The Securities and Exchange Commission adopted on June 29 significant reforms to the rules for registered public offerings in the United States. These reforms substantially liberalize the communications that issuers are permitted to make before and during a proposed public offering. The new rules also streamline the registration process and enable issuers and underwriters to make better use of electronic delivery of prospectuses. In addition, the Commission used the new rules as an opportunity to codify its position on issuer and underwriter liabilities in public offerings and to provide guidance for compliance with this position. The SEC has not published the final rules, and the following summary is based on the statements made by Commission members and staff at the open meeting held to adopt the rules.
Benefits for Large Issuers
The greatest beneficiaries of the new rules will be large, established public companies. The rules create a new category of "well-known seasoned issuers" or "WKSI," who have a public equity float of $700 million or more, or have issued at least $1 billion in SEC-registered debt securities in the past three years. Despite a number of comments on this point, the Commission retained the rule that issuers will be ineligible for WKSI status if they have failed to timely file their Exchange Act reports or have violated the anti-fraud provisions of the securities laws in the past three years. (We will need to see the final rules to know whether settlements of government allegations of violations will also disqualify issuers.) Although the reforms apply to all issuers, the new rules give WKSIs the greatest latitude to communicate during and in connection with an offering and the most flexible SEC registration procedures.
Communication Reforms
As Commissioner Campos said during the Commission's open meeting, the new rules mark the end of the SEC's traditional quiet period rules and significantly expand permitted communications during a public offering. Communications of factual business information and communications more than 30 days prior to a filing for an offering will be protected by new safe harbors in the rules. WKSIs may make offerings of securities prior to filing a registration statement. The Commission also adopted the proposal for "free writing" prospectuses, which permits issuers and underwriters to use offering documents other than the registration statement, subject to filing requirements in some instances and Section 12(a)(2) liability under the Securities Act. At the open meeting, the staff indicated that the adopting release will identify permitted media communications, including interviews and other articles, (at the cost of such media communications being treated as free-writing prospectuses) and modify the final rules such that live transmissions of road shows will be treated as oral, rather than written, communications.
Offering Process Reforms
The final rules for registration statement procedures substantially modify the offering process for WKSIs. Registration statements for WKSIs will automatically becomes effective on filing without staff review, and WKSIs may register securities on a pay-as-you-go basis for new offerings. Other issuers will benefit from the elimination of the limit on the amount of securities that can be included in shelf registrations, more flexible rules for the content of shelf registration statements and the greater use of incorporation by reference.
Prospectus Delivery Reforms
As proposed, the final rules adopt the "access equals delivery " model for prospectus delivery, which eliminates the requirement for physical delivery of a final prospectus if investors have access, including electronic access, to a final prospectus properly filed with the SEC. Issuers, underwriters and dealers would not be required to actually deliver a final prospectus before written confirmations or allocations are sent to investors or in connection with aftermarket trading.
Liability Reforms
Despite extensive negative comments from market participants, the new rules formally establish liability for misstatements and omissions based on the information "conveyed" to investors at the time the contract for the sale of the security is completed. At the open meeting, the staff indicated that the adopting release, when available, will provide additional guidance on this issue, including possible methods for revising the sale contract and sale date in the event new material information about the issuer or offering becomes available after the initial contract date.