SEC’s New Registration Rules: Who Benefits Most?

When word spread that the Securities and Exchange Commission was planning to loosen the rules governing the so-called “quiet period,” the word out was that it would greatly benefit the companies and underwriters planning an initial public offering.

Kroenlein

In fact, the proposals really aren’t about the “quiet period” and IPOs, but rather a sweeping of changes to securities registration rules initially set during the Depression era.

“A lot of the press has focused on what companies can say in the quiet period, but it’s [more significantly] a revamping of many aspects of the public offering process,” asserts David Kroenlein, corporate partner at Winston & Strawn concentrating in public and private financing. “The SEC is trying to move to a situation where all investors have access to the same knowledge base.”

Electronic Delivery, “WKSI’s”

Ruvoldt

In general, the proposals encourage companies to provide more information during the offering period than they have in the past. “The core of the changes is about transparency,” asserts Harold Ruvoldt, partner at Edwards & Angell and managing partner of its New York City office.

For one thing, the SEC finally signaled it is fully entering the Internet age. For the first time, it would permit companies to disseminate prospectuses for initial public offerings as well as secondary offerings electronically. Companies will no longer be required to deliver a physical copy.

This alone could save almost $200 million annually, SEC Commissioner Harvey Goldschmid reportedly said at the Commission’s open meeting last week. Previously, companies could deliver some compliance documents electronically, but only with the consent of shareholders (see recent related CW coverage in box at right).

The biggest beneficiaries of the new rules figure to be large companies that are already public. The SEC has divided all companies into four categories, and it gave the most latitude to what it now calls "Well-Known Seasoned Issuers," which it defines as companies that have been reporting for at least a year, whose filings have been timely, and have either $700 million worth of public common float or have issued $1 billion of registered debt in the preceding three years.

By the same token, most of the proposals would not be available to blank check companies, penny stock issuers, or shell companies.

Anderson

The "Well-Known Seasoned Issuers" would be able to engage in "automatic shelf registrations." In other words, they will be able to file their public offering with the SEC and offer the securities right away, points out Will Anderson, partner, with Bracewell & Patterson. Currently, this process can take from 10 days to three months between the time that a public company files and it is able to put its offering on the market to the public.

Companies will also be able to subsequently add additional classes of securities to a registration statement and add additional majority owned subsidiaries as registrants, Anderson notes.

Free Writing Prospectus?

The major reason for these changes is because under Sarbanes-Oxley the SEC is required to review periodic reports, like the quarterlies and annual.

In addition, these larger, established companies will be able to provide additional information to the public beyond what is contained in the initial prospectus. This means they can speak freely with the media and the public about their offerings, and even advertise in print or on radio or television. The only stipulation is that this information is filed with the SEC in a “free writing prospectus.”

According to experts, a free writing prospectus is a written communication—for example, a one-page summary sheet or advertisement—that is contained outside the initial prospectus. This additional information would then have to be filed with the SEC.

“Under the proposed rules, Well-Known Season Issuers would be free to engage in oral and written communications at any time, exempt from quiet period restrictions, as long as information about the offering filed with the SEC in a ‘free writing prospectus,’” points out Fried, Frank, Harris, Shriver & Jacobson, in a report to clients.

Non-seasoned issuers can also use this free writing prospectus, but the difference is that they must send the “statutory prospectus” that was initially filed for the offering along with the additional communication, points out Anderson.

A free writing prospectus would be subject to liability under Section 12(a)(2) of the Securities Act and the anti-fraud provisions of the federal securities laws, but would not be subject to liability under Section 11 of the Securities Act, say attorneys. The upshot: “Removing the most onerous liability provisions should enable greater communication between issuers and the public during the offering process,” notes Fried, Frank.

The Not-So-Quiet Period

This brings us to the so-called quiet period. The proposals would permit significantly greater communications before and during registered offerings of securities and therefore eliminate many possible "gun jumping" violations, Anderson notes.

For example, communications by issuers more than 30 days before filing a registration statement would not be considered prohibited offers so long as the communications did not reference a securities offering, he points out.

Currently, there is a lot of confusion as to when the quiet period starts. Anderson says, for example, that it could be interpreted as beginning as early as when a company hoping to go public initially contacts a potential underwriter. “Everyone has always been skittish about what they can say in pre-registration and registration,” adds Kroenlein.

There are additional less significant, but important proposals, as well. For example, all companies will be required to include “risk factors” in their 10-K filings.

Also, "accelerated filers," which are companies whose market caps exceed $75 million, must disclose in their annual reports of written SEC staff comments that were issued more than 180 days before the end of the fiscal year, where those comments remain unresolved at the time of filing the annual report and the issuer believes those comments to be material.

In addition, the SEC would allow issuers to incorporate by reference previously filed reports into a registration statement on Form S-1 or Form F-1. The proposals would eliminate Form S-2 and Form F-2, thus streamlining the process.

Now, keep in mind that these are the interpretations of lawyers shortly after the SEC published its summary proposals. By next week, the Commission is expected to unveil an estimated 400 pages of details and elaborations on these proposals, which are expected to clear up any questions or confusion that might exist. There will be a 75-day comment period, after which the SEC is expected to make the rules final.

Is it possible that the new rules could be delayed, similar to what has happened to the SEC’s proposed proxy access rules? Don’t count on it. Attorneys do expect a large number of comments to stream into the SEC. But, unlike proxy access, the proposals are being embraced by most participants. Says Kroenlein of Winston & Strawn, “Nothing on its face seems to be arousing anything significantly that splits the Commissioners.”