a final prospectus without pricing information), (4) a writing that is distributed after the registration statement is made effective but is accompanied or preceded by a statutory prospectus, in accordance with Section 2(a)(10)(a) of the Securities Act, (5) a summary prospectus contemplated by Rule 431, (6) a written communication used in reliance on the special rules for asset-backed issuers permitting the use of informational and computational materials (Rule 167 and Rule 426), and (7) certain prospectuses to be used in shelf registration statements pursuant to Rule 430B and Rule 430C. 27 The SEC s adopting release states that [w]hile the definition of offer is broad, not all communications relating to an offering are offers or offers by an offering participant. As a non-exclusive illustration, the gun-jumping provisions have been administered in a manner that excludes from categorization as an offer a media publication or television or radio broadcast that is based solely on information that is filed with us or available on an unrestricted basis or on other information the dissemination of which did not represent an offer by an issuer or other offering participant, where there is no other involvement or participation by an offering participant. On that basis, for example, a newspaper article about an initial public offering that is based on the filed registration statement, on a press release that is filed with or furnished to us, on a filed free writing prospectus, or on filed issuer information where the issuer and other offering participants have refused to comment and not otherwise been involved, would not be categorized as an offer under the gun-jumping provisions. 22

23 that would not be considered offers or prospectuses, such as Rule 134 notices, Rule 135 notices, regularly released factual business information, regularly released forward looking information, and research reports falling within the safe harbors, will not be free writing prospectuses. A written communication of a well-known seasoned issuer that is used prior to the filing of a registration statement (pursuant to Rule 163) will be a free writing prospectus, but will not be considered a Section 10(b) prospectus because it will be used prior to filing a registration statement. The SEC declined to specifically exclude offshore communications from the scope of the definition of free writing prospectus. The adopting release states: Whether an offshore communication is considered an offer in the United States subject to the federal securities laws will depend on when and how the communication is made and the availability of other exemptions, such as those for offshore press conferences. The SEC also declined to specifically exclude rating agency reports from the scope of the definition. [W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.... We think [the entanglement theory and the adoption theory] are equally applicable with respect to issuer or offering participant involvement regarding rating agency reports. For example, if an issuer or underwriter distributes the rating agency report in connection with an offering of the securities, it is appropriate to conclude that such party has adopted that report and should be liable for its contents. Liability under the entanglement theory depends upon the level of pre-publication involvement in the preparation of the information. B. Definition of Written Communication The SEC rules define the term written communication very broadly to include all methods of communication, including electronic communications, but not oral communications. Therefore, a written communication includes any communication that is written, printed, a radio or television broadcast or a graphic communication. 28 Graphic communication includes all forms of electronic media, including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks and other forms of computer data compilation. In particular, electronic postings on web sites, including electronic road shows, would be deemed written communications subject to the free writing prospectus rules. The SEC adopting release makes clear that the definition is written broadly in order to encompass new technologies and that the list of technologies in the definition of graphic communication are meant to be illustrative rather than exhaustive. The definition of written communications does not cover oral communications. In particular, the term does not cover live phone calls, through whatever means by which they are transmitted, including the Internet. In addition, the term graphic communication does not include a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted through graphic means ; the SEC s adopting release explains that live, in real-time communications to a live audience have less of the permanence of communications 28 A note included in the definition of written communication states that a communication that is a radio or television broadcast is a written communication regardless of the means of transmission of the broadcast. The SEC adopting release states that a cable television show will be considered a television broadcast that is a written communication, and a television show or radio program that may be seen or heard through the Internet on a computer will also be considered a television or radio broadcast that is a written communication. A communication may fall outside the definition of graphic communication because it originates live, in real-time to a live audience but such communication (for example, a live business news program broadcast by traditional means or on cable) may be a television or radio broadcast. On the other hand, a live, in real-time communication that is transmitted by graphic means to a live audience would be an oral communication. Given the potentially unlimited and uncontrolled nature of dissemination of broadcast communications and the language of the Securities Act, we believe that this is an appropriate distinction. 23

24 that originate in graphic form or that appear on the printed page. As a result, live road shows, even if transmitted electronically to an overflow room or another city, are not graphic communications and thus are not free writing prospectuses. The SEC s adopting release also clarifies that written communications will not include individual telephone voice mail messages from live phone calls but will include broadly disseminated or blast voice mail messages; because blast voice mails are not to a live audience, the SEC believes they more closely resemble graphic communications than oral communications. The SEC adopting release includes the following examples of what does and does not constitute a written communication: Not a Written Communication Is a Written Communication a live telephone call s, facsimiles and postings on web sites a live telephone call that is recorded by the recipient a live telephone call or video or webcast conference that is recorded by or on behalf of the originating party and then transmitted, or is otherwise transmitted other than live and in realtime a live, in-person road show to a live audience a live telephone call or video or webcast conference that is recorded by the recipient and then re-transmitted by the recipient is a graphic communication by the recipient when it is retransmitted a live, in-person road show to a live audience that is transmitted graphically an interview with an issuer s CEO conducted live as part of a television program is a written communication regardless of how the television signal is transmitted (over the airwaves, or through cable, satellite or Internet) and regardless of how it is received by the recipient (whether a television set or a computer) a live, in-person road show to a live audience that is transmitted to an overflow room a webcast or video conference that originates live and in real-time at the time of transmission and is transmitted through video conferencing facilities or is webcast in real-time to a live audience (whether or not audience members can record it) 24

25 C. Conditions to the Use of a Free Writing Prospectus A free writing prospectus can be used by an issuer or any other offering participant in connection with a registered offering of securities after the filing of the registration statement if the writing satisfies the following requirements (included in new Rule 433). Rule 433 provides that a free writing prospectus that satisfies these conditions is deemed to be a prospectus permitted under section 10(b) of the Securities Act for purposes of sections 2(a)(10), 5(b)(1) and 5(b)(2) of the Securities Act and will, for purposes of considering it a prospectus, be deemed to be public, without regard to its method of use or distribution, because it is related to the public offering of securities that are the subject of a filed registration statement. Well-Known Seasoned Issuers and Seasoned Issuers: Statutory Prospectus Must be on File. The issuer or any other offering participant may use a free writing prospectus in the following offerings after a registration statement relating to the offering has been filed that includes a prospectus that, other than by reason of Rule 433 (a free writing prospectus) or Rule 431 (a summary prospectus), satisfies the requirements of section 10 of the Securities Act (which includes any preliminary prospectus, base prospectus or prospectus subject to completion): 29 offerings of securities registered on Form S-3 as a primary offering by a company with at least a $75 million public float (instruction I.B.1), or a primary offering of non-convertible investment grade securities (Instruction I.B.2), or by certain majority-owned subsidiaries (Instruction I.C.); offerings of securities registered on Form F-3 as a primary offering by a company with at least a $75 million public float (instruction I.B.1), or a primary offering of non-convertible investment grade securities (Instruction I.B.2), or by certain majority-owned subsidiaries (Instruction I.A.5.); any other offering not excluded from reliance on Rule 433 (the free writing prospectus rule) of securities of a well-known seasoned issuer; or any other offering not excluded from reliance on Rule 433 (the free writing prospectus rule) of securities of an issuer eligible to use Form S-3 or Form F-3 for primary offerings with a public float of at least $75 million. Nonreporting and Unseasoned Issuers: Accompanying Statutory Prospectus. For nonreporting and unseasoned issuers (issuers who do not fit into the four categories described in the preceding paragraph), including IPO s, in general a free writing prospectus can be used by any person participating in the offer or sale of the securities only if it is accompanied or preceded by the most recent statutory prospectus that satisfies the requirements of Section 10 of the Securities Act. Importantly, this can be accomplished by an electronic hyperlink. (1) In order to use the free writing prospectus safe harbor, a registration statement relating to the offering must have been filed that includes a prospectus that satisfies the requirements of section 10 of the Securities Act, including a price range where required by rule. In addition, the free writing prospectus must be accompanied or preceded by the most recent prospectus that satisfies the requirements of Section 10 of the Securities Act, including a price range where required by rule (e.g., an IPO preliminary prospectus without a price range would not satisfy the requirements of Section 10), where (a) the free writing prospectus is or was prepared by or on behalf of or used or referred to by an issuer or any other offering participant, or (b) consideration has been or will be given by the issuer or offering participant for the 29 The SEC proposing release stated that [f]or offerings of securities of eligible seasoned issuers, we would not propose to condition use of the free writing prospectus on actual delivery of the preliminary prospectus. Instead, we would propose that the user of the free writing prospectus notify the recipient, through a required legend, of where the recipient can access or hyperlink to the preliminary or base prospectus by providing the URL for the prospectus. 25

26 dissemination (in any format) 30 of any free writing prospectus (including any published article, publication or advertisement). 31 (2) In the case of an IPO, free writing prospectuses cannot be used until the registration statement is on file and a preliminary prospectus containing a price range is available. (3) The requirement to deliver the most recent prospectus satisfying the requirements of section 10 of the Securities Act would be satisfied if a free writing prospectus that is an electronic communication contained an active hyperlink to such most recent prospectus. 32 The hyperlink method is not available for free writing prospectuses in an IPO until a preliminary prospectus is on file that contains a price range. (4) Once the required statutory prospectus is sent or given to an investor, additional free writing prospectuses can be provided to that investor without having to provide an additional statutory prospectus, unless there is a material change in the most recent statutory prospectus from the provided prospectus. 33 The SEC s adopting release states that once an investor had been sent a preliminary prospectus, absent a material change, the Rule permits subsequent communications to that investor by an offering participant that constitute free writing prospectuses without the user having to hyperlink to or otherwise redeliver a statutory prospectus with each communication. (5) After effectiveness and availability of a final prospectus meeting the requirements of Section 10(a) of the Securities Act, the final prospectus must precede or accompany any free writing prospectus, whether or not an earlier statutory prospectus had been previously provided to the recipient. 34 The result of this framework is that, for nonreporting issuers and unseasoned issuers, in general a free writing prospectus can be used only if it is preceded or accompanied by the most recent prospectus that satisfies the requirements of Section 10 of the Securities Act (generally a red herring or a final prospectus), which can be accomplished by electronic hyperlink. The SEC s adopting release indicates, for example, that the most recent statutory prospectus must precede or accompany the free 30 The SEC s adopting release states that in any format is meant to encompass all means of dissemination of the materials, including graphic, television or radio broadcast, or written. 31 The free writing prospectus would also need to be accompanied or preceded by the most recent prospectus that satisfies the requirements of Section 10 of the Securities Act if Section 17(b) of the Securities Act required disclosure that consideration was or would be given by the issuer or other offering participant for any activity described therein in connection with the free writing prospectus. Section 17(b) of the Securities Act provides that it is unlawful for any person to publish, give publicity to, or circulate any notice, advertisement, newspaper, article, letter or communication which, though not purporting to offer a security for sale, describes such security for consideration received or to be received from an issuer, underwriter or dealer, without fully disclosing the receipt of such consideration and the amount thereof. 32 The SEC s adopting release adds that [t]he condition that the statutory prospectus precede or accompany the free writing prospectus will not require that it be provided through the same means, so long as it is provided at the required time. Referring to its availability will not satisfy this condition. 33 The SEC expects that if there are material changes in a preliminary prospectus, or preliminary prospectus supplement, the issuer and offering participants generally will recirculate the revised preliminary prospectus or supplement to potential purchasers. 34 The SEC s adopting release states that [i]f a final prospectus is given or sent prior to or with a written offer, under the exception in clause (a) of Securities Act Section 2(a)(10) [containing the definition of prospectus in the Securities Act], the written offer is not a prospectus and therefore will not be a free writing prospectus and Rules 164 and 433 [permitting free writing prospectuses] will not apply. 26

27 writing prospectus in order to permit reliance on the free writing rules for the following communications: (i) (ii) (iii) (iv) a direct written communication by an issuer or offering participant, a written communication or a television or radio broadcast prepared by or on behalf of or used or referred to by an issuer or an offering participant, the dissemination, in any format including publication or broadcast, of any free writing prospectus (including any published article, publication, or advertisement) for which (a) consideration is or will be given by the issuer or an offering participant, or (b) Section 17(b) of the Securities Act required disclosure of a payment made or consideration given by an issuer or other offering participant, or a paid published or broadcast advertisement by an issuer or other offering participant. The SEC adopting release observes that, as a result of the requirement to deliver a preliminary prospectus, the use of broadly disseminated free writing prospectuses in registered offerings by these types of issuers and offering participants in these offerings may not be feasible unless they are in electronic form and contain a hyperlink to the statutory prospectus. We believe that this is an appropriate result, as conditioning the use of the free writing prospectus on its being preceded or accompanied by the statutory prospectus will assure that an investor has a balanced disclosure document of an issuer with no or limited reporting history against which to evaluate the free writing prospectus and to place the statements made in context. Filing Requirement. Issuers must file with the SEC any free writing prospectus that they prepare by a means reasonably calculated to result in filing no later than the date of first use. 35 In particular, the issuer must file with the SEC the following material: Issuer Free Writing Prospectus. Any issuer free writing prospectus ( a free writing prospectus prepared by or on behalf of the issuer or used or referred to by the issuer ), Issuer Information. Any issuer information ( material information about the issuer or its securities that has been provided by or on behalf of the issuer ) 36 that is contained in a free writing prospectus prepared by or on behalf of or used by any other offering participant other than the issuer 37 and Final Term Sheet. A description of the final terms of the issuer s securities in the offering contained in a free writing prospectus or portion thereof prepared by or on behalf of the issuer or any offering participant, after such terms have been established for all classes in the offering 35 Oral communications would not be subject to any filing conditions, but would still be subject to Section 12(a)(2) liability and the anti-fraud provisions of the securities laws. 36 A written communication or information is prepared or provided by or on behalf of a person if the person or an agent or representative of the person authorizes the communication or information or approves the communication or information before it is used. An offering participant other than the issuer is not considered an agent or representative of the issuer solely by virtue of its acting as an offering participant. 37 The SEC s adopting release states: This condition only provides that the issuer information contained in the offering participant s free writing prospectus be filed, not necessarily the free writing prospectus itself. In addition, this condition does not apply where a free writing prospectus prepared by or on behalf of an offering participant, other than the issuer, contains information prepared on the basis of or derived from issuer information but not issuer information. 27

28 (e.g., a free writing prospectus that contains a description of the terms of the issuer s securities that does not reflect the final terms is not required to be filed). 38 In general, there is no condition that underwriters and participating dealers file the free writing prospectuses that they prepare, use or refer to. The SEC s adopting release states that this includes information prepared by underwriters and others on the basis of or derived from, but not containing, issuer information. Such information can be, but is not limited to, information that is proprietary to the preparer. 39 However, as an exception to this general rule, any offering participant, other than the issuer, must file any free writing prospectus that is used or referred to by such offering participant and distributed by or on behalf of such person in a manner reasonably designed to lead to its broad unrestricted dissemination. For example, the filing condition applies where (1) an underwriter includes a free writing prospectus on an unrestricted web site or hyperlinks from an unrestricted web site to information that would be a free writing prospectus; or (2) an underwriter sends out a press release regarding the issuer or the offering that is a free writing prospectus. 40 On the other hand, the SEC said, a web site with access restricted to customers or a subset of customers will not require filing, nor will an by an underwriter to its customers, regardless of the number of customers. Free writing prospectuses sent directly to customers of an offering participant, without regard to number, would not be broadly disseminated and thus would not need to be filed. Selling security holders are offering participants and thus are subject to the free writing prospectus rules as well. A selling security holder who is unaffiliated with the issuer and who uses a free writing prospectus is treated as any other offering participant who may be an underwriter. In addition, the SEC states in the adopting release, [i]f the selling security holder is an affiliate of the issuer and the selling security holder prepares, uses, or refers to a free writing prospectus, it should consider, in addition to underwriter status, whether it is acting by or on behalf of the issuer. Further, the issuer and such affiliated selling security holder should evaluate whether the selling security holder has access to material information about the issuer and whether it is including such material issuer information in that free writing prospectus. The condition to file a free writing prospectus does not apply if the free writing prospectus does not contain substantive changes from or additions to a free writing prospectus previously filed with the SEC. In addition, Rule 433 provides that the condition to file issuer information contained in a free writing prospectus of an offering participant other than the issuer does not apply if such information is 38 The issuer must file writings that contain the final terms of the securities, whether prepared by the issuer or an offering participant. In addition, the SEC rejected comments which questioned whether the issuer could know if a term sheet reflected the actual final terms of the securities. 39 The SEC proposing release stated that [t]he ability of offering participants to use free writing prospectuses in connection with offerings would impart a greater ability to provide information to investors about securities before they make investment decisions. For example, issuers and underwriters would be able to provide proprietary analytical material that is specifically tailored to address the particular asset allocation considerations of different investors. 40 The SEC s proposing release also stated that [a]n underwriter, dealer, or other offering participant would be considered to have made such a distribution of a free writing prospectus if the dissemination was made by or on its behalf. As with an issuer free writing prospectus, by or on behalf of an underwriter, dealer or other offering participant would mean that the particular underwriter, dealer, or other offering participant, its agent or representative authorized and approved the use of the free writing prospectus before its dissemination. Thus, an issuer, underwriter, dealer, or other offering participant could not indirectly disseminate information through the press or otherwise without complying with the conditions of proposed Rule 433. In that case, the materials provided to the press would be a free writing prospectus of the underwriter, dealer, or other offering participant.... Where an issuer distributed a free writing prospectus prepared by an underwriter, dealer or other offering participant, that free writing prospectus would be an issuer free writing prospectus for purposes of the filing condition. 28

29 included (including through incorporation by reference) in a prospectus or free writing prospectus previously filed that relates to the offering. Any required filing with the SEC must be made by a means reasonably calculated to result in filing no later than the date of first use. However, a free writing prospectus or portion thereof that contains only a description of the final terms of the issuer s securities in the offering or of the offerings must be filed by the issuer within two days of the later of the date such final terms have been established for all classes of the offering and the date of first use. (The adopting release states that the filing condition under this provision will not be satisfied by the timely filing of a prospectus supplement under Rule 424.) The condition to file a free writing prospectus or issuer information for a free writing prospectus used at the same time as a communication in a business combination transaction subject to Rule 425 is satisfied if (i) the free writing prospectus or issuer information is filed in accordance with Rule 425, including the filing timeframe of Rule 425, (ii) the filed material pursuant to Rule 425 indicates on the cover page that it is also being filed pursuant to Rule 433, and (iii) the filed material pursuant to Rule 425 contains the legend required by Rule Rule 134 notices and Rule 135 notices are not considered free writing prospectuses and therefore do not need to be filed. This differs from Securities Act Rule 425, which is applicable to business combination transactions and covers all communications, including Rule 135 notices. Each free writing prospectus or issuer information contained in a free writing prospectus filed with the SEC must identify in the filing the SEC file number for the related registration statement or, if unknown, a description sufficient to identify the related registration statement. Information. The free writing prospectus can take any form and need not meet the informational requirements otherwise applicable to prospectuses. It may include information the substance of which is not included in the registration statement. There are no line item disclosure requirements, other than the legend. However, the information in a free writing prospectus cannot conflict with (i) information contained in the filed registration statement, including any prospectus or prospectus supplement that is part of the registration statement, which has not been superseded or modified, or (ii) information contained in the issuer s periodic and current reports filed or furnished to the SEC that are incorporated by reference into the registration statement and have not been superseded or modified. Rule 408, which requires the registration statement to include all material information necessary to make the required statements not misleading, is also being amended to clarify that the failure to include in a registration statement information included in a free writing prospectus will not, solely by virtue of inclusion of the information in a free writing prospectus, be considered an omission of material information required to be included in the registration statement. 41 The SEC s adopting release discusses the interplay between Rule 433 and the rules applicable in business combination transactions where there is capital raising transaction at the same time. The rules we are adopting today applicable to registered capital formation transactions generally will apply to registered capital formation transactions even if they have some connection to or are proximate in time to a business combination transaction. As a result, if an issuer undertakes a registered capital formation transaction that is related to, or takes place at around the same time as, a business combination transaction, then the issuer can, if the conditions to the applicable rules are satisfied, rely on the rules we adopt today that apply to the registered capital formation transaction and Rules 165 and 166 for the business combination transaction. This is true whether the two transactions are connected (for example, the purpose of the capital formation transaction is to finance a contemporaneous business combination transaction) or independent of each other. 29

30 Legend Requirement. Any free writing prospectus used in reliance on this exemption must contain substantially the following legend: The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-8[xxxxx-xxx]. The legend also may provide an address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer s web site and provide the internet address and the particular location of the documents on the web site. 42 In response to comments, the legend in the final rules is generic, rather than issuer-specific as in the proposed rules; as a result, a single toll-free telephone number could be used to request a copy of the prospectus. Record Retention. Issuers and offering participants must retain all free writing prospectuses that they have used, and that have not been filed with the SEC, for three years following the date of the initial bona fide offering of the securities in question. Examples of items to which the record retention policy applies because they are not required to be filed are (1) free writing prospectuses prepared by underwriters and not containing issuer information and (2) descriptions of the terms of securities or of the offering not reflecting final terms. The rules as proposed would have required all free writing prospectuses to be retained, whether or not filed with the SEC. To the extent the record retention requirements of Rule 17a-4 of the Exchange Act apply to free writing prospectuses required to be retained by a broker-dealer, such free writing prospectuses are required to be retained in accordance with such requirements. D. Liability for Using a Free Writing Prospectus A free writing prospectus is not part of a registration statement subject to liability under Section 11 of the Securities Act, unless the issuer elects to make it part of the registration statement. 43 Regardless of whether the free writing prospectus is filed, any seller offering or selling securities by means of the free writing prospectus will be subject to liability for prospectuses under Sections 12(a)(2) of the Securities Act and could be subject to liability under the anti-fraud provisions of the securities laws, including Section 10(b) of the Exchange Act and Rule 10b-5. Some commenters stated that liability for free writing prospectuses should take into account other information that is conveyed to investors for purposes of analyzing the total mix of information available. In response, the SEC stated in the adopting release that free writing prospectuses may incorporate or refer investors to other information, so that investors will be advised to consider the information in the free writing prospectus in context. However, the free writing prospectus cannot include language that deems an investor to have read or to have knowledge of or rely on other documents. Whether such other information is conveyed to the investor will be determined based on the facts and circumstances. 42 The SEC s adopting release also indicates that certain additional legends are inappropriate, particularly disclaimers of responsibility or liability. Examples of impermissible legends or disclaimers, which are not exclusive, that will cause the materials not to be permissible free writing prospectuses or not to be effective as to any purchaser for liability purposes include (1) disclaimers regarding accuracy or completeness or reliance by investors, (2) statements requiring investors to read or acknowledge that they have read or understand the registration statement or any disclaimers or legends, (3) language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation of an offer to buy (if the material is not a prospectus or offer it could not be a free writing prospectus allowed pursuant to Rule 164) and (4) for information that must be filed with the SEC, statements that the information is confidential. 43 A free writing prospectus used after a registration statement is filed is governed by Section 10(b) of the Securities Act, which states specifically that a prospectus permitted by Section 10(b) is not subject to Section 11 liability. 30

31 A free writing prospectus filed pursuant to Rule 433 will be filed as a separate filing similar to the way in which Rule 425 filings are made. A free writing prospectus will not have to be filed under Form 8-K. Issuers may file a free writing prospectus on Form 8-K if they want to have the information incorporated by reference into the registration statement. The free writing prospectus also can be filed as part of the registration statement or included in an Exchange Act report incorporated by reference into the registration statement. In such case, the free writing prospectus would be subject to Section 11 liability. Since the free writing prospectus will be deemed a Section 10(b) prospectus, the SEC will retain the authority to halt the use of any materially false or misleading free writing prospectus in accordance with Section 10(b). In addition, Rule 418 is being amended to allow the SEC to request issuers to furnish promptly any free writing prospectus used in connection with the offering. E. Underwriter Cross-Liability for Free Writing Prospectuses Used by Others Commenters expressed concern about possible cross-liability by one offering participant for another offering participant s free writing prospectus, whether or not the first offering participant used that free writing prospectus. In response, the SEC adopted a new interpretation of the term by means of for purposes of Section 12(a)(2), which imposes liability for sales by means of a prospectus. Under this new provision, codified in new Rule 159A(b), an offering participant other than the issuer will not be considered to offer or sell securities that are the subject of a registration statement by means of a free writing prospectus as to a purchaser unless either: (1) the offering participant used or referred to the free writing prospectus in offering or selling the securities to the purchaser, or (2) the offering participant offered or sold securities to the purchaser and participated in planning for the use of the free writing prospectus by one or more other offering participants and such free writing prospectus was used or referred to in offering or selling securities to the purchaser by one or more of such other offering participants, 44 or (3) the offering participant was required to file the free writing prospectus pursuant to Rule 433 (the free writing prospectus rule). In addition, a person is not considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed the free writing prospectus with the SEC pursuant to Rule 433. F. Electronic Road Shows The new SEC rules, and interpretations contained in the adopting release, contain significant guidance regarding the treatment of live and electronic road shows. 45 Oral Statements at Road Shows. Oral statements made at a live road show will not constitute written communications and therefore are not free writing prospectuses. 44 The SEC s adopting release states that [w]e do not intend that the typical inter-syndicate arrangement providing for sales out of the syndicate pot falls within this provision, unless the arrangement contemplates use of free writing prospectuses in a manner described in the provision. 45 The term road show is defined as an offer (other than a statutory prospectus or a portion of a statutory prospectus filed as part of a registration statement) that contains a presentation regarding an offering by one or more members of the issuer s management... and includes discussion of one or more of the issuer, such management, and the securities being offered. 31

32 Live, Real Time Roadshows Transmitted Graphically. Communications that, at the time of the communication, originate live, in real-time to a live audience and do not originate in recorded form or otherwise as a graphic communication, even if transmitted through graphic means, are not considered graphic communications or written communications, and therefore are not free writing prospectuses. As a result, a live, in real-time road show to a live audience that is transmitted graphically will not be a graphic communication, and therefore not a written communication, or a free writing prospectus. It will still, however, be an offer subject to Securities Act Section 12(a)(2) and the other liability provisions of the federal securities laws. Slides/Visual Aids at Live, Real Time Roadshows. Information that is presented as part of the live, in real-time road show to a live audience will not be a free writing prospectus. Where a communication (such as slides or other visual aids) is provided or transmitted as part of a live road show that is not a written communication, and that communication is provided in a manner designed to make it available only as part of the road show and not separately, that communication is deemed part of the road show and is not a written communication. Overflow Rooms. The exclusion for presentations to a live audience that originate live, in real-time also covers overflow rooms at live, in-person road shows, as well as live road shows transmitted electronically to another city. Electronic Road Shows. Road shows that do not originate live, in real-time to a live audience and are graphically transmitted are electronic road shows that will be considered written communications and, therefore, free writing prospectuses. They are permitted if the conditions for free writing prospectuses are satisfied. Issuer involvement or participation in an electronic road show that is a written communication will make it an issuer free writing prospectus. No Filing Requirement for Electronic Road Shows, Other Than in IPO s. In general, a written communication that is a road show is not required to be filed with the SEC, with one exception. The road show is required to be filed in the case of a road show that is a written communication for an offering of common equity or convertible equity securities by a nonreporting issuer at the time of the filing of the registration statement for the offering. However, in this case the roadshow does not need to be filed with the SEC if the issuer of the securities makes at least one version of a bona fide electronic road show 46 available without restriction electronically to any person, including any potential investor in the securities (and if there is more than one version of a roadshow for the offering that is a written communication, the version available without restriction must be made available no later than the other versions). Withdrawal of Electronic Roadshow No-Action Letters. With the adoption of the new rules governing electronic roadshows, the SEC is withdrawing its no-action letters for electronic road shows in registered public offerings, which impose various conditions on electronic road shows A bona fide electronic road show is defined as a road show that is a written communication transmitted by graphic means that contain a presentation by one or more officers of an issuer or other persons in an issuer s management... and, if more than one road show that is a written communication is being used, includes discussion of the same general areas of information regarding the issuer, such management, and the securities being offered as such other issuer road show or shows for the same offering. The SEC s adopting release states that, to be bona fide, the version (1) need not address all of the same subjects or provide the same information as the other versions of an electronic road show and (2) need not provide an opportunity for questions and answers or other interaction, even if other versions of the electronic road show do provide such opportunities. The SEC in its adopting release declined to provide further guidance on which categories of information could be properly excluded from the bona fide version. 47 See, e.g., Private Financial Network (March 12, 1997); Net Roadshow, Inc. (July 30, 1997); Bloomberg L.P. (October 22, 1997); Thompson Financial Services, Inc. (September 4, 1998); Activate.net Corporation (June 3, 1999); Charles Schwab & Co., Inc. (November 15, 1999); and Charles Schwab & Co., Inc. (February 9, 2000). 32

33 The free writing prospectus provisions will permit electronic road shows to be used without compliance with many of the conditions in the no-action letters. For example, the road show audience will not have to be limited in any way, the road show need not be the re-transmission of a live presentation in front of an audience, the electronic road show can be edited, viewers do not need to be limited to viewing it either within a 24-hour period or twice, viewers are allowed to copy, print or download the road show, and multiple versions of the road show will be permitted. Electronic Road Shows in Private Placements. The SEC s adopting release also acknowledges that electronic road shows may be used in private placement transactions as well. The adopting release states: Our rules do not address these offerings, although the treatment of electronic communications in the definitions of graphic communication and written communication apply to private placement transactions. For example, in an offering made in reliance on Securities Act Rule 505 or Rule 506 of Regulation D, an electronic road show or other communication that is a written communication would implicate the provisions of Securities Act Rule 502 regarding information that must be provided to non-accredited investors and restrictions on general solicitation and general advertising. The SEC s adopting release clarifies that whether or not road shows are written communications, all road shows that are offers are subject to Section 12(a)(2) liability. In addition, all road shows that are offers that are written communications are free writing prospectuses, whether or not required to be filed. G. Free Writing Prospectuses Published or Distributed by the Media In some cases the new rules will treat media publications as a free writing prospectus where an issuer or offering participant provides information to the publisher and the communication is really an offer by the issuer or such offering participant. Under Rule 433(f), any written offer that is prepared and published or disseminated by a person that is in the business of publishing, radio or television broadcasting or otherwise disseminating written communications (who is unaffiliated with the issuer or any other offering participant), for which an issuer or any other offering participant or any person acting on its behalf provided, authorized, or approved information, will be considered at the time of publication or dissemination a free writing prospectus prepared by or on behalf of the issuer or such other offering participant. Therefore, under these circumstances, the media publication would generally need to comply with all of the requirements otherwise applicable to free writing prospectuses, including the filing requirement. In general, a media publication deemed to be a free writing prospectus would need to be filed by the issuer or offering participant within four business days after the issuer or offering participant became aware of the publication. Under Rule 433(f) the filing, legend, and accompanying prospectus requirements will be deemed satisfied so long as (1) no payment is made or consideration given by or behalf of the issuer or other offering participant for the written communication or its dissemination and (2) the issuer or other offering participant in question files the written communication with the SEC with the required legend within four business days (increased from one day in the proposing release) after the issuer or other offering participant becomes aware of the publication, radio or television broadcast, or other dissemination of the writing. Persons in the media have no filing or other responsibilities under these provisions. The filing requirement is subject to the following: (i) the issuer or other offering participant is not required to file the material if the substance of the free writing prospectus has previously been filed with the SEC; (ii) any filing may include information that the issuer or offering participant in question reasonably believes is necessary or appropriate to correct information included in the communication; and (iii) in lieu of filing the actual written communication as published or disseminated, the issuer or offering participant in question may file a copy of the materials provided to the media, including transcripts of interviews or similar materials, provided the copy or transcripts contain all the information provided to the media. In addition, the adopting release states that the free writing prospectus will have to be filed only once, regardless of the number of publications in which the information is included. 33

34 Therefore, as described in the adopting release, if an issuer or offering participant prepares, pays for or gives consideration for, the preparation, publication or dissemination of or uses or refers to a published article, television or radio broadcast or advertisement, the issuer or other offering participant will have to satisfy the conditions to the use of a free writing prospectus at the time of publication or broadcast. For example, in the case of a non-reporting issuer or reporting unseasoned issuer, a statutory prospectus will have to precede or accompany the communication. As a result, in offerings by non-reporting and unseasoned issuers, issuers and offering participants will not be able to prepare or pay for published or broadcast written advertisements, infomercials or broadcast spots about the issuer, its securities or the offering that includes information beyond that permitted by Rule 134. In contrast, for seasoned issuers, a registration statement including the most recent statutory prospectus would need to be on file with the SEC, and the issuer or offering participant would need to file the free writing prospectus with the SEC not later than the date of first use. However, where the free writing prospectus is prepared and published or broadcast by unaffiliated persons in the media and not paid for by the issuer or offering participants, the statutory prospectus will not need to precede or accompany the media communication, although a filed registration statement including a statutory prospectus would be necessary, except in the case of a well-known seasoned issuer. Therefore, an interview or other media publication or television or radio broadcast where an issuer or offering participant participates (but does not prepare or pay for the event or article) could be a free writing prospectus but would not require prior or simultaneous delivery of the statutory prospectus. For example, the SEC stated in its adopting release, an underwriter or issuer will be permitted to invite the press to a live road show or an electronic road show, but, in most cases, we will consider an article including information obtained at that road show to be a free writing prospectus of the issuer or underwriter and subject to the rules regarding free writing prospectuses. 48 As another example, if a chief executive of a non-reporting issuer gives an interview to a financial news magazine without payment to the magazine for the article, the publication of the article after the filing of the registration statement will be a free writing prospectus of the issuer that will be subject to the filing conditions by the issuer after publication. In that case, there will be no requirement that a statutory prospectus precede or accompany the article at the time of the publication. The adopting release states that the free writing prospectus rules only apply to offers. Whether or not a media publication is an offer and therefore a free writing prospectus of the issuer or other offering participant will depend on the facts and circumstances. In addition, because the exception for free writing prospectuses is nonexclusive and does not preclude reliance on other exemptions from the gun-jumping provisions, compliance with Rule 433 for the use of a free writing prospectus, including filing, does not preclude reliance on the argument that the communication is not an offer. In particular, we have administered the gun-jumping provisions so that where there is no other involvement of an issuer or other offering participant, media publications based on information filed with us or available on an unrestricted basis are not offers of the issuer or other offering participant. The new rules also contain a special provision for issuers in the media business. An issuer that is in the business of publishing or radio or television broadcasting may rely on the special media-related rules as to any publication or radio or television broadcast that is a free writing prospectus in respect of an offering of its own securities if the issuer or an affiliate (1) is the publisher of a bona fide newspaper, magazine or business or financial publication of general and regular circulation or bona fide broadcaster of news including business and financial news, (2) has established policies and procedures for the independence of the content of the publications or broadcasts from the offering activities of the issuer, and (3) publishes or broadcasts the communication in the ordinary course. 48 The adopting release states that, assuming that the road show in question is an offer, an article published based on information obtained from a road show with a limited audience could be a free writing prospectus depending on its content. On the other hand, an article published based solely on information provided at a readily accessible electronic road show open to an unrestricted audience may not be an offer as discussed above where there is no other involvement by an issuer or offering participant. 34

35 H. Ability to Cure Failures to File, Include the Legend or Retain Records An immaterial or unintentional failure to file or delay in filing a free writing prospectus as necessary to satisfy the filing conditions will not result in a violation of Section 5(b)(1) or the loss of the ability to rely on the free writing prospectus safe harbor if (1) a good faith and reasonable effort was made to comply with the filing condition and (2) the free writing prospectus is filed as soon as practicable after discovery of the failure to file. In its adopting release the SEC declined to clarify what constitutes unintentional, a good faith and reasonable effort and discovery of a failure to file. Similarly, pursuant to new Rule 164, an immaterial or unintentional failure to include the specified legend in a free writing prospectus as necessary to satisfy the legend condition will not result in a violation of Section 5(b)(1) of the Securities Act or the loss of the ability to rely on the free writing prospectus exemption if (1) a good faith and reasonable effort was made to comply with the legend condition, (2) the free writing prospectus is amended to include the specified legend as soon as practicable after discovery of the omitted or incorrect legend and (3) if the free writing prospectus was transmitted without the specified legend, it must be retransmitted with the legend by substantially the same means as, and directed to substantially the same prospective purchasers to whom, the free writing prospectus was originally transmitted. For example, if a free writing prospectus without a legend was sent by to a distribution list, it would have to be retransmitted with the specified legend by to the same distribution list. Also, an immaterial or unintentional failure to retain a free writing prospectus as necessary to satisfy the record retention condition will not result in a violation of Section 5(b)(1) of the Securities Act or the loss of the ability to rely on Rule 164 so long as a good faith and reasonable effort was made to comply with the record retention condition. This provision was added in the final rule in response to comments. I. Information on, or Hyperlinked from, an Issuer s Web site An offer of an issuer s securities that is contained on the issuer s Web site or hyperlinked by the issuer from its Web site to a third party s Web site is, pursuant to new Rule 433(e), a written offer of such securities by the issuer and, unless otherwise exempt or excluded from the requirements of Section 5(b)(1) of the Securities Act, the filing requirement for free writing prospectuses would apply to such offer. The SEC s adopting release states that if an issuer or other offering participant includes a hyperlink within a written communication offering the issuer s securities, such as an electronic free writing prospectus, to another web site or to other information, the hyperlinked information will be considered part of that written communication. For example, while a research report published or distributed by a broker or dealer around the time of an offering may not be considered an offer by the broker or dealer under Rule 139, an issuer hyperlinking to that research report will not be able to rely on Rule 139. As a result, the research report could be a free writing prospectus of the issuer, and the conditions of Rule 433, including the filing requirement, would need to be satisfied. The new rules also address concerns that historical information on an issuer s web site that is accessed at a later time might be considered republished at the later date, with attendant securities law liability. Under Rule 433(e), historical issuer information on an issuer s web site that is identified as such and located in a separate section of the issuer s web site containing historical issuer information, that has not been incorporated by reference into or otherwise included in a prospectus of the issuer for the offering and that has not otherwise been used or referred to in connection with the offering, will not be considered a current offer of the issuer s securities and therefore will not be a free writing prospectus. The SEC s adopting release states that whether or not information is historical information of the issuer will depend on the facts and circumstances. In addition, the SEC s adopting release provides that other information located on or hyperlinked to a web site might similarly not be considered a current offer of the issuer s securities and, therefore, not a free writing prospectus, where it can be demonstrated that the information was published 35

36 previously. For example, certain information that, while not contained in a separate section of an issuer s web site, is dated or otherwise identified as historical information and is not referred to in connection with the offering activities may not be a current offer, depending on the particular facts and circumstances. Some commenters requested clarification on the treatment under the free writing prospectus rules of information on an issuer s web site hyperlinked from a third party s web site. The SEC s adopting release stated that information that is an offer and is contained on the web site of an offering participant or contained on the web site of another person hyperlinked from the web site of an offering participant could be a free writing prospectus of that offering participant. J. Issuers Ineligible to Use Free-Writing Prospectuses The free writing prospectus provisions of Rule 146 and Rule 433 are available only if at the eligibility determination date for the offering in question the issuer is not an ineligible issuer (or, in the case of any offering participant, other than the issuer, the participant has a reasonable belief that the issuer is not an ineligible issuer). However, an ineligible issuer can still utilize a free writing prospectus which contains only descriptions of the terms of the securities in the offering or offerings, unless the issuer is or during the last three years the issuer or any of its predecessors was a blank check company, a shell company (other than a business combination related shell company) or an issuer for an offering of penny stock. The rules as initially proposed would have precluded ineligible issuers from using free writing prospectuses in any circumstance. In addition, the free writing prospectus provisions of Rule 146 and Rule 433 are not available for (1) a registered investment company, (2) a business development company, (3) registration of a business combination transaction or (4) an issuer, other than a well-known seasoned issuer, registering an offering on Form S-8. For purposes of Rules 146 and 433, the determination date as to whether an issuer is an ineligible issuer in respect of an offering is either: (1) the time of filing of the registration statement covering the offering, or (2) if the offering is being registered on a shelf registration statement, the earlier time after the filing of the registration statement covering the offering at which the issuer, or in the case of an underwritten offering the issuer or another offering participant, makes a bona fide offer, including without limitation through the use of a free writing prospectus, in the offering. K. Distribution of Free Writing After Effectiveness Under existing rules, after a registration statement becomes effective written offers and free writing are permitted if accompanied or preceded by a Section 10(a) prospectus. Under Section 2(a)(10) of the Securities Act, these written offers and free writings would not be deemed to be prospectuses and, thus, would also not be considered free writing prospectuses subject to the free writing prospectus rules. The SEC s adopting release comments in this context that a base prospectus included in a shelf registration statement that omits information is not a final prospectus meeting the requirements of Section 10(a). 36

37 L. Summary of the Impact of the SEC s Communications Rules on Different Types of Issuers The SEC s communications rules as applied to different types of issuers may be summarized as described below and in Appendix A attached to this memorandum: 1. Nonreporting Issuers (Including Voluntary Filers). Nonreporting issuers are issuers that are not required to file reports with the SEC, whether or not they are voluntarily reporting. Voluntary filers are therefore considered nonreporting issuers. The new rules apply to nonreporting issuers as follows: Regularly-released factual information can be released, but only to persons, such as customers and suppliers, other than in their capacities as investors or potential investors in the issuer s securities, by the issuer s employees or agents who regularly and historically have provided such information to such person. There is no safe harbor for forward-looking information. Any communications made more than 30 days before the date of filing a registration statement which do not reference a securities offering are permitted under Rule 163A. No communications about an offering are permitted in the 30 days before filing a registration statement, except as permitted by Rule 135. After a registration statement is filed, Rule 134 notices are permitted, but information related to pricing and ratings cannot be included unless a price range has been included in the prospectus filed with the SEC. After a registration statement is filed, free writing prospectuses can be used, but only if a Section 10(b) prospectus accompanies or precedes the free writing prospectus, including by hyperlink. After a registration statement is declared effective, free writing is permitted and will not be deemed a prospectus so long as it is accompanied or preceded by a Section 10(a) prospectus. 2. Reporting Unseasoned Issuers. Reporting unseasoned issuers are issuers that are required to report with the SEC but are not qualified to make primary offerings on Forms S-3 or F-3. The new rules apply to these issuers as follows: Regularly-released factual information can be released. Regularly-released forward-looking information can be released. Any communications made more than 30 days before the date of filing a registration statement which do not reference a securities offering are permitted under Rule 163A. No communications about an offering are permitted in the 30 days before filing a registration statement, except as permitted by Rule 135. After a registration statement is filed, Rule 134 notices are permitted. After a registration statement is filed, free writing prospectuses can be used, but only if a Section 10(b) prospectus accompanied or preceded the free writing prospectus, including by hyperlink. After a registration statement is declared effective, free writing is permitted and will not be deemed a prospectus so long as it is accompanied or preceded by a Section 10(a) prospectus. 3. Seasoned Issuers. A seasoned issuer is an issuer eligible to use Form S-3 or Form F-3 to register primary offerings of its securities (1) for cash on behalf of the issuer or any other person, pursuant to General Instruction I.B.1. of Form S-3, or (2) which are non-convertible investment grade securities, pursuant to General Instruction I.B.2. of Form S-3, or (3) which are investment 37

38 grade asset-backed securities, pursuant to General Instruction I.B.5. of Form S-3. In addition, majority-owned subsidiaries eligible to use Form S-3 or Form F-3 for offerings of their securities also will be considered seasoned issuers. The new rules apply to these issuers as follows: Regularly-released factual information can be released. Regularly-released forward-looking information can be released. Any communications made more than 30 days before the date of filing a registration statement which do not reference a securities offering will be permitted under Rule 163A. No communications about an offering will be permitted in the 30 days before filing a registration statement, except as permitted by Rule 135. After a registration statement is filed, Rule 134 notices will be permitted. After a registration statement is filed, free writing prospectuses can be used, but only if a Section 10(b) prospectus is on file with the SEC. After a registration statement is declared effective, free writing is permitted and will not be deemed a prospectus so long as it is accompanied or preceded by a Section 10(a) prospectus. 5. Well-Known Seasoned Issuers. The new rules apply to these issuers as follows: Regularly-released factual information can be released. Regularly-released forward-looking information can be released. Any communications made more than 30 days before the date of filing a registration statement which do not reference a securities offering will be permitted under Rule 163A. Any communications made prior to filing a registration statement, including in the 30 days before filing a registration statement, will be permitted and subject to the rules governing free writing prospectuses. After a registration statement is filed, Rule 134 notices will be permitted. After a registration statement is filed, free writing prospectuses can be used, but only if a Section 10(b) prospectus is on file with the SEC. After a registration statement is declared effective, free writing is permitted and will not be deemed a prospectus so long as it is accompanied or preceded by a Section 10(a) prospectus. III. Research Reports The SEC s new rules generally permit greater dissemination of research reports by brokers and dealers around the time of an offering. 49 A. Definition of Research Report The term research report has never previously been defined in the context of the research safe harbors. Under the new rules, the term research report will mean any written communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, 49 Rules 137, 138 and 139 continue to be available only to brokers and dealers, not issuers. The SEC s adopting release states that [i]ssuers cannot use the safe harbor provisions for research reports prepared or distributed by brokers or dealers in reliance on the rules to directly or indirectly communicate with potential investors about the issuer s offering. For example, a hyperlink on an issuer s web site during its registered offering to a research report could raise concerns in this regard. Issuers using research reports in this manner could be deemed to have adopted the contents of such reports and, under our rules, the reports could be considered free writing prospectuses. 38

39 whether or not it provides information reasonably sufficient upon which to base an investment decision. This definition includes all types of research reports, whether issuer specific or industry compendiums separately identifying the issuer. The proposed definition was based on the definition of research report in Regulation AC and would have included a writing as research only if it provided sufficient information upon which to base an investment decision. In response to comments, the final definition was made broader than the proposed definition, covering research whether or not it provided sufficient information on which to base an investment decision. The same definition applies to Rules 137, 138 and The term research report includes any written communication and thus does not cover oral communications. The SEC s adopting release states that the research safe harbors are not intended to protect oral communications that might be offers from the liability provisions of Securities Act Section 12(a)(2).... Whether oral communications relate to general research or are in connection with an offering may also involve distinctions that are too fine to be appropriate for the research exemptions. Whether a particular oral communication about an issuer or its securities by an offering participant is an offer will thus continue to depend on the facts and circumstances. B. Rule 137 Rule 137 provides a non-exclusive safe harbor for the issuance of research by a broker or dealer which is not and does not propose to be a participant in a distribution of securities and which receives no consideration in connection with the publication of the research. The broker or dealer must publish the research report in the regular course of its business. The rule provides that the research is not an offer or participation under Section 2(a)(11) of the Securities Act, so the publisher of the research cannot be deemed an underwriter. Under the new rules, the following changes will be made to Rule 137: Rule 137 historically applied only to issuers required to file reports pursuant to Section 13 or 15(d). The new rule will apply to research about all issuers, including non-reporting issuers, and not just issuers required to file reports pursuant to Section 13 or 15(d). 51 The broker not only is not and does not propose to participate in the distribution but also has not participated in the distribution. The prohibition on consideration will not preclude payment of the regular price being paid by the broker or dealer for independent research or the regular subscription or repurchase price for the research report. C. Rule 138 Rule 138 provides a non-exclusive safe harbor for the publication of research by a broker or dealer in the ordinary course of its business, where the research relates solely to common stock, or debt or preferred stock convertible to common stock, and the issuer proposes to file, has filed or has an effective registration statement 50 The adopting release notes that 12 brokerage firms that were part of the global research analyst settlement agreed to disclose, on trade confirmations, account statements and on their web sites, their research ratings, along with the research ratings of independent research providers. We do not believe that the continued publication of these ratings on trade confirmations and on account statements, as required under the global research analyst settlement, would raise concerns about whether the ratings were offers in that they would be provided in the ordinary course, and as to confirmations, after the sale of the securities. The continued inclusion of either the firm s own ratings or those of the independent research provider on the firms web sites during an offering could be an offer of the issuer s securities unless the safe harbors in Rules 137, 138, or 139 are available to the firm at that time. 51 In addition, Rules 137, 138 and 139 will not be available to any issuer that is, or was during the past three years, or which has a predecessor that was during the past three years, a blank check company, a shell company (other than a business combination related shell company) or an issuer of penny stock. 39

40 relating solely to nonconvertible debt or nonconvertible preferred stock, and vice versa, in either case where the broker or dealer proposes to be a participant in the distribution. 52 The following chart illustrates the changes being made to Rule 138: Old Rule 138 New Rule 138 General Eligibility Criteria Rule 138 applies to issuers that meet the registrant requirements of Form S-3 or Form F-3. The rule will apply not just to Form S- 3/F-3 issuers, but to any issuer if as of the date of reliance on Rule 138 it is required to file reports, and has filed all periodic reports required during the preceding 12 months (or such shorter time that the issuer was required to file such reports) on Form 10-K, 10-Q and 20-F. The rule will not apply to any issuer that is, or was during the past three years, or has a predecessor that was during the past three years, a blank check company, a shell company, or an issuer of penny stock. Alternative Eligibility Criteria for Foreign Private Issuers Rule 138 applies to foreign private issuers that (1) meet all the registrant requirements of Form F-3, other than the reporting history provision, and (2) meet the minimum float or investment grade securities provisions of such form, (3) as long as the company s securities have been traded for at least 12 months on a designated offshore securities market. (1) and (2) No change. (3) As amended, either the company satisfies the 12-month trading requirement with respect to its equity securities (the old rule covered all securities), or it has a worldwide public float of $700 million or more. Publish in ordinary course The broker or dealer must publish research in the ordinary course of its business. Same. 52 Rules 138 and 139 provide that a research report issued in compliance with those rules is not an offer for purposes of Section 5(c) of the Securities Act and Section 2(a)(10) of the Securities Act (which contains the definition of prospectus ). However, the anti-fraud provisions of the federal securities laws Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder--continue to apply to research reports issued pursuant to Rules 137, 138 and

41 Publication of research on the types of securities in question No such requirement. There is a new requirement that the broker or dealer must publish or distribute research reports on the types of securities in question in the regular course of its business. This does not mean that the dealer must be publishing about the specific issuer or its securities. The principal change to Rule 138 is to expand its coverage to a broader group of issuers. As adopted, the rule will apply to any issuer that has filed all required Forms 10-K, 10-Q and 20-F in the prior 12 months, not just to Form S-3/F-3 eligible issuers. The rule also will apply to non-reporting foreign private issuers who either have had equity traded on an offshore securities market for at least 12 months or pursuant to the new rules have a $700 million public float. On the other hand, the SEC did not accept comments that Rule 138 be made available to research reports on voluntary filers and Schedule B issuers and that it apply to all private offerings. There is a new requirement that the broker or dealer must publish or distribute research reports on the types of securities in question (but not the specific issuer) in the regular course of its business. The SEC s adopting release states that this does not mean, however, that the broker or dealer must have a history of publishing research reports about the particular issuer or its securities. If a broker or dealer begins publishing research about a different type of security around the time of a public offering of an issuer s security and does not have a history of publishing research on those types of securities, we are concerned that such publication or distribution might be a way to provide information about the publicly offered securities in order to circumvent the provisions of Section 5 and the permissible free writing rules we are adopting today. D. Rule 139 Rule 139 provides a non-exclusive safe harbor for the publication of research by a broker or dealer, even where the broker or dealer is or will be a participant in the distribution of an issuer s securities. The rule provides that the research is not an offer for purposes of Section 5(c) of the Securities Act or Section 2(a)(10) (which contains the definition of prospectus) under the Securities Act. The safe harbor applies both to issuer-specific reports distributed with reasonable regulatory in the normal course of business, as well as industry reports which cover a substantial number of companies. The following table compares the old and new Rule 139: Issuer Specific Report: General Issuer Criteria Old Rule 139 New Rule 139 Rule 139 is available if the company meets the registrant requirements of Form S-3 or Form F-3 and the minimum float or investment grade securities provisions of the form, and is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act. Rule 139 is available if the company (1) at the later of the time of filing its most recent Form S-3 or Form F-3 or the time of its most recent Section 10(a)(3) amendment, meets the registrant requirements of Form S-3/F-3, and either at such date meets the minimum float provisions of such form or, at the date of reliance on this rule, is offering investment grade securities, and (2) as of the date of reliance on the rule has filed all periodic reports required during the preceding 12 months on Forms 10-K, 10-Q and 20-F. 41

42 Issuer-Specific Report: Special Eligibility Rule for Foreign Private Issuers Issuer-Specific Report: Reasonable Regularity Requirement Industry Report Criteria A foreign private issuer can use Rule 139 if (1) it meets all the registrant requirements of Form F-3 other than the reporting history provisions, and (2) it meets the minimum float or investment grade securities provisions of such form, and (3) the company s securities have been traded for a period of at least 12 months on a designated offshore securities market. The information in an issuer-specific report must be contained in a publication which is distributed with reasonable regularity in the normal course of business. A research report is not distributed with reasonable regularity if it contains information concerning a company with respect to which a broker or dealer currently is not publishing research. In order to rely on Rule 139, an industry report must satisfy the following five criteria: (a) The issuer is required to file reports pursuant to Section 13 or 15(d), or is a non-reporting foreign private issuer meeting certain requirements. (b) The information is contained in a publication which is distributed with reasonable regularity in the normal course of business. (c) The publication includes similar information with respect to a substantial number of companies in the company s industry, or contains a comprehensive list of securities recommended by such broker or dealer. (d) The information is given no materially greater space or prominence in such publication than that given to other securities or companies. A foreign private issuer can use Rule 139 if: (1) No change. (2) No change. (3) The company s equity securities have been traded for at least 12 months on a designated offshore securities market, or the worldwide market value of the company s outstanding common equity held by non-affiliates is $700 million or more. This requirement is eliminated. Instead, the broker or dealer must publish or distribute research reports in the regular course of business and such publication or distribution must not represent the initiation or publication of research about such issuer or its securities or reinitiation of such publication following discontinuation of publication of such research. In order to rely on Rule 139, an industry report must satisfy the following criteria: (a) Same. (b) Deleted. (c) Same. (d) Same. 42

43 Industry Report Projections (e) An opinion as favorable or more favorable about the company or any class of its securities was published by the broker or dealer in the last publication addressing the company or its securities prior to the commencement of participation in the distribution. Where projections of a company s earnings or sales are included in an industry report, (1) The projections must have been published previously on a regular basis. (2) The projections must be included with respect to either a substantial number of companies in the registrant s industry or sub-industry, or all companies in a comprehensive list which is contained in the publication. (3) The projections must cover the same periods for both the registrant and such other companies. (4) No specific provision. (e) This provision is deleted. Instead, the broker or dealer must publish or distribute research reports in the regular course of its business and, at the time of the publication or distribution, must include similar information about the issuer or its securities in similar reports. With respect to projections: (1) The broker-dealer must have previously published or distributed projections on a regular basis. (2) Projections must be included with respect to either a substantial number of issuers in the issuer s industry or subindustry or substantially all issuers represented in the comprehensive list of securities contained in the research report. (3) The projections must cover the same or similar periods with respect to the registrant and such other companies. (4) At the time of publishing or disseminating research, the broker dealer must be publishing projections with respect to that issuer. The new rules make the following principal changes to Rule 139: With respect to industry reports, there is no longer a requirement that an opinion as favorable or more favorable have been published by the broker or dealer in its prior publication addressing the company or its securities. With respect to issuer-specific reports, the requirement that the publication must be issued with reasonable regularity is eliminated. Instead, the broker or dealer must publish or distribute research reports in the regular course of business and such publication or distribution must not represent the initiation or publication of research about such issuer or its securities or re-initiation of such publication following discontinuation of publication of such research. 53 The requirement that a foreign private issuer s securities must have traded on a designated offshore market for at least 12 months is amended to specify that it relates only to the issuer s equity securities. Also, in lieu of this requirement, the foreign private issuer can have a worldwide public float of $700 million or more. 53 The SEC s adopting release states that we are not requiring any minimum time period for the broker or dealer to have distributed or published research reports, only that the particular broker or dealer have initiated or re-initiated coverage. In addition, the amendment as adopted does not require that the previously published or distributed research report cover the same securities that are the subject of the registered offering. 43

44 E. Rule 144A and Regulation S Both Rules 138 and 139 are being amended to specify that if the conditions of the rule are satisfied, the publication or dissemination of research will not (1) be considered an offer or general solicitation or general advertising in connection with a Rule 144A offering or (2) constitute directed selling efforts for Regulation S offerings or be inconsistent with the offshore transaction requirement under Regulation S. 54 F. Research and Proxy Solicitations The SEC also codified a staff no-action interpretation that the publication or dissemination by a broker or dealer of a research report in accordance with Rules 138 or 139, during a transaction in which the broker or dealer or its affiliate participates or acts in an advisory role, is a solicitation to which Rules 14a-3 through 14a-15 (other than Rule 14a-9) of the proxy rules do not apply. This codifies, with some variation, a no-action letter issued to Merrill Lynch, Pierce, Fenner & Smith Incorporated (October 24, 1997). In response to comments, the exemption applies to all transactions whether or not registered under the Securities Act; the proposal would have been limited to a transaction registered under the Securities Act. IV. Shelf Registration A. Overview of the Current Shelf Registration Procedures Shelf registration is currently governed by Rule 415. This rule provides that securities may be registered for an offering to be made on a continuous or delayed basis in the future in one of eleven categories of offerings. The shelf category most used covers securities to be registered on Form S-3 or F-3 which are to be offered and sold on a continuous or delayed basis by or on behalf of the company, a majority-owned subsidiary of the company or a person of which the company is a majority-owned subsidiary (shelf category X). 55 Other categories of shelf offerings include, among others, (1) securities to be offered or sold solely by or on behalf of a person other than the company, a subsidiary of the company or a person of which the company is a subsidiary (shelf category I), (2) securities the offering of which will be commenced promptly, will be made on a continuous basis and may continue for a period in excess of 30 days from the date of initial effectiveness (shelf category IX), (3) securities to be offered and sold pursuant to a DRIP plan or an employee benefit plan, (4) securities to be issued upon the exercise of options, warrants or rights, (5) securities to be issued upon conversion of other outstanding securities, (6) securities to be pledged as collateral and (7) securities which are to be issued in connection with business combination transactions (shelf category VIII). B. Modifications to Shelf Procedures The new rules will generally make the shelf registration process less burdensome for all issuers. Principal changes to Rule 415 include the following: Two Year Period. Under current shelf rules, securities registered in shelf categories VIII (business combination transactions), IX (continuous offerings for more than 30 days after 54 Regulation S is also being amended to clarify that (1) the publication of a research report by a broker or dealer in accordance with Rules 138 or 139 will not constitute directed selling efforts and (2) the publication or distribution of a research report in accordance with Rules 138 or 139 by a broker or dealer at or around the time of an offering in reliance on Regulation S will not cause the transaction to fail to be an offshore transaction. 55 Before the adoption of the new rules, category X had covered offerings on behalf of the company, any subsidiary of the company, or any person of which the company was a subsidiary. The new rules amended category X to refer only to majority-owned subsidiaries, not subsidiaries generally. 44

45 effectiveness) and X (standard Form S-3 primary issuances) may only be registered in an amount which is reasonably expected to be offered and sold within two years from the initial effective date of the registration statement. Under the new rules, the two year limitation will no longer apply to shelf offerings in category X and will only apply to (1) shelf offerings in category VIII and (2) shelf offerings in category IX which are not registered on Form S-3 or Form F-3. Three Year Period. Under the new rules, securities registered on an automatic shelf registration statement and securities described in shelf categories VII (mortgage-related securities), IX (continuous offerings) and X (standard Form S-3 primary issuances) may be offered and sold for a period of three years after the initial effective date of the registration statement. There is no limit on the amount that can be registered. Unused amounts can be carried forward. Under the new rules, new shelf registration statements must be filed every three years, where the shelf relates to an automatic shelf registration statement or offerings pursuant to shelf categories VII, IX and X. The new registration statement and prospectus must include all the information that would be required at that time in a prospectus relating to all offerings that it covers. Prior to the effective date of the new registration statement (including at the time of filing in the case of an automatic shelf registration statement), the issuer may include any unsold securities covered by the earlier registration statement by identifying on the bottom of the facing face the amount of such unsold securities being included and any filing fee paid in connection with the unsold securities. The offering of securities on the earlier registration statement will be deemed terminated as of the date of effectiveness of the new registration statement. If the new registration statement is an automatic shelf registration statement, it will be immediately effective. If it is not an automatic shelf registration statement, (1) so long as the new registration statement is filed within three years of the original effective date of the old registration statement, securities covered by the prior registration statement may continue to be offered and sold until the earlier of the effective date of the new registration statement or 180 days after the third anniversary of the initial effective date of the prior registration statement, and (2) a continuous offering of securities covered by the prior registration statement that commenced within three years of the initial effective date may continue until the effective date of the new registration statement if such offering is permitted under the new registration statement. At the Market Offerings. Under current rules, an at the market offering is an offering of securities into an existing trading market for outstanding shares of the same class at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker. Under current rules, securities sold in an at the market offering (1) must be issued on a Form S-3 or F- 3, (2) if voting securities, must not exceed 10% of the aggregate market value of the company s outstanding voting stock held by non-affiliates, and (3) must be sold through underwriters, who must be named in the prospectus. Under the new rules, an at the market offering is an offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price. Under the new rules, the only limitation on an at the market offering is that it must be issued pursuant to shelf category (X). Immediate Shelf Takedowns. Under current SEC policy, issuers that file shelf registration statements for a continuous or delayed offering on Forms S-3 or F-3 are not permitted to make an immediate takedown off the shelf after it is declared effective unless the takedown is disclosed in the shelf registration statement. The new rules reverse this policy and allow immediate primary offerings on Form S-3 or Form F-3 following effectiveness. 45

46 C. Information in Base Prospectuses and Prospectus Supplements Under current practice, a shelf registration statement at the time of effectiveness may contain a base prospectus which omits information about the particular offering and the particular plan of distribution. When particular offerings are made using the base prospectus, a prospectus supplement containing this additional information may be distributed to investors and filed with the SEC. New Rule 430B specifies the relationship between base prospectuses and prospectus supplements and clarifies what information should be included in a base prospectus and what may be in a prospectus supplement. Rule 430B, which generally would only apply to offerings in shelf category X (primary offerings on Form S-3), offerings by well-known seasoned issuers registered on automatic shelf registration statements, and secondary offerings by certain primary shelf eligible issuers, serves as a shelf offering corollary to existing Rule 430A which applies to non-shelf offerings. 56 Information That is Unknown or Unavailable to the Issuer. In general, the base prospectus for offerings in shelf category X (standard Form S-3 primary offerings) may omit from the information required by the form to be in the prospectus information that is unknown or not reasonably available to the issuer pursuant to Rule This is intended to be consistent with current practice. The base prospectus still must include, for other than automatic shelf registration statements, general descriptions of the types of securities and possible plans of distribution. Identity of Selling Shareholders. Under current SEC policy, new or previously unidentified selling shareholders can be added to resale registration statements only pursuant to a post-effective amendment, with limited exceptions. This can impose potential delay on a transaction because the SEC may choose to review the post-effective amendment. The new rules address this concern by allowing certain issuers to add the names of selling shareholders, and all information about them required by Item 507 of Regulation S-K, after effectiveness of the registration statement either in post-effective amendments, in prospectus supplements (which will be deemed part of the registration statement for liability purposes) or in Exchange Act reports incorporated by reference into the registration statement (subject to filing a prospectus supplement identifying such report). 58 Specifically, a base prospectus filed as part of a shelf registration statement for offerings pursuant to shelf category I (secondary shelves) by an issuer eligible to use Form S-3 or Form F-3 for primary 56 A base prospectus that complies with Rule 430B will be deemed a Section 10 statutory prospectus (although not a Section 10(a) final prospectus) and thus can be used for making offers after the registration statement is filed. In addition, once a Rule 430B base prospectus is on file, (1) issuers can communicate using Rule 134 notices (which requires that a prospectus satisfying the requirements of Section 10 of the Securities Act be filed) and (2) issuers and other offering participants can use free writing prospectuses under Rules 164 and 433 (which requires that a prospectus satisfying the requirements of Section 10 be filed). 57 In addition, as discussed below, pursuant to Rule 430B(a), the base prospectus filed as part of an automatic shelf registration statement can also omit information as to whether the offering is a primary offering or an offering on behalf of other persons, or a combination thereof, the plan of distribution for the securities, a description of the securities registered other than an identification of the name or class of such securities, and the identification of other issuers. 58 The SEC adopting release states that [a]s we are amending Rule 424 today, prospectus supplements may be filed in connection with selling security holders offerings, to add selling security holders omitted pursuant to Rule 430B and to provide supplemental or additional information. The filing of a prospectus supplement to include the identity of omitted selling security holders pursuant to Rule 424(b)(7) will be deemed to be a new effective date of the registration statement for Section 11 liability purposes of the issuer and underwriter. Under the Securities Act, selling security holders may be underwriters in connection with the distribution of the securities being registered for resale on their behalf. 46

47 offerings (satisfying the $75 million public float requirement) can omit the identities of selling shareholders and amounts of securities to be registered on their behalf if (1) the initial offering transaction of the securities (or securities convertible into such securities) the resale of which are being registered on behalf of each of the selling security holders, was completed, (2) the securities (or securities convertible into such securities) were issued and outstanding prior to the original date of filing the registration statement covering the resale of the securities, (3) the registration statement refers to any unnamed selling security holders in a generic manner by identifying the initial offering transaction in which the securities were acquired 59 and (4) the issuer is not, and during the past three years neither the issuer nor any of its predecessor was, a blank check company, a shell company (other than a business combination related shell company), or an issuer in an offering of penny stock. 60 Following effectiveness, the registrant will need to file a prospectus, a prospectus supplement or a post-effective amendment to add the names of previously unidentified selling shareholders and the amounts of securities they intend to sell. Any prospectus supplement that identifies selling security holders and the amounts to be sold by them that was previously omitted from the registration statement pursuant to Rule 430B will need to be filed with the SEC within two business days after the earlier of the date of sale or the date of first use. Methods of Including Omitted Information. Information omitted from a base prospectus pursuant to the provisions above may be included in the prospectus by a post-effective amendment, a prospectus supplement filed pursuant to Rule 424(b) or, if the form permits, incorporating the information by reference to a periodic or current report filed with the SEC. Rule 430B makes clear that prospectus supplements and information in them will be deemed part of and included in the registration statement just like information in a base prospectus or in a document incorporated by reference into the registration statement. Where a prospectus supplement filed pursuant to Rule 424(b) relating to an offering does not include disclosure of omitted information regarding the terms of the offering, the securities, or the plan of distribution, or selling security holders for the securities that are the subject of the form of prospectus, because such omitted information has been included in periodic or current reports incorporated by reference into the prospectus, the issuer must file a form of prospectus identifying the periodic or current reports that are incorporated by reference into the prospectus that is part of the registration statement that contain such omitted information. Such form of prospectus must be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7). Incorporation by Reference of Information into Forms S-3 and F-3. The new rules allow primary shelf eligible issuers and well known seasoned issuers with automatic shelf registration statements to add more information into a prospectus through a prospectus supplement or an 59 The SEC adopting release states that [i]n response to commenters suggestions, we have clarified that the transaction that the issuer must disclose in the resale registration statement must be the initial offering transaction in which the securities were initially sold, not a resale transaction in which any particular selling security holder may have acquired the securities. The goal of the disclosure is to clearly link the securities being registered for resale to a completed initial offering. Moreover, we have revised the instructions to Form S-3 and Form F-3 to eliminate any requirement to name any selling security holders prior to effectiveness if the conditions of Rule 430B are satisfied. 60 The SEC adopting release states that [a]n issuer registering the resale of securities sold in a private offering may not rely on this provision to identify after effectiveness selling security holders who will acquire the securities directly from the issuer if the securities are not yet issued in the private offering, even where the investors are contractually bound to acquire the securities. The issuer can still register the resale of the not-yet-issued securities, but it must identify the selling security holders in the registration statement at the time of filing and prior to effectiveness because the issuer will know the identities of the selling security holders who will acquire the securities from it. 47

48 incorporated document, rather than solely through a post-effective amendment, than is currently the case. The new rules amend Form S-3 and Form F-3 to allow any information required in the base prospectus pursuant to Items 3 through 11 of Form S-3 and Form F-3 to be incorporated by reference through documents filed pursuant to Exchange Act reports. This includes risk factors, ratio of earnings to fixed charges, use of proceeds, determination of offering price, dilution, selling security holders, plan of distribution, description of securities, interests of named experts and counsel, and material changes. Therefore, all of this information can be included in Exchange Act reports or in the prospectus or a prospectus supplement (which would be deemed part of the registration statement). The current undertakings required for shelf registration statements include an undertaking that the issuer will file a post-effective amendment to (1) include any prospectus required by Section 10(a)(3), (2) reflect any facts or events which individually or in the aggregate represent a fundamental change in the information in the registration statement or (3) include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change in such information. Under the new rules, this undertaking will provide that if the registration statement is on Form S-3 and F-3, the information need not be in a post-effective amendment if it is in periodic reports incorporated into the registration statement or in a prospectus supplement. Material Changes to the Plan of Distribution. In particular, under the new rules, material changes in the plan of distribution in Forms S-3 and F-3, which currently are required to be included in post-effective amendments, can be included by incorporated Exchange Act reports or prospectus supplements. The standard shelf undertakings are being amended to reflect that material changes to the plan of distribution can be made in this manner rather than by post-effective amendment. D. Automatic Shelf Registration for Well-Known Seasoned Issuers The SEC has also adopted a new form of automatic shelf registration which makes the shelf registration process more flexible for well-known seasoned issuers. Under the new rules, eligible well-known seasoned issuers can register unspecified amounts of different specified types of securities on immediately effective Form S-3 or Form F-3 registration statements. Eligible issuers may add additional classes of securities or eligible majorityowned subsidiaries as additional registrants after the automatic shelf registration statement is effective. They also may freely accommodate both primary and secondary offerings using automatic shelf registration. Issuers can pay filing fees in advance or on a pay-as-you-go basis at the time of each takedown in an amount calculated for that takedown. The rules also allow more information to be omitted from the base prospectus than is allowed for other issuers. 61 Eligibility. An issuer may utilize automatic shelf registration if it is a well-known seasoned issuer at the most recent eligibility determination date. The determination date as to whether an issuer is a well-known seasoned issuer is the latest of (1) the time of filing of its most recent shelf registration statement, or (2) the time of its most recent amendment (by post effective amendment, incorporated report or form of prospectus) to a shelf registration statement for purposes of complying with section 10(a)(3) of the Securities Act (or if such amendment is not made within the period required by section 10(a)(3), the date on which such amendment is required), or (3) in the event that the issuer has not filed a shelf registration statement or amended a shelf registration statement for purposes of complying with Section 10(a)(3) for sixteen months, the time of filing of the issuer s most recent annual report on Form 10-K or 20-F (or if such report has not been filed by its due date, such due 61 Many of the new rules regarding automatic shelf registration build on the recommendations contained in the SEC s Report of the Task Force on Disclosure Simplification (March 5, 1996). Among other things, this report recommended that seasoned Form S-3/F-3 issuers should be able to include secondary offerings without identifying the selling security holders until the time of the actual offering, reallocate securities or register a new class of securities by post-effective amendment, register a dollar amount without specifying the classes of securities being registered, and pay the registration fee at the time securities are taken down from the shelf. 48

49 date). The automatic shelf registration statement can cover any securities offering, other than shelf offerings registering business combinations and mortgage-related securities. If an issuer is no longer eligible to use an automatic shelf registration statement, it will have to either post-effectively amend its registration statement onto the form it is then eligible to use or file a new registration statement on such form. For example, a well-known seasoned issuer that is initially eligible for automatic shelf registration, that is not eligible at the time of its annual report filing, but that retains its eligibility to file a shelf registration statement under Rule 415 on Form S-3, can file a post-effective amendment or a new registration statement on Form S-3 that designates an amount of securities to be registered and otherwise complies with requirements for seasoned issuers that are not well-known seasoned issuers. Securities Covered. Generally the registration statement can cover securities of the company, securities of majority owned subsidiaries and securities owned by selling security holders. The registration statement need not indicate whether the securities are being sold in primary offerings or on behalf of selling security holders. (1) Company Securities. The registration statement can cover (a) any securities to be offered pursuant to Rule 415, Rule 430A or Rule 430B by a registrant that is a well-known seasoned issuer with a worldwide public float of at least $700 million or more, or (b) any securities to be offered pursuant to Rule 415, Rule 430A or Rule 430B by a registrant that is a well-known seasoned issuer which has issued in the last three years at least $1 billion of non-convertible securities, if the issuer is also able to register a primary offering of its securities under Form S-3 because it has a public float of at least $75 million, or (c) non-convertible securities, other than common equity, to be offered pursuant to Rule 415, Rule 430A or Rule 430B by a registrant that is a well-known seasoned issuer only by reason of having issued in the last three years at least $1 billion of non-convertible securities and does not have a public float of at least $75 million. (2) Majority Owned Subsidiary Securities. The registration statement can cover securities of majority-owned subsidiaries to be offered pursuant to Rule 415, Rule 430A or 430B if the parent registrant is a well-known seasoned issuer and the subsidiary securities fall into one of 4 categories. 62 If the registrant is a majority-owned subsidiary, it must be required to file and have filed reports pursuant to Section 13 or 15(d) of the Exchange Act and must satisfy the requirement of the form with regard to incorporation by reference or information about the majority-owned subsidiary must be included in the registration statement (or in a post-effective amendment). 62 These four categories include (a) securities of a majority-owned subsidiary that is a well-known seasoned issuer at the time it becomes a registrant (other than pursuant to the majority-owned subsidiary provision in the definition of wellknown seasoned issuer), (b) securities of a majority-owned subsidiary that are non-convertible securities, other than common equity, and the parent registrant provides a full and unconditional guarantee of the payment obligations on the non-convertible securities, (c) securities of a majority-owned subsidiary that are a guarantee of (A) nonconvertible securities, other than common equity, of the parent registrant being registered or (B) nonconvertible securities, other than common equity, of another majority-owned subsidiary being registered and the parent registrant has provided a full and unconditional guarantee of the payment obligations on such non-convertible securities, or (d) securities of a majority-owned subsidiary that are investment grade securities. 49

50 (3) Selling Security Holder Securities. The registration statement can cover securities of any person other than the issuer. The registration statement and the prospectus are not required to separately identify the selling security holders or the securities to be sold by such persons until the filing of a prospectus, prospectus supplement, post-effective amendment to the registration statement, or periodic or current report under the Exchange Act that is incorporated by reference into the registration statement and prospectus, identifying the selling security holders and the amount of securities to be sold by each of them and, if included in a periodic or current report, a prospectus or prospectus supplement is filed pursuant to Rule 424(b)(7). Registration of Securities Offered. The issuer can register an unspecified amount of securities to be offered, without indicating whether the securities are being sold in primary offerings or secondary offerings on behalf of selling security holders. Well-known seasoned issuers that satisfy the definition only because they have issued over $1 billion of non-convertible securities (other than equity securities) can only register non-convertible securities (other than equity securities), unless they also are primarily eligible to use Form S-3 or Form F-3 for a primary offering because they have a public float of $75 million or more. The calculation of registration fee table in the initial filing will not need to include a dollar amount or specific number of securities, unless a fee based on an amount of securities is paid at the time of filing, but the table must at least list each class of security registered and indicate if the filing fee will be paid on a pay-as-you-go basis. The issuer can specify the number or dollar amount of securities in a prospectus supplement at the time it pays a fee in advance of or for each offering. The base prospectus in the initial registration statement must identify in general terms the names or classes of securities registered. The description need not be detailed only the identification of the names or classes of securities such as debt, common stock, and preferred stock is required. In addition, in order to give issuers more flexibility, the issuer need not allocate the mix of securities registered among the issuer, its eligible subsidiaries and selling security holders. 63 Automatic Effectiveness. The automatic shelf registration statement will become effective immediately, without staff review, including an automatic shelf registration statement filed at the end of a three year period in order to update a previously filed automatic shelf registration statement. Any post-effective amendment thereto, including a post-effective amendment to register additional classes of securities, also will become effective immediately. 64 Although the registration statement will become effective immediately, whether or not there are open SEC comments, the adopting release states that the SEC expects issuers to evaluate disclosure or accounting issues in Exchange Act filings before filing registration statements, including automatic shelf registration statements, and at the time of filing incorporated Exchange Act reports. 63 The SEC s adopting release includes the following description of the SEC s view regarding allocation on an omnibus shelf registration statement: Currently, an issuer offering securities on Form S-3 or Form F-3 is not required to specify the amount of each class of securities that it will offer, but it is required to separately register and designate the amount and classes of securities that may be offered and sold by eligible subsidiaries and selling security holders. Under our current rules, offerings for selling security holders are not considered delayed offerings under Rule 415(a)(1)(x) and thus must be separately registererd or designated prior to effectiveness of the registration statement. Except under our new rules for well-known seasoned issuers, issuers cannot offer and sell securities of selling security holders using an unallocated shelf registration statement. 64 The staff of the Division of Corporation Finance will continue to review, upon request, prospectus supplements involving novel and unique securities offerings that are submitted to them prior to the offering. 50

51 An automatic registration statement and any post-effective amendment thereto will be deemed filed on the proper registration form unless the Division of Corporation Finance notifies the issuer after filing of its objection to use of the form. There is no specific time period during which the Division of Corporation Finance must object. Following any such notification, the issuer must amend its automatic shelf registration statement onto an eligible registration form or otherwise resolve the issue with the Division of Corporation Finance. However, any continuous offering of securities pursuant to Rule 415 that the issuer has already commenced may continue until the effective date of a new registration statement or post-effective amendment to the registration statement that the issuer files on the proper registration form, if the issuer files promptly after notification the new registration statement or post-effective amendment and if the offering is permitted to be made under the new registration statement or post-effective amendment. Also, any securities sold prior to staff notification of ineligibility will not be deemed to have been sold in violation of Section 5 or subject to rescission rights. The SEC s adopting release states that the automatic shelf registration statement may facilitate different types of offerings that issuers currently may elect to conduct on an unregistered basis, such as rights offerings conducted by eligible foreign private issuers. Foreign private issuers currently often do not extend rights offerings to U.S. security holders because the registration process in the U.S. does not accommodate the timing mechanics of rights offerings. The SEC believes that the ability of eligible foreign private issuers to use the automatic shelf registration process should encourage eligible foreign private issuers to extend rights offerings to U.S. investors. Adding Additional Classes of Securities of the Issuer. Well-known seasoned issuers can add additional classes of securities to the automatic shelf registration statement by filing a posteffective amendment, which becomes effective automatically, to register an unspecified amount of securities of the new class of security. An issuer can provide the disclosure about the new class of securities of the issuer in a post effective amendment, a prospectus supplement deemed part of and included in the registration statement, or an Exchange Act report that is incorporated by reference into the registration statement. Adding Majority-Owned Subsidiaries as New Registrants. An automatic shelf registration statement can be amended by post-effective amendment to add a majority-owned subsidiary as a new registrant. The post-effective amendment would need to identify the additional registrants, in accordance with new General Instruction IV(B) of Form S-3, and the registrant and the additional registrants and other persons required to sign the registration statement would need to sign the post-effective amendment. The post-effective amendment would consist of the facing page; any disclosure required by the form that is necessary to update the registration statement to reflect the additional securities, additional classes of securities or additional registrants; any required opinions and consents; and the signature page. Required information, consents or opinions may be included in the prospectus and registration statement through a post-effective amendment or may be provided through a document incorporated by reference into the registration statement and the prospectus that is part of the registration statement or, as to the required information only, contained in a prospectus supplement filed pursuant to Rule 424(b) that is deemed part of and included in the registration statement and prospectus that is part of the registration statement. Pay-As-You-Go Registration Fees. A well-known seasoned issuer that registers securities offerings on an automatic shelf registration statement, or registers additional securities or classes of securities, may, but is not required to, defer payment of all or any part of the required registration fee. 51

52 If the issuer elects to defer payment, the Calculation of Registration Fee table in the registration statement must indicate that the issuer is relying on Rule 456(b) but need not include the number of shares or units of securities or the maximum aggregate offering price of any securities until the issuer updates the fee table to reflect payment of the pay-as-you-go registration fee. If payment is to be deferred, the fee table in the initial filing must identify the classes of securities being registered and must provide that the issuer elects to rely on Rule 456(b) and Rule 457, but the fee table does not need to specify any other information. If the issuer elects to defer payment, it must pay the pay-as-you-go registration fees in advance of or in connection with an offering of securities within the time required to file the prospectus supplement pursuant to Rule 424(b) for the offering. If the issuer fails, after a good faith effort to pay the filing fee within the time required, the issuer will still be considered to have paid the fee in a timely manner if it is paid within four business days of its original due date. In connection with each individual takedown, the issuer must reflect the amount of the pay-as-you-go registration fee by updating the Calculation of Registration Fee table to indicate the class and aggregate offering price of securities offered and the amount of registration fee paid or to be paid in connection with the offering or offerings either (1) in a post-effective amendment filed at the time of the fee payment or (2) on the cover page of a prospectus filed pursuant to Rule 424(b). When the issuer amends the fee table, the amended fee table must include either the dollar amount of securities being registered if paid in advance of or in connection with an offering, or the aggregate offering price for all classes of securities referenced in the offerings and the applicable registration fee. The actual registration fee will be calculated based on the fee payment rate in effect on the date of the fee payment (upon filing if paid in advance, or at the time of a takedown). The rules provide flexibility in the timing of the fee payment. Issuers using pay-as-you-go can still deposit monies in a lockbox account for payment of filing fees when due. The amount of the fee will be calculated based on the fee schedule in effect when the money is withdrawn from the lockbox account, not at the time the money is deposited into the lockbox account. The SEC stated that this is intended to help issuers, such as those with medium term note programs, to determine the fee payment approach most appropriate for them. A registration statement filed relying on the pay-as-you-go registration fee payment provisions will be considered filed as to the securities or classes of securities identified in the registration statement when it is received by the SEC, if it complies with all other requirements of the Securities Act. The securities sold pursuant to the registration statement will be considered registered if the pay-as-you-go registration fee is paid and the post-effective amendment or prospectus containing the amended fee table is filed as required. The final rules eliminate a proposed requirement to pay a nominal ($100) initial filing fee. Information That May be Omitted From the Base Prospectus. A base prospectus filed as part of an automatic shelf registration statement can omit not just information that is unknown or not unreasonably available to the issuer (which all issuers can omit pursuant to Rule 430B), but also information as to whether the offering is a primary or secondary offering, the description of the securities to be offered other than an identification of the name or class of the securities, the names of any selling security holders, and disclosure regarding any plan of distribution. Including Omitted Information in an Automatic Shelf Registration Statement. Information can be added to any shelf registration statement (whether or not an automatic shelf registration) on Form S-3 or F-3 pursuant to a post-effective amendment, a periodic or current report 52

53 incorporated by reference into the registration statement, or a prospectus supplement which would be deemed to be part of the registration statement pursuant to Rule 430B. 65 Any information required to be in the prospectus pursuant to Item 3 through Item 11 of Form S-3 and Form F-3 can be included in this manner, including the public offering price, any updating information regarding the issuer (whether or not a fundamental change), a detailed description of the securities (including information not contained or incorporated by reference in the base prospectus), the identity of underwriters and selling security holders, and the plan of distribution for the securities. The only exception to this approach is that the addition of new types of securities, or new eligible issuers, including guarantors, and the securities they may issue, must be accomplished by posteffective amendment, which will be effective upon filing. Indenture Qualification Under the Trust Indenture Act. The SEC s position is that the indenture covering the securities to be sold must be qualified under the Trust Indenture Act when the registration statement becomes effective and not at the time of any post-effective amendment. Accordingly, for debt securities or guarantees included in the registration statement at original effectiveness, the trust indenture will be required to be included in the registration statement at the time that registration statement becomes effective. For debt securities or guarantees added to the registration statement through a post-effective amendment, the trust indenture will be required to be included in the registration statement at the time that post-effective amendment becomes effective. Duration of the Registration Statement. Issuers will be required to file new automatic shelf registration statements every three years. Issuers will be prohibited from issuing securities off an automatic shelf registration statement that is more than three years old. However, as long as eligibility for automatic shelf registration is maintained, the new registration statement will be effective immediately and will carry forward, at the issuer s election, either any unused fees paid or unsold securities registered and fees paid attributable to such registered securities under the old registration statement. Therefore, an issuer s securities offerings under the registration statement would not be interrupted. V. Prospectus Delivery The new rules eliminate in many cases the need for issuers, underwriters and dealers to physically deliver a final prospectus if a statutory prospectus is filed with the SEC on EDGAR. A. Access Equals Delivery (Rule 172(b)) Section 5(b)(2) of the Securities Act states that it is unlawful to deliver a security unless it is accompanied or preceded by a Section 10(a) prospectus. This provision effectively requires every purchaser of securities in a registered offering to physically receive a final prospectus. The new rules allow issuers and other offering participants to satisfy this delivery requirement without physical delivery if a statutory prospectus is filed with the SEC on EDGAR. 66 Specifically, physical delivery is not required to satisfy Section 5(b)(2) if the following conditions are met: 65 Rule 430B requires that the issuer file a prospectus supplement if the Exchange Act reports include the offering-related information. 66 The SEC rules still require physical delivery of preliminary prospectuses in initial public offerings. Also, the SEC did not amend Rule 15c2-8 of the Exchange Act, which requires broker-dealers to take reasonable steps to comply promptly with written requests for copies of the final prospectus. 53

54 (1) The registration statement relating to the offering is effective and is not the subject of any pending stop order proceeding or examination by the SEC under Sections 8(d) or 8(e) of the Securities Act. (2) Neither the issuer, nor an underwriter or participating dealer is the subject of a pending proceeding under Section 8A of the Securities Act in connection with the offering. Section 8A allows the SEC to bring cease-and-desist proceedings against any person whom the SEC finds is violating, has violated or is about to violate the Securities Act and the rules adopted thereunder. (3) The issuer has filed with the SEC a prospectus with respect to the offering that satisfies the requirements of Section 10(a) or the issuer will make a good faith and reasonable effort to file such a prospectus within the time required under Rule 424 and, in the event that the issuer fails to file timely such a prospectus, the issuer files the prospectus as soon as practicable thereafter. 67 This condition (3) does not apply to transactions by dealers requiring delivery of a final prospectus pursuant to section 4(3) of the Securities Act. The adopting release also states that, as a result of the operation of the new rules, if a current final prospectus is on file with the SEC, final prospectuses will no longer be required to be delivered in connection with market-making transactions by dealers affiliated with issuers. B. Confirmations and Notices of Allocations (Rule 172(a)) Section 5(b)(1) of the Securities Act currently prohibits the delivery of written confirmations and notices of allocation after effectiveness of a registration statement unless they are accompanied or preceded by a Section 10(a) prospectus. 68 The new rules allow confirmations and notices of allocation to be delivered even if not accompanied or preceded by a prospectus, subject to certain conditions. In particular, after the effective date of a registration statement, written confirmations of sales of securities in a registered can be distributed if the confirmation contained information limited to that called for in Rule 10b-10 of the Exchange Act and other information customarily included in written confirmations of sales, which may include notices of registration provided pursuant to Rule 173. Similarly, notices of allocation of securities sold or to be sold in a registered offering can be distributed and may include information identifying the securities (including the CUSIP number) and otherwise may include only information regarding pricing, allocation and settlement and information incidental thereto. For example, broker-dealers can send notices after effectiveness to inform investors in a public offering of their allocations. 69 The new rules allow distribution of confirmations and notices of allocation, as described above, subject to the following conditions: 67 This rule does not apply to any registered investment company, BDC, business combination transaction, or offering registered on Form S Section 5(b)(1) provides that it is unlawful to transmit any prospectus unless it meets the requirements of Section 10 of the Securities Act. The term prospectus is defined in Section 2(a)(10) as any communication which offers any security for sale or confirms the sale of any security. Therefore, a confirmation or notice of allocation would be deemed to be a prospectus. However, the definition of prospectus states that a communication sent or given after the effective date of the registration statement is not a prospectus if it is accompanied or preceded by a Section 10(a) prospectus. Therefore, a confirmation or notice of allocation could be sent after effectiveness only if accompanied or preceded by a Section 10(a) prospectus. 69 The notice of allocation may not include information related to the demand for the securities or other information designed to facilitate an investment decision. This information, the SEC stated, if communicated in writing should be the subject of a free writing prospectus. 54

55 (1) The registration statement relating to the offering is effective and is not the subject of any pending stop order proceeding or examination by the SEC pursuant to Sections 8(d) or 8(e) under the Securities Act. (2) Neither the issuer, nor an underwriter or participating dealer is the subject of a pending proceeding under Section 8A of the Securities Act in connection with the offering. Section 8A allows the SEC to bring cease-and-desist proceedings against any person whom the SEC finds is violating, has violated or is about to violate the Securities Act and the rules adopted thereunder. (3) The issuer has filed with the SEC a prospectus with respect to the offering that satisfies the requirements of Section 10(a) or the issuer will make a good faith and reasonable effort to file such a prospectus within the time required under Rule 424 and, in the event that the issuer fails to file timely such a prospectus, the issuer files the prospectus as soon as practicable thereafter. 70 This condition (3) does not apply to transactions by dealers requiring delivery of a final prospectus pursuant to section 4(3) of the Securities Act. C. Notice of Registration (Rule 173) As a corollary to the access equals delivery rules, the new rules also will require underwriters participating in an offering to provide purchasers with a notice stating that the sale was made pursuant to a registered offering. 71 The new rule includes the following elements: The requirement applies to each underwriter or dealer selling in the transaction (or, if the sale is made by the issuer and not by or through an underwriter or dealer, the issuer). The requirement applies in a transaction that represents (1) a sale by the issuer or an underwriter or (2) a sale where there is not an exclusion or exemption from the requirement to deliver a final prospectus meeting the requirements of Section 10(a) pursuant to Section 4(3) of the Securities Act or Rule 174. Within two business days following the completion of the sale, the underwriter or dealer must provide to each purchaser from it either (1) a copy of the final prospectus or (2) a notice to the effect that the sale was made pursuant to a registration statement or in a transaction in which a final prospectus would have been required to have been delivered in the absence of Rule 172. Compliance with Rule 173 is not a condition to reliance on Rule 172. A purchaser may request from the person responsible for sending a notice a copy of the final prospectus if one has not been sent. However, the SEC s adopting release states that the requested prospectus does not have to be provided before settlement and that the final prospectus can be comprised of a set of documents which taken together satisfy the information requirements of Section 10(a) of the Securities Act. A Rule 173 notice may be included in a Rule 10b-10 confirmation. After the effective date of a registration statement, Rule 173 notices are exempt from Section 5(b)(1) of the Securities Act. The rule does not apply to (1) transactions solely between brokers or dealers in reliance on Rule 153 or to (2) registered investment companies, BDC s, business combination transactions, or offerings registered on Form S This rule does not apply to any registered investment company, BDC, business combination transaction, or offering registered on Form S The proposing release stated that providing the notice to investors would not impose a significant incremental cost because the notice could consist of a pre-printed message that is automatically delivered with the confirmation required by Exchange Act Rule 10b

56 D. Transactions Taking Place on an Exchange or Through a Registered Trading Facility (Rule 153) Rule 153 was historically intended to help brokers on a stock exchange satisfy their prospectus delivery requirement between each other. The rule provides that a prospectus delivery requirement under Section 5(b)(2) of the Securities Act is complied with if the issuer or any underwriter delivers copies of the Section 10(a) prospectus to the exchange for the purpose of redelivery to members of the exchange upon their request. The rule only applies to national securities exchanges (e.g., the NYSE) but not to Nasdaq or other alternative trading facilities. The new rules eliminate the requirement that prospectuses be physically delivered to the exchange. Any requirement of a broker or dealer under Section 5(b)(2) to deliver a prospectus to another broker or dealer as a result of a transaction effected between such parties on or through a national securities exchange or facility thereof, a trading facility of a national securities association, or an alternative trading system registered pursuant to Regulation ATS under the Exchange Act is satisfied if the following conditions are satisfied: (1) securities of the same class as the securities that are the subject of the transaction are trading on that exchange or facility, (2) the registration statement is effective and is not the subject of any pending proceeding or examination, (3) neither the issuer, nor any underwriter or participating dealer is the subject of a pending proceeding under the Securities Act in connection with the offering, and (4) the issuer has filed or will file with the SEC a prospectus with respect to the offering that satisfies the requirements of Section 10(a) of the Securities Act. E. Aftermarket Prospectus Delivery (Rule 174) Dealers are currently required to deliver final prospectuses in secondary market transactions for specified periods of time after a registration statement becomes effective. Rule 174 specifies that (1) no prospectus delivery is required by dealers for reporting issuers, (2) final prospectuses must be delivered for 25 days with respect to nonreporting issuers that will be listed on a national securities exchange or quoted on Nasdaq, and (3) final prospectuses must be delivered for 90 days after effectiveness or after funds are released from the escrow or trust account in connection with offerings of securities of non-reporting companies that will not be so listed or quoted as well as offerings by blank check companies. The new rules eliminate any dealer requirement to physically deliver a final prospectus pursuant to Section 4(3) of the Securities Act and Rule 174 if a statutory prospectus has been posted on EDGAR and Rule 172 is otherwise complied with. VI. Liability The SEC s new rules impact or clarify liability in three principal ways under the federal securities laws. A. Information Delivered After the Time of Sale for Purposes of Section 12(a)(2) and Section 17(a)(2) Liability 1. New Rule 159 Sections 12(a)(2) and 17(a)(2) of the Securities Act impose liability for materially misleading disclosures in connection with the sale of securities in an offering. Under Section 12(a)(2), sellers have liability to purchasers for offers or sales made by means of a prospectus or oral communication that contains an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading. Similarly, Section 17(a)(2) makes it unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any failure 56

57 to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 72 The Securities Act registration regime allows companies to send information to an investor after the investor becomes committed to purchase a security. For example, in shelf offerings, issuers can file a final prospectus supplement two business days after a takedown from a shelf registration statement. In adopting new Rule 159, the SEC is taking the position that the liability standards of Sections 12(a)(2) and 17(a)(2) should apply only to information which an investor has received at the time when an investor has entered into a contract of sale and is thus committed to the transaction. 73 The SEC s interpretation is codified in new Rule 159. This rule provides that [f]or purposes of Section 12(a)(2) [and Section 17(a)(2)] of the Act only, and without affecting any other rights a purchaser may have, for purposes of determining whether a prospectus or oral statement included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading at the time of sale (including, without limitation, a contract of sale), any information conveyed to the purchaser only after such time of sale (including such contract of sale) will not be taken into account. Thus, evaluation of information at or prior to the time of sale would not take into account any modifications, corrections or additions that are made available after the time of sale, including information contained in any final prospectus, prospectus or Exchange Act filing that is only filed or delivered after the time of sale. 74 The SEC s adopting release states that [f]or purposes of Section 12(a)(2) and Section 17(a)(2), whether or not information has been conveyed to an investor at or prior to the time of the contract of sale currently is a facts and circumstances determination, and our actions today do not affect that determination. Such information could include information in the issuer s registration statement and prospectuses for the offering in question, the issuer s Exchange Act reports incorporated by reference therein or information otherwise disseminated by means 72 The SEC s adopting release clarifies that Sections 12(a)(2) and 17(a)(2) do not require that oral statements or the prospectus or other communication contain all information called for under the line-item disclosure rules or otherwise contain all material information. Instead, the determination of liability is based on whether the communication includes a material misstatement or fails to include material information that is necessary to make the communication not misleading in light of the circumstances in which the communication is made. As a result, for example, a statement prior to the time of a contract of sale that a transaction is the same as the XYZ transaction or just like the XYZ transaction with specified modifications can, if there are no material omissions that would make that statement misleading under the circumstances in which it is made, meet the standards of Section 12(a)(2) and Section 17(a)(2). 73 Both Sections 12(a)(2) and 17(a)(2) focus on a seller s liability at the time of sale. The term sale under the Securities Act includes any contract of sale. The SEC states that the date of a sale is the date of contractual commitment, not the date that a confirmation is sent or received or the date when payment is made. Further, the Uniform Commercial Code does not require that a securities contract be in writing. Under our interpretation, the time of contract of sale can be the time the purchaser either enters into the contract (including by virtue of acceptance by the seller of an offer to purchase) or completes the sale. 74 Although the SEC s interpretation focuses on the time the investor becomes committed to purchase the securities, the SEC s adopting release emphasizes that the rule is not intended to affect any of an investor s other rights. Section 12(a)(2) would still apply to oral communications and prospectuses (including final prospectuses) at other times. Section 17(a)(2) would similarly apply to statements at other times. In addition, both Securities Act Section 12(a)(2) and Section 17(a) assess liability for offers as well as for sales. Also, the SEC interpretation is not intended to affect the information requirements for registration statements or final prospectuses and prospectus supplements; the final prospectus must still contain information necessary to satisfy a line item requirement or Rule 408 of the Securities Act and to meet the requirements of Section 10(a) of the Securities Act, and issuers must still include required disclosures in their registration statements either directly or through incorporation by reference. 57

58 reasonably designed to convey such information to investors. Such information also could include information directly communicated to investors (including, under the rules we are adopting today, through the use of free writing prospectuses). Accordingly, companies will need to make sure that any required disclosures are either included in the preliminary prospectus or are conveyed to investors before pricing an offering. Since the SEC did not clarify how the information could be conveyed to investors, issuers and underwriters will need to determine whether including the information in a Form 8-K which is incorporated by reference into the registration statement constitutes conveyance to investors. The SEC s interpretation and new Rule 159 will have no effect on Section 11 of the Securities Act, which imposes liability on the issuer and other enumerated persons for material misstatements in a registration statement at the time it is declared effective. Under SEC rules, some information contained in a prospectus or prospectus supplement that is filed after the time of the contract of sale is considered to be part of and included in a registration statement at the time of effectiveness for purposes of liability under Section 11. For example, in nonshelf offerings, the registration statement at the time of effectiveness will be deemed to include certain information omitted at the time of sale which is included in a final prospectus pursuant to Rule 430A. Therefore, the class of investors that may have a claim under Section 11 and Section 12(a)(2) may be different Termination of Sales Contract and Entry into New Contract In response to comments, the SEC s adopting release clarifies that the interpretation and rule will not affect the ability of the seller and purchaser to consider subsequently provided facts or disclosure and, among other actions, by agreement terminate their sale contract and by agreement enter into a new contract of sale with respect to the offered securities. In such case, the time of the contract of sale to that purchaser will be the time of the new contract of sale. The SEC s adopting release states that any such procedure would conflict with federal law unless (1) the investor is provided adequate disclosure of the contractual arrangement, (2) the investor is provided with adequate disclosure of its rights under the existing contract at the time termination is sought, (3) the investor is provided with adequate disclosure of the new information that the seller seeks to convey and (4) the investor is provided with a meaningful ability to elect to terminate or not terminate the prior contract and to elect to enter into or not enter into the new contract. Whether or not the investor is given such adequate disclosure and meaningful ability will depend on the particular facts and circumstances. An evaluation would include but not be limited to the following: The manner and prominence of the disclosure of the contractual arrangements and the investor s rights under the old contract. The process by which the new or changed material information will be conveyed to the purchaser. Factors to consider in determining whether the new information has been conveyed could include whether it is identified as new or changed or is otherwise sufficiently prominent. The method by which the purchaser is required to make or communicate its decisions. For the contractual provision to be consistent with the anti-waiver provisions of the federal securities laws, the purchaser must knowingly terminate the prior contract if it chooses to do so. Similarly, the investor must knowingly enter into the new contract if it chooses to do so. The method chosen does not necessarily require an affirmative communication rather than acquiescence by silence after the lapse of a specified period of time. The method chosen should give the purchaser a meaningful ability to make its contractual decisions in light of the new or changed material information. 75 In addition, a free writing prospectus that is not part of a registration statement will not be subject to Section 11 liability, although it will be subject to Section 12(a)(2) and Section 17(a)(2) liability. 58

59 In addition, any contractual provision to the effect that the seller is deemed to have communicated information to the purchaser would be a violation of the anti-waiver provisions of the federal securities laws. Moreover, a contractual provision that provides that a purchaser is deemed to have read or have constructive or actual knowledge of information or documents, generally, would act as a waiver of substantive rights under the federal securities laws and thus would be inconsistent with the anti-waiver provisions of the federal securities laws. A contractual provision stating that a purchaser who has access to information is charged with knowledge of that information for purposes of Section 12(a)(2) would be impermissible. B. Issuer as Seller Under Section 12(a)(2) Section 12(a)(2) imposes liability on a seller of securities. In Pinter v. Dahl, 486 U.S. 622 (1988), in interpreting the term seller under Section 12(a)(1), the Supreme Court held that statutory liability is not limited to those persons who simply pass title to the securities but may extend to any person who actively solicited the securities transaction to further its own financial motives. Courts have typically applied Pinter to claims brought under Section 12(a)(2). Because the issuer does not have title to its securities when shares are issued in a firm commitment underwriting, historically Section 12(a)(2) liability could only be imposed on an issuer when it solicited the securities transaction at issue. Following Pinter, courts have frequently rejected Section 12(a)(2) claims against issuers in offerings consummated under firm commitment underwriting arrangements. These courts have usually concluded that allegations that the issuer s conduct consisted of the type of conduct one would expect of an issuer, i.e., preparation of a registration statement or prospectus or presentation at a roadshow, 76 does not rise to the level of active solicitation to make the issuer subject to Section 12(a)(2) liability as a seller. 77 The SEC s new Rule 159A, if enforced by the courts, will significantly change the scope of liability for issuers under Section 12(a)(2) in primary offerings of securities. Under the rule, in a primary offering of securities of the issuer, regardless of the underwriting method used to sell the issuer s securities, the term seller includes the issuer of the securities sold to a person as part of the initial distribution of such securities, and the issuer is considered to offer or sell the securities to such person, if the securities are offered or sold to such person by means of any of the following communications: any preliminary prospectus or prospectus of the issuer relating to the offering required to be filed pursuant to Rule 424; 76 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) (the issuer and its directors and officers are not liable under Section 12(a)(2) to purchasers in a firm commitment underwriting where they did not actively solicit the plaintiffs to purchase their shares); Lone Star Investment Club v. Schlotzsky s Inc., 238 F.3d 363, (5 th Cir. 2001) (issuers generally cannot be held liable under Section 12(a)(2) when securities are sold through a firm commitment underwriting, but plaintiffs should be permitted to try to show that the issuer s role exceeded normal bounds and that the issuer became the vendor s agent); In re Nationsmart Corp. Sec. Lit., 130 F.3d 309, 319 (8 th Cir. 1997) (allegations that the corporation offered, sold, and solicited sales of shares, by means of a prospectus, were sufficient to support the claim that the corporation was a "seller" under Securities Act Section 12(2)); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1215 (1 st Cir. 1996) (there is no issuer liability under Section 12(a)(2), absent active solicitation by the issuer); Lalor v. Omtool, Ltd., 2000 WL , Fed. Sec. L. Rep. P 91,286 (D. N.H. Dec 14, 2000) (since the IPO was made pursuant to a firm commitment underwriting, the issuer and its officers and directors cannot be liable for Section 12(2) violations). 77 But see In re American Bank Note Holographics, Inc., 93 F. Supp. 2d 424, (S.D.N.Y. 2000) (allegations that the issuer attended roadshows, issued a press release announcing the IPO and prepared the prospectus in order to raise as much money as possible in an IPO constituted active solicitation and made the issuer a seller under section 12(a)(2) even though shares were issued in a firm commitment underwriting). 59

60 any free writing prospectus relating to the offering prepared by or on behalf of 78 the issuer or used or referred to by the issuer; the portion of any other free writing prospectus relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and any other communication that is an offer in the offering made by the issuer to such person. 79 The rule only applies to primary offerings of securities and does not address whether an issuer is a seller in a registered offering by selling shareholders only. Also, the rule does not affect the determination of whether any person other than an issuer is a seller for purposes of Section 12(a)(2). 80 Finally, the rule is aimed only at liability to purchasers in the initial distribution of the securities and would not cover purchasers of the issuer s securities in the aftermarket. C. Section 11 Liability for Prospectus Supplements Prior to adoption of the new rules, only information included in a base prospectus or in an Exchange Act periodic report that was incorporated by reference into a base prospectus was deemed to be included in a shelf registration statement. Prospectus supplements were generally thought not to be part of the registration statement or subject to Section 11 liability. New Rule 430B clarifies that prospectus supplements and information in them will be deemed to be part of and included in a registration statement filed pursuant to shelf category X (primary shelf offerings on Form S-3). New Rule 430C includes similar provisions for all offerings made other than in reliance on Rule 430B and other than for prospectuses filed in reliance on Rule 430A. The information in the prospectus supplement, by virtue of being included in the registration statement, would become subject to Section 11 liability. The SEC s adopting release concludes that [a]s a result of Rule 430B and Rule 430C, prospectus supplements required to be filed under Rule will, in all cases, be deemed to be part of and included in registration statements for purpose of Securities Act Section 11. The date on which information in a prospectus supplement is deemed part of a registration statement depends on the purpose of the prospectus supplement. For offerings other than shelf takedowns, Rule 430B provides that information omitted from a form of prospectus that is part of an effective registration statement in accordance with Rule 430B and contained in a form of prospectus required to be filed with the SEC pursuant to Rule 424(b) is deemed part of and included in the registration statement as of the date such form of filed prospectus is first used 81 after effectiveness. However, with respect to information in prospectus supplements filed in connection with a shelf takedown, Rule 430B provides that information in a form of prospectus required to be filed with the SEC pursuant 78 Information is provided or a communication is made by or on behalf of an issuer if an issuer or an agent or representative of the issuer authorizes or approves the information or communication before its provision or use. An offering participant other than the issuer shall not be an agent or representative of the issuer solely by virtue of its acting as an offering participant. 79 The SEC s adopting release states that [a] communication by an underwriter or dealer participating in an offering would also not be on behalf of the issuer solely by virtue of that participation. As today, there are circumstances where the involvement of an issuer could be sufficiently extensive (for example under adoption and entanglement theories) that a communication of another person, including an offering participant, could be by an issuer. 80 In addition, the undertakings required by Item 512 of Regulation S-K in shelf offerings are being amended to provide that, for the purpose of determining liability of the company under the Securities Act to any purchaser in the initial distribution of the securities, the issuer undertakes that in a primary offering of securities pursuant to a registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to the purchaser by means of the communications described above, the issuer will be deemed a seller to the purchaser and will be considered to offer or sell the securities to such purchaser. 81 The SEC s view is that the date of first use is not the date the prospectus supplement is given to a purchaser in connection with a sale but instead is the date that the prospectus is made available to the managing underwriter, syndicate member or any prospective purchaser. 60

61 to Rule 424(b)(2), (b)(5) or (b)(7) 82 is deemed to be part of and included in the registration statement on the earlier of the date such subsequent form of prospectus is first used or the date and time of the first contract of sale of securities in the offering to which such subsequent form of prospectus relates. The following liability provisions apply in this shelf takedown context: New Effective Date. The date on which a form of prospectus is deemed to be part of and included in the registration statement is deemed, for purposes of liability under Section 11 of the issuer and any underwriter at the time only, to be a new effective date of the part of such registration statement relating to the securities to which such form of prospectus relates. Such part of the registration statement consists of all information included in the registration statement and any prospectus relating to the offering of such securities (including information relating to the offering in a prospectus already included in the registration statement) as of such date and all information relating to the offering included in reports and materials incorporated by reference into such registration statement and prospectus as of such date, in each case not modified or superseded. The offering of such securities at that time shall be deemed to be the initial public bona fide offering thereof. 83 Experts. If a registration statement is amended to include or is deemed to include, through incorporation by reference or otherwise, a report or opinion of any expert, then for liability purposes under Section 11, the part of the registration statement for which liability against such person is asserted shall be considered as having become effective with respect to such person as of the time the report or opinion is deemed to be part of the registration statement and a consent required has been provided. Signatories. Except for an effective date resulting from the filing of a form of prospectus filed for purposes of including information required by section 10(a)(3) of the Securities Act or reflecting a fundamental change in the business, the date a form of prospectus is deemed part of and included in the registration statement shall not be an effective date as to (i) any director of the issuer or (ii) any person signing any report or document incorporated by reference into the registration statement, except for such a report or incorporated document for purposes of including information required by section 10(a)(3) of the Securities Act or reflecting a fundamental change in the business. 82 Rule 424(b)(2) covers primary offerings of securities pursuant to shelf category X or delayed offerings pursuant to shelf categories I, VII or VIII. Rule 424(b)(5) covers information from both 424(b)(2) and 424(b)(3). Rule 424(b)(7) covers prospectuses with the names of selling security holders and the amounts to be sold by them. 83 The triggering of a new effective date for a shelf takedown would not affect the information that was in the registration statement at the time of any prior sale. Rules 430B and 430C specifically provide that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement after the effective date of such registration statement or portion thereof in respect of an offering will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date. The SEC s adopting release states that [c]urrently, there can be a mismatch between issuers and underwriters in the time that liability is assessed. For example, in an offering off a shelf registration statement, an issuer could have its liability assessed as of the date of the registration statement s initial effectiveness (or post-effective amendment) or the most recent updating required under Securities Act Section 10(a)(3), while the liability of an underwriter would be assessed at the later time when it became an underwriter. In such a case, underwriters in takedowns occurring after the date of initial effectiveness (or post-effective amendment) or the Section 10(a)(3) update would be subject to liability under Section 11 for an issuer s Exchange Act reports incorporated by reference into the prospectus included in the registration statement after that date while issuers would not. Rule 430B results in most cases in the date of effectiveness of a registration statement for an issuer and underwriter in a particular offering being close in time. 61

62 Accountants and Other Experts Regarding Prior Expertised Material. The date a form of prospectus is deemed part of and included in the registration statement will not be an effective date as to (i) any accountant with respect to financial statements or other financial information contained in the registration statement as of a prior effective date and for which the accountant previously provided a consent, unless the form of prospectus contains new audited financial statements or other financial information as to which the accountant is an expert and for which a new consent is required, and (ii) any other person whose report or opinion as an expert or counsel has, with their consent, previously been included in the registration statement as of a prior effective date, unless the form of prospectus contains a new report or opinion for which a new consent is required. The new effective date of the registration statement is relevant only for Section 11 liability purposes. The new effective date is not considered the filing of a new registration statement for purposes of form eligibility; such determination would continue to be made at the time of the Section 10(a)(3) update to the registration statement. Also, the new effective date does not affect the determination of when information is conveyed to a purchaser for Section 12(a)(2) liability purposes. Prospectus supplements filed with the SEC other than in connection with a shelf takedown, pursuant to Rule 424(b)(3) (covering information which constitutes a substantive change from or addition to the information in the last form of prospectus filed with the SEC), will be deemed part of and included in a registration statement as of the date it is first used after effectiveness. In addition, new Rule 430C provides that in offerings made other than in reliance on Rule 430B and other than for prospectuses filed in reliance on Rule 430A, information contained in a form of prospectus required to be filed with the SEC pursuant to Rule 424(b) is deemed to be part of and included in the registration statement on the date it is first used after effectiveness. Rule 430C also provides that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. Also, nothing in Rule 430C affects the information required to be included in an issuer s registration statement and prospectus. The company undertakings in shelf registration statements required by Item 512(a) of Regulation S-K are being broadened to require companies to undertake and accept that prospectus supplements filed in accordance with Rules 430B and 430C will be deemed part of the shelf registration statement for purposes of determining liability under the Securities Act Companies would undertake that, for the purpose of determining Securities Act liability, (1) if the issuer is relying on Rule 430B, (a) each prospectus filed by an issuer pursuant to Rule 424(b)(3) will be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement, and (b) each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part of the registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act will be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus, or (2) if the issuer is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. 62

63 D. Due Diligence Interpretation Section 11 of the Securities Act includes a defense from liability for certain persons if they had after reasonable investigation, reasonable ground to believe that the registration statement did not contain material misstatements. Similarly, Section 12(a)(2) of the Securities Act includes a defense for persons who did not know, and in the exercise of reasonable care could not have known of the material misstatement. The SEC s adopting release clarifies that the standard of care under Section 12(a)(2) is less demanding than that prescribed by Section 11 or, put another way, that Section 11 requires a more diligent investigation than Section 12(a)(2). Moreover, we believe that any practices or factors that would be considered favorably under Section 11, including pursuant to Rule 176, would also be considered as favorably under the reasonable care standard of Section 12(a)(2). 85 VII. Other Changes to the Registration Process A. Expanded Use of Incorporation by Reference in Forms S-1 and F-1 The new rules will allow certain issuers filing on Forms S-1 and F-1 to incorporate by reference a large portion of the information required in the form. The documents incorporated by reference will not need to be delivered to investors with the prospectus. An issuer will need to satisfy the following requirements in order to incorporate by reference on Forms S- 1 and F-1: The issuer must be required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act. The issuer must have filed all reports and other materials required to be filed by Sections 13(a), 14 or 15(d) of the Exchange Act during the prior 12 months (or for such shorter period that the issuer was required to file such reports). The issuer must have filed an annual report under Section 13(a) or 15(d) of the Exchange Act for its most recently completed fiscal year. The issuer is not, and during the past three years neither the issuer nor any of its predecessors was, a blank check company, a shell company (other than a business combination related shell company) or a registrant for an offering of penny stock. Also, the issuer cannot be registering an offering that effectuates a business combination. The issuer must make its periodic and current reports that are incorporated by reference into the registration statement readily available and accessible on a web site maintained by or for the issuer and containing information about the issuer Securities Act Rule 176 provides that, in determining whether or not the conduct of a person constitutes a reasonable investigation or a reasonable ground for belief under Section 11, relevant circumstances include, with respect to a person other than the issuer, (1) the type of issuer, (2) the type of security, (3) the type of person, (4) the office held when the person is an officer, (5) the presence of absence of another relationship to the issuer when the person is a director or proposed director, (6) reasonable reliance on officers, employees and others whose duties should have given them knowledge o the particular facts, (7) when the person is an underwriter, the type of underwriting arrangement, the role of the particular person as an underwriter and the availability of information with respect to the company and (8) whether, with respect to a fact or document incorporated by reference, the particular person had any responsibility for the fact or document at the time of the filing from which it was incorporated. The SEC had solicited comment in the proposing release as to whether it should modify Rule 176, but the SEC ultimately declined to make any changes to the rule. 86 Issuers may satisfy this condition by including hyperlinks on their website directly to the reports or other materials filed on EDGAR or on another third-party web site where the reports or other materials are made available in the appropriate time frame and access to the reports or other materials is free of charge to the user. 63

64 A qualifying issuer can incorporate by reference all of the information required by Items 3 through 11 of Form S-1 and Item 4 of F Issuers electing to use this provision will need to include the following additional information in their Form S-1 or Form F-1: The issuer must describe any and all material changes in the company s affairs which have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest Form 10-K and which have not been described in a Form 10-Q, Form 8-K or Form 6-K filed with the SEC. 88 The issuer must specifically incorporate by reference into the prospectus contained in the registration statement, by means of a statement to that effect in the prospectus listing all such documents, its latest annual report on Form 10-K, 20-F or 40-F and all other reports previously filed pursuant to Section 13(a) or 15(d) of the Exchange Act or proxy or information statements filed pursuant to Section 14 of the Exchange Act since the end of the fiscal year covered by the annual report. The issuer may only incorporate previously filed documents; forward incorporation is not permitted. The issuer must state (1) that it will provide to each person to whom a prospectus is delivered a copy of any or all of the documents incorporated by reference in the prospectus contained in the registration statement but not delivered with the prospectus, (2) that it will provide these reports or documents upon written or oral request, (3) that it will provide these documents at no cost to the requester, (4) the name, address, telephone number, and address, if any, to which the request for these documents must be made, and (5) the issuer s web site address, including the URL where the incorporated reports and other documents may be accessed. If the issuer sends any information that is incorporated by reference in the prospectus contained in the registration statement, it must also send any exhibits that are incorporated by reference in that information. The issuer must identify the reports and other information that it files with the SEC and state that the public may read and copy its SEC filings at the SEC s public reference room and that the public may obtain information on the operation of the public reference room by calling the SEC at SEC Electronic filers must also state the SEC maintains an internet site that contains reports, proxy 87 This includes summary information, risk factors, ratio of earnings to fixed charges, use of proceeds, determination of offering price, dilution, selling shareholders, plan of distribution, description of securities, interests of named experts, and information with respect to the company (including business, litigation, properties, market price and dividends on common stock, financial statements, selected financial information, supplementary financial information, MD&A, changes in accountants, market risk disclosures, directors and officers, executive compensation, security ownership and related party transactions). 88 Issuers using Form F-1 will also need to include in the prospectus contained in the registration statement, if not included in reports incorporated by reference, (1) pro forma financial statements required by Article 11 of Regulation S-X and financial statements of acquired entities required by Rule 3-05 of Regulation S-X, (2) restated financial statements if there has been a change in accounting principles or a correction of an error where such change or correction requires material retroactive restatement of financial statements, (3) restated financial statements where one or more business combinations accounted for by the pooling of interest method of accounting have been consummated subsequent to the most recent fiscal year and the acquired businesses, considered in the aggregate, are significant, or (4) any financial information required because of a material disposition of assets outside the normal course of business. In addition, if the financial statements included in the registration statement are not sufficiently current to comply with the requirements of Item 8.A of Form 20-F, financial statements compliant with that item must be presented (1) directly in the prospectus, (2) through incorporation by reference and delivery of a Form 6-K identified in the prospectus as containing such financial statements, or (3) through incorporation by reference of an amended Form 20-F, Form 40-F or Form 10-K, in which case the prospectus must disclose that the form has been so amended. Any financial statements or information required to be furnished must be reconciled pursuant to either Item 17 or 18 of Form 20-F, whichever is applicable to the primary financial statements. 64

65 and information statements, and other information regarding issuers that file electronically with the SEC and must state the address of that site ( B. Elimination of Forms S-2 and F-2 Forms S-2 and F-2 are eliminated. The SEC s adopting release stated that from 2001 to 2004 only nine issuers filed 10 Forms F-2 and only 153 issuers filed 253 Forms S-2. C. Expanded Ability of Majority-Owned Subsidiaries to Use Forms S-3 and F-3 Forms S-3 and F-3 currently provide that majority-owned subsidiaries can utilize the forms if (1) the registrant-subsidiary itself meets the registrant requirements and the applicable transaction requirement, (2) the parent of the registrant-subsidiary meets the registrant requirements and the conditions of the transaction requirement related to primary offerings of non-convertible investment grade securities are met, or (3) the parent of the registrant-subsidiary meets the registrant requirements and the applicable transaction requirement, and fully and unconditionally guarantees the payment obligations on the securities being registered, and the securities being registered are non-convertible securities. The new rules will allow majority-owned subsidiaries to utilize Forms S-3 and F-3 under the same circumstances in which majority-owned subsidiaries are considered well-known seasoned issuers. These include circumstances where either (1) the parent of the registrant-subsidiary meets the registrant requirements and the applicable transaction requirement, and provides a full and unconditional guarantee of the payment obligations on the securities being registered, and the securities being registered are non-convertible securities, other than common equity, (2) the parent of the registrant-subsidiary meets the registrant requirements and the applicable transaction requirement, and the securities of the registrant subsidiary being registered are full and unconditional guarantees of the payment obligations on the parent s non-convertible securities, other than common equity, being registered, or (3) the parent of the registrant-subsidiary meets the registrant requirements and the applicable transaction requirement, and the securities of the registrant subsidiary being registered are guarantees of the payment obligations on the nonconvertible securities, other than common equity, being registered by another majority owned subsidiary of the parent, where the parent provides a full and unconditional guarantee of such nonconvertible securities. D. Elimination of Rule 434 The new rules eliminate Rule 434, which had permitted the use of term sheets in connection with certain offerings. Rule 434 was used very rarely, and the new rules regarding free writing prospectuses will permit the use of written descriptions of the securities, including term sheets, under more flexible circumstances. E. Rule 424(b) The new rules make two main changes to Rule 424(b). First, new Rule 424(b)(8) provides that a form of prospectus otherwise required to be filed pursuant to Rule 424(b) that is not filed within the required time frame must be filed as soon as practicable after the discovery of such failure to file. Second, new Rule 424(b)(7) requires a form of prospectus that identifies selling security holders and the amounts to be sold by them (that was previously omitted in reliance on Rule 430B) to be filed with the SEC no later than the second business day after the earlier of the date of sale or the date of first use. 65

66 VIII. Exchange Act Disclosure A. Risk Factor Disclosure The new rules require risk factor disclosure in the Form 10-K and Form 10 where appropriate. Issuers must describe under the caption Risk Factors, where appropriate, the risk factors described in Item 503(c) 89 of Regulation S-K that are applicable to the company. The adopting release clarifies that a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer. The risk factor discussion must be in plain English. In addition, issuers must disclose in their Form 10-Q any material changes from previously disclosed risk factors contained in the company s Form 10-K. The adopting release states that the rules do not otherwise require, and we discourage, unnecessary restatement or repetition of risk factors in quarterly reports. Many companies already include risk factors in their periodic reports in order to obtain the benefit of an existing safe harbor for forward-looking statements. Section 27A of the Securities Act provides a safe harbor from liability for forward-looking statements if the forward-looking statement is identified as a forward-looking statement and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement. The safe harbor also covers oral forward-looking statement for reporting issuers if the oral forward-looking statement is accompanied by an oral statement that additional information concerning factors that could cause actual results to materially differ is contained in a readily available written document (any document filed with the SEC or generally disseminated is deemed to be readily available). B. Disclosure of Unresolved Staff Comments The new rules require disclosure of unresolved staff comments in Form 10-K s and Form 20-F s filed by any accelerated filer 90 or well-known seasoned issuer. If the accelerated filer or well-known seasoned issuer has received written comments from the SEC staff regarding its periodic or current reports under the Exchange Act at least days before the end of its fiscal year to which the annual report relates, and such comments remain unresolved, the issuer must disclose the substance of any such resolved comments that the issuer believes are material. The disclosure may provide other information including the position of the issuer with respect to any such comment. Staff comments that have been resolved, including those that the staff and issuer have agreed will be addressed in future Exchange Act reports, would not need to be disclosed. 89 Section 503(c) of Regulation S-K provides that issuers should [w]here appropriate, provide under the caption Risk Factors a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. 90 An accelerated filer, as defined in Rule 12b-2 of the Exchange Act, is an issuer after it first meets the following conditions as of the end of its fiscal year: (i) the aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer is $75 million or more; (ii) the issuer has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve calendar months; (iii) the issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act; and (iv) the issuer is not eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports. 91 The adopting release clarifies that the 180-day time period begins from the date of the first comment letter that specifically raises the issue, which may be later than the date of the initial comment letter on the filing. 66

67 Some commenters suggested that well-known seasoned issuers should be able to choose to either comply with the disclosure requirement or abstain from conducting an offering until the comments were resolved. The SEC specifically declined to adopt this suggestion. The SEC already publicly discloses all comments and company responses regarding SEC filings. However, the SEC only discloses this information at least 45 days after the staff completed its review. The new disclosure requirement effectively accelerates this process with respect to material unresolved comments. C. Disclosure of Status as Voluntary Filer under the Exchange Act Under the new rules, the cover of Form 10-K and Form 20-F will include a check box in which the issuer must indicate whether or not it is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act (e.g., whether it is a voluntary filer). The SEC adopting release states that it is important that the staff and the market understand when issuers are filing Exchange Act reports voluntarily, since such issuers may cease filing these reports at any time. Voluntary filers are issuers that are not required to file reports with the SEC but which do so voluntarily. Most voluntary filers are issuers who completed a registered offering of debt securities under the Securities Act, have no equity securities registered under Section 12 of the Exchange Act, and continue to file Exchange Act reports even after their reporting obligation under Section 15(d) has been suspended. Section 15(d) suspends automatically its application to any issuer where, on the first day of the issuer s fiscal year, it has fewer than 300 holders of record of the class of securities that created the Section 15(d) obligation. Several commenters stated that it could be difficult for foreign private issuers to determine their voluntary status due to difficulty in calculating their number of U.S. holders. In its adopting release the SEC replied that it did not believe such issues to be a significant obstacle. D. Disclosure of Status as a Well-Known Seasoned Issuer Under the new rules, the cover of Form 10-K and Form 20-F will include a check box in which the issuer must indicate whether or not it is a well-known seasoned issuer. 67

68 Fried, Frank, Harris, Shriver & Jacobson LLP New York One New York Plaza New York, NY Tel: Fax: Washington, DC 1001 Pennsylvania Avenue, NW Washington, DC Tel: Fax: Website Fried, Frank, Harris, Shriver & Jacobson (London) LLP 99 City Road London EC1Y 1AX, England Tel: Fax: Fried, Frank, Harris, Shriver & Jacobson (Europe) 5, boulevard de la Tour- Maubourg Paris, France Tel: Fax: Frankfurt Rahmhofstrasse Frankfurt am Main, Germany Tel: Fax: