On June 29, the SEC adopted new rules that modify and significantly improve the communications, registration, and offering processes under the Securities Act.  Although the actual rules have not yet been published, set forth below is a summary of the expected rules based on the presentation of the Staff Senior Counsel to the SEC.  (Of course, last minute changes are possible.)

The rules address three main areas:

• Permitting more written communications during registered securities offerings;
• Eliminating delivery of a final prospectus; and
• Streamlining the shelf registration process and other procedures in the offering process.

Well Known Seasoned Issues

The rules create a new class of issuers, called "well-known seasoned issuers."  These are issuers that are the most widely followed in the marketplace by market participants, the media, and institutional investors.
A well-known seasoned issuer is one that:

• has been reporting and is timely in its filings under the Exchange Act for one year, and
• either (1) has $700 million of world-wide public float or (2) has issued $1 billion in non-convertible securities, other than common equity, in registered offerings for cash in the preceding three years.  (Issuers meeting this $1 billion threshold may register only non-convertible, non-equity securities, unless they also have a $75 million public float.)¹

Liberalizing Communications Around Registered Offerings

The publicity rules (called "gun-jumping" rules) of the Securities Act restrict any offers before a registration statement is filed and restrict written communications to the statutory prospectus, even after filing.  The new rules will permit more communications.

The cumulative effect of the new rules for the Securities Act gun-jumping provisions is expected to be as follows:

• Well-known seasoned issuers will be permitted to engage at any time in all communications, including use at any time of a "free writing prospectus," subject to conditions (including, in some cases, filing with the SEC).  A "free writing prospectus" is a written communication, including an electronic communication, that constitutes an offer outside the statutory prospectus;
• All reporting issuers, certain asset-backed issuers and well-known non-reporting foreign private issuers, will, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information;
• Non-reporting issuers will at any time be permitted to continue to publish factual business information that is regularly released and intended for use by persons other than in their capacity as investors or potential investors;
• Communications by issuers more than 30 days before filing a registration statement will be permitted without violating the gun-jumping provisions, so long as they do not refer to a securities offering that is the subject of a registration statement;
• After the filing of a registration statement, all eligible issuers and other offering participants will be permitted to use a "free writing prospectus," subject to conditions (including filing with the SEC).²
• Electronic road shows used in an IPO of common or convertible equity securities will not have to be filed if the issuer makes at least one version of a bona fide electronic road show readily available electronically to an unrestricted audience.  Electronic road shows for other offerings will not have to be filed.³
• Rule 134 which permits very limited public notice about the offering will be changed to allow issuers and offering participants to communicate a broader category of routine information.
• The rules will expand the exemptions for research reports used by brokers and dealers.
• Conforming changes will be made to Regulation FD in light of the recommended communications rules.

Liability at Time of Sale

The SEC will reaffirm the interpretation that, for prospectus level liability (under Section 12(a)(2) and Section 17(a)(2) of the Securities Act), the assessment of whether a statement is false or misleading will be based upon information conveyed to an investor at the time of sale, and information conveyed only after that time will not be taken into account. ⁴

Streamlining the Shelf Registration Process

The new rules streamline the requirements for the shelf registration process under the Securities Act.  For issuers eligible to use shelf registration, these rules:

• Codify in a single rule the information that may be omitted from a base prospectus in a shelf registration statement at effectiveness and included later.
• Replace the requirement that issuers register only securities they intend to offer within two years with a requirement that the issuer update the registration statement with a new registration statement that is filed every three years;
• Eliminate restrictions on "at-the-market" equity offerings for primary shelf eligible issuers;
• Permit immediate takedowns of securities off of shelf registration statements;
• Permit primary shelf eligible issuers to use prospectus supplements to make material changes to the plan of distribution described in the base prospectus; and
•  For primary shelf eligible issuers, permit selling security holders to be identified in prospectus supplements, where the securities (or securities convertible into such securities) to be sold are outstanding when the registration statement is filed.

Automatic Shelf Registration

For offerings by well-known seasoned issuers, the new rules will establish "automatic shelf registration," which is significantly more flexible.  The automatic shelf registration process will allow eligible well-known seasoned issuers to:

• Register unspecified amounts of specified types or classes of securities on immediately effective Form S-3 or Form F-3 registration statements without allocating between primary or secondary offerings;
• Exclude more information from the base prospectus than from a regular shelf registration statement, including a description of securities (other than identifying the type or class) and the plan of distribution;
• Allow issuers to elect to pay filing fees on a "pay-as-you-go" basis at the time of each takedown off the shelf registration statement; and
• Add additional classes of securities and eligible majority-owned subsidiaries after effectiveness.

Incorporation by Reference in Form S-1 and F-1

The new rules will also conditionally allow reporting issuers to incorporate by reference previously filed Exchange Act  reports into a Securities Act registration statement on Form S-1 or Form F-1 and eliminate Securities Act registration statement Forms S-2 and F-2.

Final Prospectus Delivery

The new rules will change the requirements for prospectus delivery in registered offerings.  The new rules create an "access equals delivery" model for final prospectuses. Under the rules, filing a final prospectus with the SEC and complying with other conditions will satisfy delivery requirements.  A cure provision for inadvertent failures to file is included.  The rules include a separate requirement to notify investors that they purchased securities in a registered offering.

Changes to Exchange Act  Reports

Finally, the new  rules require issuers to include the following in their Exchange Act periodic reports:

• for Form 10-K filers, disclosure of risk factors, where appropriate;
• disclosure regarding the issuer's status as a "voluntary" filer of Exchange Act reports; and
• for "accelerated filers" and well-known seasoned issuers, disclosure in their Exchange Act annual reports of written staff comments that were issued more than 180 days before the end of the fiscal year to which the annual report relates, where those comments remain unresolved at the time of filing the annual report and the issuer believes those comments to be material.
  

Footnotes:

1. Certain issuers - such as blank check companies, shell companies, and penny stock issuers – are not eligible to take advantage of the new rules.  Many of the new rules will also not be available to investment companies or business development companies, or in merger and acquisition transactions, because there are separate regulatory structures that apply to these types of issuers and transactions.

2.The conditions to use of a "free writing prospectus" include the filing of any issuer free writing prospectus, material information about the issuer or its securities provided by the issuer that is contained in any other person's free writing prospectus, any broadly disseminated underwriter or other offering participant free writing prospectus, and any description of final terms.  The filing condition will not apply to other underwriter free writing prospectuses not used by the issuer.

 A filed registration statement will be a condition to use of a free writing prospectus. In addition, for unseasoned or non-reporting issuers, the statutory prospectus will have to accompany or precede the free writing prospectus if an issuer or offering participant prepares or pays for the free writing prospectus.
 Ineligible issuers include those in bankruptcy and those who have violated the anti-fraud provisions of the federal securities laws.

 Any free writing prospectus used or referred to by a person will be subject to liability under Section 12(a)(2) of the Securities Act and the anti-fraud provisions of the federal securities laws, whether or not filed.  A free writing prospectus will not be part of the registration statement and therefore will not be subject to liability under Section 11. The rules address cross-liability issues among offering participants that may arise from the use of free writing prospectuses.

3. The definition of graphic communications subject to the rules for written communnications will exclude communications that are live and in real-time to a live audience, regardless of the means of transmission.  Electronic road shows that are not live will be free writing prospectuses.

4.The new rules also:

• Ensure that prospectus supplements will be included in a registration statement for disclosure liability purposes; and
• Establish a new effective date for each prospectus filing reflecting a takedown of securities off a shelf registration statement only for issuers and underwriters at that time.  Filing a prospectus supplement for a takedown will not trigger a new effective date for officers, directors, or experts, including auditors.

For further information, contact Guy P. Lander (212.588.5511) in New York, Patricia Olasker (416.863.5551) in Toronto or Maryse Bertrand  (514.841.6460).

Davies Ward Phillips & Vineberg LLP, with over 225 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and Paris, and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments contained herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances.  For particular applications of the law to specific situations, the reader should seek professional advice.