Companies looking to tap the capital markets have reason to rejoice. The Securities and Exchange Commission has approved changes to the Securities Act that should make that process faster, easier and less expensive.
The reforms mark major changes to regulations dating back to the 1930s; The Securities Act of 1933 was the first federal law to regulate the offering of securities to the public. The Act, which was one of more than a dozen major legislative initiatives enacted during the first 100 days of President Franklin D. Roosevelt’s first term, has been ostensibly unchanged in over 70 years. An attempt to reform the offering process in 1998, known as the “Aircraft Carrier” proposal, was considered too vast of an overhaul, and sank under its own weight.
Anderson
The impact of the much-anticipated reforms is expected to be great. “It is a significant departure from current law and probably the most significant reform to the securities act in many years,” said Will Anderson, a partner in the Houston office of Bracewell & Giuliani.
“We’ve all been sort of waiting for the public markets to come back; this is going to help accelerate the process by making it easier to raise money,” noted Paul Edwards, chair of the securities law practice group at McDonald Hopkins in Cleveland. “All of these reforms taken together make a significant improvement in the ease of offering securities,” he added. “Companies will be able to access our capital markets more efficiently, and that will benefit the economy.”
The reforms 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.
The final rules, which were approved during a June 29 open meeting, will take effect 120 days after publication in the Federal Register, according to SEC spokesman John Heine.
The rules as approved included a few changes from the original October 2004 proposal, based on feedback received during the comment period. Below are some of the major highlights of the reforms.
Head Of The Class
The reforms 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.
To qualify as a WKSI, which rhymes with “dixie,” issuers must have been reporting and timely in their Exchange Act filings for one year, and have either $700 million of world-wide public float, or must have issued $1 billion in non-convertible securities—other than common equity—in registered offering for cash in the preceding three years. The SEC said issuers meeting this $1 billion threshold may register only non-convertible securities, other than common equity, unless they also have a $75 million public float.
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 SEC noted that blank check companies, 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.
Not So Quiet Periods
While the largest companies may be the biggest beneficiaries of the new rules, observers note that the measures offer something for nearly everyone.
One change that applies to all registered offerings is a loosening of the so-called “quiet period” rules that govern what companies can and can’t say before and during a registered offering.
McCoy
“The reforms help everybody because they liberalize an issuer’s communications before and during a registered offering by creating safe harbors and exemptions for gun jumping,” said Michael McCoy, an attorney in the Phoenix office of Bryan Cave. McCoy, a former attorney in the SEC's Division of Corporation Finance, also noted that the Commission “provided quite a bit of guidance on what can and can’t be said, and what needs to be said.”
The SEC specified that 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.
Access Equals Delivery
Signaling the SEC’s embrace of electronic communications, the new rules provide that for prospectus delivery, access equals delivery.
“If you file and make available a final prospectus electronically, you don’t have to physically deliver it,” notes Anderson at Bracewell & Giuliani. “That saves time and printing and delivery costs for all issuers.”
Edwards
According to Edwards at McDonald Hopkins, the move marks a “big step in the right direction, and one that had to be taken in the modern world.”
Free Writing Prospectuses
The revised rules permit the use, under certain conditions, of a “free writing prospectus"—a written communication, including an electronic communication, that constitutes an offer outside the statutory prospectus.
The rules set forth several conditions for use of free-writing prospectuses, including a requirement that in some cases they must be filed with the SEC.
WKSIs get the most latitude, because they can use a FWP at any time, while other eligible issuers and other offering participants have to wait until after the filing of a registration statement to use a FWP. Anderson said he expects most issuers to take advantage of the ability to use FWPs.
On The Road
One change to the original proposal pertains to electronic road shows—live presentations by management to potential investors that were typically made available for a select audience, such as institutional investors.
Anderson said there was some concern that, the way the original proposal was written, a live communication by officers and directors to investors by Webcast or other means could be deemed a “graphic communication,” which would have to be filed with the SEC. As an example, Anderson said, if a live presentation to investors made in a ballroom was also shown via Web cast to a spillover crowd in a nearby room, under the original proposal the presentation would have had to be filed with the SEC.
WHAT'S A WKSI?
According to the Securities and Exchange Commission, a “well-known seasoned issuer” will be 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 offering for cash, not exchange, in the preceding three years.
Issuers meeting this $1 billion threshold may register only non-convertible securities, other than common equity, unless they also have a $75 million public float.
“The Commission changed the rule to make it clear that a live presentation to a live audience isn’t a graphic communication, so it doesn’t have to be filed with the SEC, no matter the means of transmission,” said Anderson.
In general, electronic road shows that aren’t live will be considered free writing prospectuses, and under certain circumstances won’t have to be filed. For example, electronic road shows used in initial public offerings won’t have to be filed if the issuer makes a version available electronically to an unrestricted audience.
Automatic Shelf Registration
Under the new rules, WKSIs can use an "automatic shelf registration" process, which allows them 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. WKSIs can also 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.
“This essentially provides for on-demand SEC registrations for WKSIs; it gives them much easier, much quicker access the capital markets,” said Anderson. “The shelf registration is effective immediately upon filing. The registrations aren’t subject to SEC review, and they can be as short as two or three pages. Companies can register and then later add additional securities, additional classes, or additional subsidiaries to the registrations.”
Under the automatic registration, issuers can opt to pay filing fees on a "pay-as-you-go" basis at the time of each takedown off the shelf registration statement.
While non-WKSIs can’t take advantage of the automatic registration, under the new rules, they can use a prospectus supplement, rather than a post-effective amendment, to revise their plan of distribution, a change that will make registration process faster and more efficient, according to Bryan Cave’s McCoy.
Another change in the final rule pertains to the liability aspects of registration statements. While filing a prospectus supplement will trigger a new effective date of registration (the date used to determine liability) for issuers and underwriters, it won’t trigger a new effective date for officers, directors, or experts, including auditors, eliminating another possible speed bump during the registration process, noted Anderson.
Other Changes
Among the other key items in the securities reform are:
A requirement that issuers register only securities they intend to offer within two years was replaced with a requirement that the issuer update the registration statement with a new registration statement that is filed every three years.
Under certain conditions, reporting issuers can incorporate by reference previously filed Exchange Act reports into a Securities Act registration statement on Form S-1 or Form F-1.
Companies conducting a registered offering can release a wider array of business and financial information, both historical and forward-looking, than they could under the previous rules, with more latitude given to WKSI’s.
The SEC broadened the scope of Rule 134 for post-filing written communications by issuers and other offering participants that relate to the offering so that such communications won’t be covered by the definition of “prospectus” and won’t incur potential prospectus liability.
The rules also expand the exemptions for research reports used by brokers and dealers.
Though the final rule has not yet been published by the Commission, a detailed outline of the key provisions is available in the box above, right. Also available are related speeches, coverage and commentary.
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