With the Dec. 1 effective date for sweeping changes to the securities offering process just weeks away, experts expect the revisions to impact the practices of both issuers and underwriters. But they say just how big an impact depends on the class of issuer, since different rules apply for the four categories of issuers.
As Compliance Week previously reported, the Securities and Exchange Commission in late June adopted rules that significantly change the communications, registration and offering processes under the Securities Act of 1933, eliminating many outdated restrictions on public offerings of securities and providing for the more timely delivery of information to investors. Overall, experts say the measures will improve the ease of offering securities and enable companies to access the capital markets more efficiently.
The new rules, which take effect Dec. 1, cover three areas: communications related to registered securities offerings; timely delivery of information to investors without mandating unnecessary delays in the offering process; and improving the registration and other procedures in the offering and capital formation process. In response to issuer questions, the SEC’s Division of Corporation Finance in September issued answers to 14 questions related to transition matters under the Securities Offering Reform Rules. For a link to the transition guidance, and a summary of the key provisions of the Securities Act Reform, see box at right.
The new rules generally aren’t available to blank check companies, shell companies, penny stock issuers, investment companies and business development companies, and companies that have violated the anti-fraud provisions of the federal securities laws during the past three years.
Keogh
“It’s still a work in progress,” says Kevin Keogh, a partner in the New York office of White & Case. “The major investment banks are still studying intensely how the offering process is going to change. Many of them have formed internal committees to review things such as the prospectus delivery requirements, the new communications rules, and how their underwriting agreements will have to change, particularly for the well-known seasoned issuers.”
Few Changes For IPOs
While they will benefit from changes to the communications rules, securities experts says not much else will change after Dec. 1 for companies going public.
Jacob
“For companies going public, other than with respect to communications, not much will change in how they do an IPO and the things they need to be concerned about,” says Valerie Ford Jacob, chairperson and head of the global capital markets group at Fried, Frank, Harris, Shriver & Jacobson. However, Jacob noted that the changes “are clarifying and helpful in regards to communications during an IPO.”
For example, Jacob notes that if a company is going public for the first time, under the new rules, “anything they say outside the 30 days before the filing isn’t deemed to, in essence, harm the offering, as long as they don’t reference the securities offering. Companies don’t have to worry about tainting the offering.” However, she cautions that companies need to take “reasonable steps” to prevent further distribution during the 30 days before the filing. For example, if the issuer gives an interview to the press in the period beyond the 30 days, it isn’t protected if the interview is published during the 30 days before filing.
Martin
“For the moment, no one thinks there will be many major differences in IPOs,” agrees David B.H. Martin, head of the securities practice group at Covington & Burling and former director of the SEC’s Division of Corporation Finance. “On the margins, some different practices may develop.”
In many cases, Martin says, the new rules are simply codifying existing practices.
Much of what will change under the new rules will take place behind the scenes, according to Martin, who notes that, “There are not going to be major, bold strokes.” Rather, he says, “There will just be subtle changes in the ways deals get processed. Some of it is simply to take the shackles off—as Allan Beller would say, ‘to get the sand out of the gears.’ For example, underwriters may send out more information via email without fear that it might be deemed an offer.”
“On other hand, for the so-called WKSIs, much is possible,” says Martin, referring to the newly created class of "well-known seasoned issuers," comprised of issuers that are presumed to be the most widely followed in the marketplace.
WKSIs Get Widest Latitude
WKSIs will see the greatest benefits—and the most significant changes to the offering process—under the new rules, which enable them to take advantage of automatic shelf registration as well as looser rules on communications. (For the SEC definition of WKSI, see box above, right.) According to the SEC, in 2003 those issuers represented approximately 30 percent of listed issuers accounting for approximately 95 percent of the U.S. equity market capitalization.
“The question is, ‘how much will be done?’” says Martin. “Certainly, the opportunity to say more and file less is also an opportunity to expose yourself more to fraud liability. Most underwriters and issuers are pondering how much of the new bounty they really want to feast off of. There’s concern about control over the process, because as soon as you allow various parties to say various things, you may expose yourself to liability you don’t need.”
While she says “the documentation will change somewhat and the process of due diligence and the mechanics of doing an offering will change slightly,” Jacob notes that, "The offering process will be dramatically different for WKSIs in terms of the speed in which they go to market and the flexibility they’re given.”
For WKSIs, “The new rules will make going to the public markets easier and more accessible compared with today,” she says, noting that, as of Dec. 1, WKSIs can file, automatically go effective, and issue securities. Under the existing rules, Jacob notes, it could take six to eight weeks to go through the SEC review process.
White & Case’s Keogh says the move to automatic shelf registrations is likely to lead to more registered offerings by WKSIs and fewer 144a offerings—an offering exemp from registration if limited to large institutional investors.
“There’s been a pattern [among WKSIs] of 144a offers of debt followed by a registration statement that makes that debt freely tradable to anyone. Now, the SEC expects WKSIs to do registered offerings rather than 144a offerings,” says Keogh. “I expect to see more issuers go the registered offering route.”
McCoy
Michael McCoy, an attorney in the Phoenix office of Bryan Cave and a former attorney in the SEC's Division of Corporation Finance, expects many WKSIs to continue to file shelf registration documents “similar to the registration documents they file now.”
“While they can file registration documents that are three or four pages under the automatic registration process, I don’t think in practice it will happen all that often,” says McCoy.
While the new rules allow WKSIs to list just the classes of securities they intend to offer, issuers now typically include several paragraphs of generic descriptions of common stock, debt and securities in their registration documents.
“I think they’ll still include that in the automatic registration statement, since the information is already available and it will make things quicker when they want to file a prospectus supplement,” says McCoy. “It’s easier to do it now than later because they have the information at their fingertips, except for the more exotic securities that investment banks come up with.”
While offerings may be completed somewhat faster, Martin says, “I don't believe that the difference between the procedures now and after the new rules is going to be so great that offerings will get done twice as fast, for instance. Overall, we’re not talking about major increases in speed. That is probably a good thing because as some point speed cuts against accuracy and good execution.”
“Of course, it is also possible that when companies and underwriters get used to the new rules and how they work, things will begin moving faster,” adds Martin. "This is a first step in the process. A logical outgrowth of the regulations is that, if they work for WKSIs, we may see them extended to other issuers. So, in five years, for instance, smaller issuers may be able to benefit from them.”
Greater Communication
The new rules liberalize the communications rules before and during the offering process, particularly for WKSIs.
Edwards
“The new communications rules allow more and better information at an earlier point in the process without unnecessary restrictions,” says Paul Edwards, chair of the securities law practice group at McDonald Hopkins. “There’s also a broader ability to continue reporting factual business-related information during an offering, and greater clarity regarding gun-jumping issues.”
Going forward, there should be less “fussing” between companies and the SEC over pre-filing communications, since under the new rules, “much of that should be able to fall under some kind of safe harbor,” notes Martin.
Still, at least initially, Jacob and others expect companies to err on the side of caution. “I think people will still be cautious,” says Jacob. But, she says, “The changes will ease the burden if something unplanned happens.”
“I think we’ll see some increased communications, particularly on the part of larger WKSIs, but people still have to be cautious about what they’re saying,” agrees Keogh.
McCoy warns that non-WKSI issuers “still need to be mindful of the communications they make to investment community.”
“I’d expect most issuers to be cautious about the information they release and the communications they provide,” adds McCoy. “Time will tell whether non-WKSIs avail themselves of the liberalized communications rules.”
Free Writing Prospectus
Those issuers need to make sure when they release information that it’s not considered an offer of securities, otherwise it’s considered a "free writing prospectus," and there’s a filing requirement, says McCoy.
The revised rules allow eligible issuers to use a free writing prospectus—a written communication, including an electronic communication, that constitutes an offer outside the statutory prospectus. While in most cases, issuers have to wait until they file a registration statement and generally have to file FWPs with the SEC, WKSIs can use a FWP at any time.
“The option to use a free writing prospectus greatly expands the things issuers can do during the so-called ‘quiet period,’” notes Edwards.
Clarification On Liability
Under the new rules, the SEC made it clear that liability attaches at the time the actual investment decision is made, not when the final prospectus is issued, as is the case now.
As a result, says Jacob, “There will be more pressure to make disclosures at the time pricing is complete. Companies won’t have the ability to fix something in their final prospectus. Before pricing, companies have to ensure everything is up to date and on file.”
“Now and especially after Dec. 1, potential plaintiffs will want to look at when the contract to buy securities was formed,” advises Edwards at McDonald Hopkins. “If the information the purchaser had received by that time was materially deficient, buyer may have a cause of action under section 12(a)(2).
Keogh says he expects to see a change in the kind of representations that issuers make to underwriters. “Now, they just say there are no material misstatements or omissions in the final prospectus. But the new rules presume the decision to buy is made when the prospectus is first delivered.” Keogh, adds, “There has to be a review and some issuer assurance to the underwriter about the information that was available at that time.”
In addition, Keogh says, “There will be some difference in the opinions that are requested from the lawyers who are involved in the offering [for WKSIs] because they will have to cover two different periods.”
Online Delivery
After Dec.1, companies will no longer have to deliver a printed copy of the final prospectus as long as it’s available online, notes Jacob, who says she expects most companies to take advantage of electronic prospectus delivery.
Keogh expects the trend toward the electronic delivery of prospectuses to become more common for institutional investors, but says, “That won’t apply as much to retail investors because underwriters generally won’t have email addresses for those investors.”
Keogh also advises that, “Access to information means the issuer, its counsel and the underwriter’s counsel need to make sure they’ve reviewed and are comfortable with the information that is publicly available at the time they commence an offering.”
Getting Ready
While companies have several weeks until the new rules take effect, Edwards says there are steps companies should be taking to get ready.
For example, Edwards says WKSIs should consider transitioning their existing shelf offerings to an automatic shelf. “For any pending shelf registration statements they have, they should think about filing a new automatic shelf registration statement after Dec. 1,” says Edwards, who notes that while companies can’t amend an existing shelf, there is a rule that preserves the filing fees paid with respect to the prior registration, so companies don’t lose their unused filing fee for a prior registration.
Edwards also advises companies to prepare for 10-K risk factor disclosures, which apply to all public companies except “small business issuers.”
While historically, risk factors were only required to be disclosed in securities offering documents, under the new rules, those disclosures are required in the 10-K for fiscal years ending after Dec. 1, 2005, and in subsequent Form 10-Qs.
“For WKSIs, risk factors are going to be particularly important because they’re going to become part of their automatic shelf registration statements as soon as they’re filed,” says Edwards.
McCoy notes that accelerated filers and WKSIs must also disclose in their form 10-K the substance of any material unresolved staff comments issued more than 180 days before the end of the fiscal year.
Adds Edwards, “Given the greater role of the 10-K and 10-Q in the ’33 Act offering and underwriting process, the underwriters, outside counsel and auditors need to be more involved in the 10-K process. The 10-K process is more a part of the offering process.”
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