SEC Issues Q&A On Securities Offering Reform Rules

In response to issuer questions, the Securities and Exchange Commission’s Division of Corporation Finance has issued answers to 14 questions related to transition matters under the Securities Offering Reform Rules that will take effect Dec. 1.

The reform measures, passed in late June, mark major changes to regulations dating back to the 1930s. The changes, which are expected to make the offering process faster and less expensive, 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.

Among other things, the measures create a new class of "well-known seasoned issuers," or WKSIs—comprised of issuers that are presumed to be the most widely followed in the marketplace—and loosen the so-called “quiet period” rules that govern what companies can and can’t say before and during a registered offering. In addition, under the new rules, 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 don’t reference a securities offering that is the subject of a registration statement.

Certain entities, like shell companies and penny stock issuers, can’t take advantage of the new rules. In addition, many of the new rules aren’t available to investment companies or business development companies, or in merger and acquisition transactions, because separate regulatory structures apply to those types of issuers and transactions. The SEC noted that the answers to the questions assume an issuer’s eligibility to use the form, the offering type, or the rule discussed.

Loughran

Peter J. Loughran, co-head of the Securities Practice Group at Debevoise & Plimpton, who called the guidance helpful, said it addresses technical questions relating to shelf registration transition matters. “There are other areas where the SEC will leave it to the market to figure out how to best use the new rules,” he said. As an example, he cites the new free writing prospectus rules, which grant issuers more liberty as to what they can say in writing outside of their prospectuses. “Issuers and underwriters will have the ability to use free writing prospectuses, but the extent to which they’ll take advantage of the new rules remains to been seen,” says Loughran. “The market will most likely develop contractual provisions governing the use of free writing prospectuses.”

Kevin Keogh, a partner in the New York office of White & Case, said the Q&A “mostly addresses timing and form issues that were somewhat unclear in the broad sweep of the new rules.” Still, Keogh adds, the Q&A provides “helpful guidance as to when to begin to comply with these sweeping rule and form changes, and what forms the SEC staff will expect to see used.”

Worth noting, says Keogh, is a question addressing whether the new communication rules can be used for an offering that commences before Dec. 1. The SEC staff clarifies that the determining factor is when the communication takes place and not when the offering began, but the determination of whether an issuer is eligible to use two of the rules (Rules 164 and 433) is determined at the time the offering began, even if that date was before Dec. 1.

Keogh

Another question addresses a matter that Keogh says has been raised by some of the large number of WKSIs that have existing shelf registration statements that became effective before Dec. 1—the question of whether those issuers can simply convert their already effective shelf registrations to the new automatic shelf registrations by filing a post effective amendment. “The answer is no,” says Keogh. “They must file a new registration statement because a different designator will be used for automatically effective S-3s and F-3s to differentiate them from those that are not automatically effective.”

According to Keogh, three of the questions (numbers nine, 10 and 11), clear away some transition questions about how to add selling shareholders and underwriters to resale registration statements and at-the-market equity offerings. “The [SEC] staff clarifies that these changes will not require a post-effective amendment but can be made by prospectus supplement—a procedural area of uneven administration in the recent past.”

The last two questions of the Commission’s FAQ address when a reporting company must begin to make disclosures about risk factors, unresolved SEC comments, and its filing status—all new requirements of Forms 10-K and 10-Q. These apply to the first 10-K for a fiscal year ending after Dec. 1, 2005 and to subsequent 10-Qs, but not earlier 10-Qs, and for foreign private issuers, to the first 20-F for a fiscal year ending after Dec. 1, 2005.

The Securities Offering Reform Transition Questions and Answers, as well as related coverage, is available in the box above, right.