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Securities Offering Reform

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Start Preamble Start Printed Page 44722

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting rules that will modify and advance significantly the registration, communications, and offering processes under the Securities Act of 1933. Today's rules will eliminate unnecessary and outmoded restrictions on offerings. In addition, the rules will provide more timely investment information to investors without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to capital. The rules also will continue our long-term efforts toward integrating disclosure and processes under the Securities Act and the Securities Exchange Act of 1934. The rules will further these goals by addressing communications related to registered securities offerings, delivery of information to investors, and procedural aspects of the offering and capital formation processes.

EFFECTIVE DATE:

December 1, 2005.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Amy M. Starr, Daniel Horwood, or Anne Nguyen, at (202) 551-3200, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549 or, with respect to questions regarding investment companies, Kieran Brown in the Division of Investment Management, at (202) 551-6784.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

We are amending Rule 30-1 [1] of the Administrative Practice and Procedure, Item 512 [2] of Regulation S-B,[3] Item 512 [4] of Regulation S-K,[5] and Rules 134, 137, 138, 139, 153, 158, 174, 401, 405, 408, 412, 413, 415, 418, 424, 426, 430A, 439, 456, 457, 462, 473, 497, and 902 [6] and eliminating Rule 434 [7] under the Securities Act.[8] We are adding Rules 159, 159A, 163, 163A, 164, 168, 169, 172, 173, 430B, 430C, and 433 under the Securities Act. We are amending Forms S-1, S-3, S-4, F-1, F-3, and F-4 and eliminating Forms S-2 and F-2 [9] under the Securities Act; amending Rule 100 [10] of Regulation FD [11] and Rule 14a-2 [12] under the Securities Exchange Act of 1934; [13] amending Forms 10, 10-K, 10-Q, 10-KSB, and 20-F [14] under the Exchange Act; and amending Form N-2 [15] under the Securities Act and the Investment Company Act of 1940.[16]

Table of Contents

I. Introduction

A. Overview

B. Background

1. Advances in Technology

2. Exchange Act Reporting Standards

II. Well-Known Seasoned Issuers; Other Categories of Issuers

A. Well-Known Seasoned Issuers

1. Definition of Well-Known Seasoned Issuer

a. Market Capitalization Threshold

b. Registered Offerings of Non-Convertible Securities Threshold

2. Timing of Determination of Well-Known Seasoned Issuer Status

3. Well-Known Seasoned Issuers' Securities Offerings

4. Comments Regarding the Definition of Well-Known Seasoned Issuer

B. Other Categories of Issuers

III. Communications Rules

A. Communications Requirements Prior to Today's Rules and Amendments

B. Need for Modernization of Communications Requirements

1. General

2. Definition of Written Communication

a. “Written Communication” and “Graphic Communication”

b. Comments Regarding Proposals

C. Overview of Communications Rules

D. Communications Rules

1. Permitted Continuation of Ongoing Communications During an Offering

a. Overview

b. Exception for Regularly Released Factual Business and Forward-Looking Information—Available to Reporting Issuers

i. Factual Business Information

(A) Scope of the Safe Harbor

(B) Comments on the Scope of the Safe Harbor

ii. Forward-Looking Information

(A) Scope of the Safe Harbor

iii. Conditions of Safe Harbor in Rule 168

(A) “By or on Behalf of” the Issuer

(1) Definition

(2) Comments on Definition

(B) Regularly Released Information

(1) Regularly Released Condition

(2) Comments on Regularly Released Condition

(C) Exclusion for Offering-Related Information

(1) Scope of Exclusion

(2) Comments on Exclusion

c. Exception for Regularly Released Factual Business Information—Available to Non-Reporting Issuers

i. Scope of the Safe Harbor

ii. Comments on the Safe Harbor

2. Other Permitted Communications Prior To Filing a Registration Statement

a. 30-Day Bright-line Exclusion From the Prohibition on Offers Prior To Filing a Registration Statement—All Issuers

i. Scope of Exclusion

ii. Comments on 30-Day Bright-line Exclusion

b. Permitted Pre-Filing Offers for Well-Known Seasoned Issuers

i. Overview

ii. Exemption for Pre-Filing Offers

iii. Comments on Exemption for Pre-Filing Offers

3. Relaxation of Restrictions on Written Offering-Related Communications

a. Rule 134

i. Expansion of Permitted Information

ii. Section 10 Prospectus Requirement

iii. Changes to Required Information

b. Permissible Use of Free Writing Prospectuses

i. Overview

ii. Definition of Free Writing Prospectus

(A) Scope of Definition

(B) Comments on Definition

iii. Permitted Use of a Free Writing Prospectus After the Filing of a Registration Statement Under Rule 433

(A) Overview

(B) Issuer Eligibility

(1) Comments on Ineligible Issuer Definition

(C) Conditions to Permitted Use of a Free Writing Prospectus

(1) Prospectus Delivery or Availability

(a) Prospectus Delivery Conditions for Non-Reporting Issuers and Unseasoned Issuers

(b) Prospectus Availability Condition for Seasoned Issuers and Well-Known Seasoned Issuers

(c) Comments on Prospectus Delivery or Availability Condition

(2) Information in a Free Writing Prospectus

(a) Information Conditions

(b) Amendment to Rule 408

(c) Legend Condition

(i) Discussion

(ii) Cure for Unintentional or Immaterial Failure to Include a Legend

(iii) Impermissible Legends or Disclaimers Start Printed Page 44723

(3) Filing Conditions

(a) General Conditions

(i) Scope of General Conditions

(ii) Conditions Specific to Final Terms of the Securities or Offering

(iii) Asset-Backed Issuers

(iv) Comments on Filing Condition

(b) Immaterial or Unintentional Failures to File

(i) Scope of Cure Provision

(ii) Comments on Cure Provision

(4) Record Retention Condition

(a) Discussion

(b) Immaterial or Unintentional Failure To Retain a Free Writing Prospectus

(D) Road Shows

(1) Definition of Electronic Road Show

(2) Treatment of Electronic Road Shows

(3) Comments on Electronic Road Shows

(E) Treatment of Communications on Web Sites and Other Electronics Issues

(1) General

(2) Historical Information on an Issuer Web Site

(3) Comments on Treatment of Communications on Web Sites and Other Electronics Issues

(F) Media Publications or Broadcasts

(1) Overview

(2) Application of Rule 164 and Rule 433 to Media Publications

(a) Prospectus Delivery or Availability

(i) Where Media Publications Are Prepared or Consideration Paid by Issuer or Offering Participant

(ii) Unaffiliated Media Publications

(b) Filing

(c) Issuers in the Media Business

(3) Responses to Comments on Treatment of Media Publications

(G) Liability Issues Affecting Free Writing Prospectuses

(1) General

(2) Filed Free Writing Prospectus Not Part of Registration Statement

(3) Cross-Liability Issues

c. Interaction of New Communications Rules with Regulation FD

i. Amendments to Regulation FD

ii. Comments on Amendments to Regulation FD

4. Use of Research Reports

a. Current Regulatory Treatment of Research Reports

b. Amendments to Exemptions for Research

i. Definition of Research Report

(A) Definition

(B) Comments on Definition of Research Report

ii. Rule 137

iii. Rule 138

(A) Amendments to Rule 138

(B) Comments on Rule 138 Amendments

iv. Rule 139

(A) Issuer-Specific Reports

(1) Amendments Regarding Issuer-Specific Reports

(2) Comments on Issuer-Specific Reports

(B) Industry-Related Reports

(1) Amendments Regarding Industry-Related Reports

(2) Comments on Industry-Related Reports

v. Rule 139a

vi. Research Report Amendments in Connection With Regulation S and Rule 144A Offerings

vii. Research and Proxy Solicitations

IV. Liability Issues

A. Information Conveyed by the Time of Sale for Purposes of Section 12(a)(2) and Section 17(a)(2) Liability

1. Interpretation and Rule

2. Comments and Guidance Regarding Our Interpretation and Rule 159

a. The Section 12(a)(2) and Section 17(a)(2) Analysis of the Information Conveyed

b. Determination of Time of Sale

c. Termination of Old Contract and Creation or Reformation of a New Contract

3. Rule 412 and Rule 430B

4. Relationship of Section 12(a)(2) and Section 17(a)(2) Interpretation and Rule 159 to Section 11 Liability

B. Issuer as Seller

C. Due Diligence Interpretation

V. Securities Act Registration Rules and Amendments

A. Overview

B. Procedural Rules

1. Procedural Changes Regarding Shelf Offerings

a. Overview

b. Information in a Prospectus

i. Mechanics

(A) Rule 430B

(B) Means for Providing Information

(C) Identification of Selling Security Holders Following Effectiveness

(1) Scope of Provision

(2) Comments on Identification of Selling Security Holders

ii. Information Deemed Part of Registration Statement

iii. Date of Inclusion of Prospectus Supplements in Registration Statements and New Effective Dates of Registration Statements

(A) Scope of Provisions

(B) New Effective Dates for Section 11 Purposes

(C) Comments on Prospectus Supplements and New Effective Dates

iv. Amendments to Rule 415

(A) Elimination of Limitation on Amount of Securities Registered

(1) Revised Provisions

(2) Comments on Elimination of Limitation on Amount of Securities Registered

(B) Immediate Takedowns From a Shelf Registration Statement Filed Under Rule 415(a)(1)(x)

(C) Eliminating “At-the-Market” Offering Restrictions for Seasoned Issuers

v. Rule 424 Amendments

vi. Elimination of Rule 434

vii. Issuer Undertakings

(A) Treatment of Information in Prospectus Supplements

(B) Prospectus Supplements Deemed Part of a Registration Statement and New Effective Dates

c. Changes to Form S-3 and Form F-3

2. Automatic Shelf Registration for Well-Known Seasoned Issuers

a. Overview

i. Rule Changes

ii. Comments on Automatic Shelf Registration

b. Automatic Shelf Registration Mechanics

i. Eligibility

ii. Information in a Registration Statement

(A) Information That May be Omitted From the Base Prospectus

(B) Mechanics for Including Information

(C) Registration of Securities to be Offered

(D) Pay-as-You-Go Registration Fees

(1) Pay-as-You-Go Fee Rules

(2) Comments on Pay-as-You-Go Fees

(E) Registration Under Securities Act Sections 5 and 6

(F) Immediate Effectiveness

(G) Duration

3. Unseasoned Issuers and Non-Reporting Issuers

a. Overview

b. Amendments to Form S-1 and Form F-1—Expanded Use of Incorporation by Reference

i. Eligibility

ii. Procedural Requirements

iii. Comments on Form S-1 and Form F-1 Amendments

c. Elimination of Form S-2 and Form F-2

VI. Prospectus Delivery Reforms

A. Current Prospectus Delivery Requirements

B. Prospectus Delivery Revisions

1. Access Equals Delivery

a. Rule 172

(i) Scope of Rule

(ii) Comments on Rule 172

b. Exceptions to the Rule

c. Notification

(i) Rule 173

(ii) Comments on Rule 173

2. Written Confirmations and Notices of Allocations

3. Transactions Taking Place on an Exchange or Through a Registered Trading Facility—Rule 153

4. Aftermarket Prospectus Delivery—Rule 174

VII. Additional Exchange Act Disclosure Provisions

A. Risk Factor Disclosure

1. Scope of Requirement

2. Comments on Risk Factor Disclosure Requirement

B. Disclosure of Unresolved Staff Comments

1. Disclosure Requirement

2. Comments on Disclosure of Outstanding Comments

C. Disclosure of Status as Voluntary Filer Under the Exchange Act

VIII. Paperwork Reduction Act

A. Background

B. Summary of Information Collections

C. Summary of Comment Letters on the PRA Analysis

D. Paperwork Reduction Act Burden Estimates

1. Exchange Act Periodic Reports and Registration Statements

2. Communications and Prospectus Delivery

3. Securities Act Registration Statements

IX. Cost Benefit Analysis

A. Background

B. Summary of Rules

1. Communications

2. Securities Act Registration Rules

3. Prospectus Delivery

4. Exchange Act Reports

C. Comments on the Proposals

D. Benefits Start Printed Page 44724

1. Increased Information Flow

2. Investor Protection

3. Facilitating Capital Formation

4. Reduced Regulatory Uncertainty

5. Lower Costs

E. Costs

1. Compliance Costs

2. Potential for Increased Liability

3. Other Potential Costs

X. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

XI. Final Regulatory Flexibility Act Analysis

A. Reasons for and Objectives of the Rules and Amendments

B. Significant Issues Raised by Public Comment

C. Small Entities Subject to the Rules

D. Reporting, Recordkeping and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

XII. Statutory Authority—Text of the Rules and Amendments

I. Introduction

A. Overview

On November 3, 2004, we issued proposed rule and form changes under the Securities Act and the Exchange Act that would modernize the securities offering and communication processes while maintaining protection of investors under the Securities Act.[17] We received over 130 comment letters on the proposals.[18] While a large number of letters focused on only one area of the proposals,[19] a significant number of the other letters addressed many aspects of the proposals. In general, commenters strongly supported the proposals and their objectives. A number of commenters believed that the proposals struck the appropriate balance between improving the capital formation process and modernizing offering communications, while preserving investor protection and avoiding unnecessary impediments to the capital formation process. As with other rulemakings, including those of the magnitude that the proposals represented, commenters provided many thoughtful comments and useful suggestions. We are adopting the rules and amendments as proposed with certain modifications to address a number of points that commenters raised.

The rules we are adopting today continue the evolution of the offering process under the Securities Act that began as far back as 1966, when Milton Cohen noted the anomaly of the structure of the disclosure rules under the Securities Act and the Exchange Act and suggested the integration of the requirements under the two statutes.[20] Mr. Cohen's article was followed by a 1969 study led by Commissioner Francis Wheat [21] and the Commission's Advisory Committee on Corporate Disclosure in 1977.[22] These studies eventually led to the Commission's adoption of the integrated disclosure system, short-form registration under the Securities Act, and Securities Act Rule 415 permitting shelf registration of continuous offerings and delayed offerings.[23]

The Commission's attention to the offering and communications processes under the Securities Act continued more recently. In particular, in March 1996, members of the Commission staff delivered the Report of the Task Force on Disclosure Simplification to the Commission.[24] It recommended a number of areas where simplification and modernization of the registration and offering process could be accomplished. In July 1996, the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report to the Commission.[25] Its principal recommendation was that the Securities Act registration and disclosure processes be more directly tied to the philosophy and structure of the Exchange Act through the adoption of a system of “company registration.” Under company registration, the focus of Securities Act and Exchange Act registration and disclosure would move from transactions to issuers, and corollary steps would be taken to provide for disclosure and registration of individual offerings within the company registration framework.

Promptly after the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report, the Commission issued a concept release regarding regulation of the securities offering process.[26] The release sought input on a number of significant issues, including:

  • Whether the concept of company registration should be pursued;
  • Whether other methods of increasing the integration of Securities Act and Exchange Act disclosure and other processes should be considered;
  • Whether existing or further reliance on Exchange Act filings should be accompanied by enhancements to Exchange Act reporting;
  • Whether companies make information about their public securities offerings available to investors in an appropriate and timely manner, including:

○ At what point in the offering process delivery of, or access to, information should be assured in connection with registered offerings under the Securities Act and whether current requirements ensure timely delivery of information to the secondary market in connection with such offerings;

○ Whether prospectus supplements in shelf offerings should be made part of the registration statement; Start Printed Page 44725

○ Whether and, if so, in what circumstances electronic access should replace actual delivery of information in connection with offerings registered under the Securities Act; and

○ Whether restrictions on written offers under the Securities Act should be liberalized and what liability standards should attach to such communications;

  • Whether adjustments to the roles and responsibilities of traditional “gatekeepers” in the Securities Act offering process, such as underwriters and accountants, should be made in light of increases in the speed of and other evolutions in the offering process;
  • Whether changes should be made to address evolution in the relationships between the public and private offering processes, including:

○ Whether changes in Rules 144A [27] and 144 [28] under the Securities Act should be considered; and

○ Whether there should be any relaxation in our prohibition against general solicitations of interest or offers in unregistered private offerings; and

  • Whether the review process of issuer filings under the Securities Act and the Exchange Act by the staff of the Division of Corporation Finance should be modified to limit the impact of the process on access to capital markets, at least for some category of large seasoned issuers.[29]

In 1998, the Commission proposed new rules under the Securities Act that were intended to modernize the securities offering process.[30] As we recognized in the Proposing Release, much of the comment in response to the 1998 proposals suggested that the system of regulating capital formation in the registered offering market provides a number of advantages that should be considered carefully and retained if we are to make other changes.

The rules we are adopting today are focused primarily on constructive, incremental changes in our regulatory structure and the offering process rather than the introduction of a far-reaching new system, as we believe that we can best achieve further integration of Securities Act and Exchange Act disclosure and processes by making adjustments in the current integrated disclosure and shelf registration systems. Further, consistent with our belief that investors and the securities markets will benefit from greater permissible communications by issuers while retaining appropriate liability for these communications, we have sought to address the need for timeliness of information for investors by building on existing statutory provisions and processes without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to the securities markets and capital.

We are adopting the proposed revisions to the registration, communications, and offering processes for registered transactions under the Securities Act with certain modifications. We believe the rules we are adopting, while limited in scope, properly address the areas that are in need of modernization. The adopted rules involve three main areas:

  • Communications related to registered securities offerings;
  • Registration and other procedures in the offering and capital formation processes; and
  • Delivery of information to investors, including delivery through access and notice, and timeliness of that delivery.

Today's rules reflect our view that revisions to the Securities Act registration and offering procedures are appropriate in light of significant developments in the offering and capital formation procedures and can provide enhanced protection of investors under the statute. We believe that the rule changes we adopt today will:

  • Facilitate greater availability of information to investors and the market with regard to all issuers;
  • Eliminate barriers to open communications that have been made increasingly outmoded by technological advances;
  • Reflect the increased importance of electronic dissemination of information, including the use of the Internet;
  • Make the capital formation process more efficient; and
  • Define more clearly both the information and the timeliness of the availability of information against which a seller's statements are evaluated for liability purposes.

The rules we are adopting today reflect certain modifications from the proposals to address important points commenters raised. The modifications to the proposals include the following:

  • The definitions of graphic communication and written communication (including as to road shows) exclude live, in real-time communications to a live audience that are transmitted graphically;
  • The free writing prospectus rules address “cross-liability” concerns among offering participants arising from the use of free writing prospectuses;
  • The free writing prospectus rules clarify the filing conditions applicable to media publications, descriptions of the final terms of securities and offerings, and electronic and other road shows, and modify the record retention provisions;
  • The shelf registration rules address issues regarding the liability of officers, directors, and accountants and other experts arising from the new effective dates triggered by the filing of prospectus supplements;
  • The definition of ineligible issuer more closely conforms the definition to other ineligibility provisions in the Securities Act;
  • The rule permitting specified written notices that are not prospectuses narrows the types of information for which a preliminary prospectus will have to include a price range as a condition;
  • The definition of well-known seasoned issuer enables issuers to include all registered non-convertible securities, other than common equity, issued for cash in measuring the amount of registered fixed income securities over the prior three years; and
  • The prospectus delivery rule addresses concerns about potential underwriter liability due to an issuer's failure to timely file its final prospectus.

We also have endeavored to provide more guidance to market participants regarding our interpretation of the liability provisions of Securities Act Sections 12(a)(2) and 17(a)(2).[31]

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B. Background

1. Advances in Technology

As we noted in the Proposing Release, significant technological advances over the last three decades have increased both the market's demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate this information. Computers, sophisticated financial software, electronic mail, teleconferencing, videoconferencing, webcasting, and other technologies available today have replaced, to a large extent, paper, pencils, typewriters, adding machines, carbon paper, paper mail, travel, and face-to-face meetings relied on previously. The rules we are adopting today seek to recognize the integral role that technology plays in timely informing the markets and investors about important corporate information and developments.

2. Exchange Act Reporting Standards

The role that a public issuer's Exchange Act reports play in investment decision making is a key component of the rules we are adopting today. Congress recognized that the ongoing dissemination of accurate information by issuers about themselves and their securities is essential to the effective operation of the trading markets. The Exchange Act and underlying rules have established a system of continuing disclosure about issuers that have offered securities to the public, or that have securities that are listed on a national securities exchange or are broadly held by the public. The Exchange Act rules require public issuers to make periodic disclosures at annual and quarterly intervals, with other important information reported on a more current basis. The Exchange Act specifically provides for current disclosure to maintain the timeliness and adequacy of information disclosed by issuers, and we have significantly expanded our current disclosure requirements consistent with the provision in the Sarbanes-Oxley Act of 2002 [32] that “[e]ach issuer reporting under Section 13(a) or 15(d) * * * disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer * * * as the Commission determines * * * is necessary or useful for the protection of investors and in the public interest.” [33]

A public issuer's Exchange Act record provides the basic source of information to the market and to potential purchasers regarding the issuer and its management, business, financial condition, and prospects. Because an issuer's Exchange Act reports and other publicly available information form the basis for the market's evaluation of the issuer and the pricing of its securities, investors in the secondary market use that information in making their investment decisions. Similarly, during a securities offering in which an issuer uses a short-form registration statement, an issuer's Exchange Act record is very often the most significant part of the information about the issuer in the registration statement.

With the enactment of the Sarbanes-Oxley Act and our recent rulemaking and interpretive actions, we have enhanced significantly the disclosure included in issuers' Exchange Act filings and accelerated the filing deadlines for many issuers. The following are examples of recent regulatory actions that have improved the delivery of timely, high-quality information to the securities markets by issuers under the Exchange Act:

  • Requiring the establishment of disclosure controls and procedures; [34]
  • Requiring a public issuer's top management to certify the content of periodic reports and highlight their responsibilities for and evaluation of the issuer's disclosure controls and procedures and internal control over financial reporting; [35]
  • Modifying the approach to current disclosure by increasing significantly the types of events that must be reported on a current basis and shortening the time for filing current reports; [36]
  • Approving listing standard changes intended to improve corporate governance and enhance the role of the audit committee of the issuer's board of directors with regard to financial reporting and auditor independence; [37] and
  • Providing further interpretive guidance regarding the content and understandability of Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—a disclosure item we believe is at the core of a reporting issuer's periodic reports.[38]

Many of the recent changes to the Exchange Act reporting framework provide greater rigor to the process that issuers must follow in preparing their financial statements and Exchange Act reports. Senior management now must certify the material adequacy of the content of periodic Exchange Act reports. Moreover, issuers, with the involvement of senior management, now must implement and evaluate disclosure controls and procedures and internal controls over financial reporting. Further, we believe the heightened role of an issuer's board of directors and its audit committee provides a structure that can contribute to improved Exchange Act reports.

As we recognized in the Proposing Release, the 1996 Concept Release and the 1998 proposals also considered the role of enhanced Exchange Act reporting as an important corollary to reform of the offering process under the Securities Act.[39] We believe that the enhancements to Exchange Act reporting described above enable us to rely on these reports to a greater degree in adopting our rules to reform the securities offering process.

II. Well-Known Seasoned Issuers; Other Categories of Issuers

A. Well-Known Seasoned Issuers

We are modifying the framework for communications in connection with public offerings for all issuers and the framework of the registration process for most issuers that report under the Exchange Act. As we explained in the Proposing Release, we believe that the most far-reaching revisions of our communications rules and registration processes should be considered for issuers that have a reporting history under the Exchange Act and are presumptively the most widely followed in the marketplace.[40]

Start Printed Page 44727

Today, the largest issuers are followed by sophisticated institutional and retail investors, members of the financial press, and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. Unlike smaller or less mature issuers, large seasoned public issuers tend to have a more regular dialogue with investors and market participants through the press and other media. The communications of these well-known seasoned issuers are subject to scrutiny by investors, the financial press, analysts, and others who evaluate disclosure when it is made.

1. Definition of Well-Known Seasoned Issuer

We are adding a new category of issuer—a “well-known seasoned issuer”—that will be permitted to benefit to the greatest degree from the modifications to our rules we are adopting today regarding communications and the registration processes.[41] We are defining a well-known seasoned issuer as an issuer that is required to file reports pursuant to Section 13(a) or Section 15(d) the Exchange Act and satisfies the following requirements as of the date on which its status as a well-known seasoned issuer is determined:

  • The issuer must meet the registrant requirements of Form S-3 or Form F-3; [42]
  • The issuer either:

○ As of a date within 60 days of its eligibility determination date must have a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or

○ As of a date within 60 days of its eligibility determination date, must have issued in the last three years, at least $1 billion aggregate principal amount of non-convertible securities, other than common equity,[43] in primary offerings for cash, not exchange, registered under the Securities Act; [44] and

  • The issuer must not be an ineligible issuer.[45]

If it does not itself meet the conditions for eligibility as a well-known seasoned issuer, a majority-owned subsidiary of a well-known seasoned issuer will nonetheless be a well-known seasoned issuer in connection with the offer and sale of its own securities if:

  • The securities are non-convertible securities, other than common equity, and the parent of the majority-owned subsidiary is a well-known seasoned issuer and fully and unconditionally guarantees those securities; [46]
  • The securities are guarantees of non-convertible securities, other than common equity, of (1) its well-known seasoned issuer parent or (2) another majority-owned subsidiary where those non-convertible securities are fully and unconditionally guaranteed by the well-known seasoned issuer parent; [47] or
  • The majority-owned subsidiary is offering non-convertible investment grade securities.[48]

Overall, the issuers that will meet our thresholds for well-known seasoned issuers are the most active issuers in the U.S. public capital markets. In 2004, those issuers, which represented approximately 30% of listed issuers, accounted for about 95% of U.S. equity market capitalization. They have accounted for more than 96% of the total debt raised in registered offerings over the past eight years by issuers listed on a major exchange or equity market. These issuers, accordingly, represent the most significant amount of capital raised and traded in the United States. As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, we believe that it is appropriate to provide communications and registration flexibilities to these well-known seasoned issuers beyond that provided to other issuers, including other seasoned issuers.

a. Market Capitalization Threshold

As we discussed in the Proposing Release, we believe that non-affiliate equity market capitalization, or “public float,” of a reporting issuer can be used as a proxy for whether the issuer has a demonstrated market following.[49] We are adopting as a threshold a public float of $700 million or more. We have used market capitalization as a proxy for public float in evaluating this threshold and its implications.

To determine whether an issuer meets the $700 million threshold under the definition, the issuer will calculate its public float in the same manner that it calculates its public float for purposes of determining Form S-3 or F-3 eligibility.[50] We have revised the definition from the proposal to clarify that the non-affiliate equity market capitalization is determined on a worldwide basis, as it historically has been for purposes of eligibility to use Form F-3. In addition, for purposes of calculating public float of a non-U.S. issuer to determine eligibility as a well-known seasoned issuer and eligibility to use Form S-3 or F-3, we interpret Start Printed Page 44728“common equity” as defined in Securities Act Rule 405 as including a class of participating voting or non-voting preferred stock of a foreign issuer where the issuance of the preferred stock results from requirements of the applicable foreign jurisdiction or market and where the class of preferred stock has liquidation or dividend preferences and other terms that cause it to be the substantial economic equivalent of a class of common stock.

To evaluate the implications of a $700 million public float threshold, staff in our Office of Economic Analysis (“OEA”) obtained data on the 12,551 registered offerings that were conducted from 1997 to 2004 by 2,875 issuers that had public equity outstanding and were listed on a major exchange or equity market.[51] Of these offerings, 9,164 were debt offerings that raised proceeds of $1,927 billion, and 3,387 were equity offerings that raised proceeds of $567 billion. The average issuer conducted 4.2 debt offerings and 1.1 equity offerings per calendar year, although as many as 209 debt offerings have been conducted by a single issuer within a calendar year.

OEA also analyzed data on the financial market conditions under which these offerings were made. High levels of analyst coverage, institutional ownership, and trading volume are useful indicators of the scrutiny that an issuer receives from the market, although no one statistic can fully capture the extent to which an issuer is followed by the market.[52] Issuers with market capitalization in excess of $700 million that conducted offerings from 1997 to 2004 typically had an average of 12 analysts following them prior to the offering.[53] This includes only sell-side analysts and is, we believe, a conservative indicator of analyst scrutiny. Institutional investors accounted for an average of 52% of equity ownership prior to offerings by issuers with market capitalization above $700 million. Those issuers had an average daily trading volume of nearly $52 million prior to offerings in this period and accounted for the following percentages of capital raised:

Offering Proceeds, by Issuer Capitalization Primary Seasoned Offerings, 1997-2004 *

[$Billions (%) Proceeds from Offerings, by Issuer Capitalization]

Market Capitalization of Issuers
>$700mm>$0 (All Issuers)
Equity$396 (70%)$567 (100%)
Debt 541,849 (96%)1,927 (100%)
Total2,245 (90%)2,494 (100%)
* Source: OEA estimates using Center for Research in Securities Prices at the University of Chicago and Securities Data Corporation data.

b. Registered Offerings of Non-Convertible Securities Threshold

Issuers that do not meet the public equity float test will be considered well-known seasoned issuers if they have issued for cash more than an aggregate of $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years. These issuers also will have to satisfy the other conditions of the well-known seasoned issuer definition, such as the form eligibility requirement.[55] In determining compliance with this threshold:

  • Issuers may aggregate the amount of non-convertible securities, other than common equity, issued in registered primary offerings during the prior three years;
  • Issuers may include only such non-convertible securities that were issued in registered primary offerings for cash—they may not include registered exchange offers in this aggregation; and
  • Parent company issuers only may include in their calculation the principal amount of their full and unconditional guarantees, within the meaning of Rule 3-10 of Regulation S-X,[56] of non-convertible securities, other than common equity, of their majority-owned subsidiaries issued in registered primary offerings for cash during the three-year period.

The aggregate principal amount of non-convertible securities that may be counted toward the $1 billion issuance threshold may have been issued in any registered primary offering for cash, on any form (other than Form S-4 or Form F-4). Those non-convertible securities need not be investment grade securities to be included in the calculation. In calculating the $1 billion amount, issuers generally may include the principal amount of any debt and the greater of liquidation preference or par value of any non-convertible preferred stock that were issued in primary registered offerings for cash.[57]

Issuers may not include the principal amount of securities that were offered in registered exchange offers by the issuer when determining compliance with the $1 billion non-convertible securities threshold. A substantial portion of these offerings involve registered exchange offers of substantially identical securities for securities that were sold in private offerings. In those cases, the original sale to investors in the private offering, relying upon, for example, the exemptions of Securities Act Section 4(2) [58] and Rule 144A, is not registered and is not carried out under the Securities Act's disclosure or liability standards. Moreover, in the subsequent registered exchange offers purchasers may not be able, in certain cases, to avail themselves effectively of the remedies otherwise available to purchasers in registered offerings for cash. While these exchange offers are permitted in some circumstances, the policy preference for registered offerings, in conjunction with the streamlining of the registration process we provide today, lead us to conclude that such exchange offers should not count towards the $1 billion threshold.

OEA analyzed statistics on issuers that did not meet the $700 million public equity threshold. OEA found that very few issuers that had public common equity but did not meet the $700 million public float threshold would meet the $1 billion non-convertible securities threshold. However, OEA also found that a number of issuers without any public common equity would meet the $1 billion threshold. Based on OEA's analysis, from 1997 to 2004 the issuers of fixed Start Printed Page 44729income securities that did not have outstanding public common equity but met the $1 billion threshold accounted for 16.7% of all of the issuers without public common equity that issued public debt, but accounted for 65% of total debt and preferred stock issued by all of such issuers. None of the debt offerings of issuers meeting the threshold was rated below investment grade, and 86% of their debt offerings were rated A or higher by a nationally recognized security rating organization (an “NRSRO”). This group of issuers also on average had 19 basis points lower yield spread for their issues relative to issuers without public common equity that had issued less than $1 billion of fixed income securities in the past three years. We believe that this lower yield spread reflects lower default risk (higher ratings) and higher liquidity and transparency of the issuers.[59]

2. Timing of Determination of Well-Known Seasoned Issuer Status

Whether an issuer satisfies the eligibility requirements for being a well-known seasoned issuer generally will be determined on an approximately annual basis. We revised the timing of determination of status as a well-known seasoned issuer in response to comments.[60] As adopted, the definition uses the 60-day window period used in Form S-3 and Form F-3 and provides that the eligibility determination will be made as of the later of the time of filing of the issuer's most recent shelf registration statement or the time of its most recent amendment (by post-effective amendment, incorporated Exchange Act report, or form of prospectus) to a shelf registration statement for purposes of complying with Securities Act Section 10(a)(3).[61] In the event that the issuer has not filed a shelf registration statement or amended a shelf registration statement for purposes of complying with Securities Act Section 10(a)(3) for sixteen months, the determination date will be the time of filing of the issuer's most recent annual report on Form 10-K or Form 20-F. If the issuer does not accomplish its Section 10(a)(3) update or file its annual report when due, the due date will become the date of determination and, because the issuer will be neither timely nor current in its reporting obligations under the Exchange Act at that time, it will cease to be a well-known seasoned issuer. It can of course become a well-known seasoned issuer again in the future if and when it meets applicable requirements.

A well-known seasoned issuer may not be an ineligible issuer on the date of determination of well-known seasoned issuer status. The date of determination of whether an issuer is an ineligible issuer for these purposes is the same date as that used for other purposes in determining the issuer's status as a well-known seasoned issuer.

3. Well-Known Seasoned Issuers' Securities Offerings

An issuer that meets the definition of well-known seasoned issuer based on the $700 million public float threshold can use an automatic shelf registration statement, as discussed below, to register any offering of securities, other than those for business combination transactions.[62] An issuer that meets the definition of well-known seasoned issuer based on the amount of registered non-convertible security issuances in the prior three years also may register any such offering for cash using automatic shelf registration if it is eligible to register a primary offering of its securities on Form S-3 or Form F-3 pursuant to General Instruction I.B.1. of such forms.[63] An issuer that meets the definition of well-known seasoned issuer based on the amount of registered non-convertible security issuances in the prior three years but is not eligible to register a primary offering of securities on Form S-3 or Form F-3 pursuant to General Instruction I.B.1 of such forms may use automatic shelf registration to register only offerings for cash of non-convertible securities, other than common equity, whether or not investment grade.

4. Comments Regarding the Definition of Well-Known Seasoned Issuer

Commenters generally supported the addition of a class of well-known seasoned issuers who will benefit the most from the new rules.[64] Most of the comments related to the threshold for eligibility based on public equity float, the definition of “debt security” for purposes of the debt threshold calculation, the inclusion of securities issued in exchange offers, the frequency of eligibility determinations, and the inclusion or exclusion of Schedule B issuers, voluntary issuers, and asset-backed issuers.[65] A number of commenters also suggested that the timing of the eligibility determination for well-known seasoned issuers be revised.[66]

Some commenters expressed the view that the $700 million threshold was too high, while others thought additional eligibility conditions should be included.[67] None of the commenters provided any empirical data supporting their views to modify the thresholds. Other commenters suggested alternative ways to measure whether an issuer should be considered a well-known seasoned issuer, including average daily trading volume or institutional ownership measures.[68] Many commenters requested that we clarify that the public float used in the calculation be the company's worldwide public float.[69] A number of commenters on the definition requested that we direct the staff to reconsider the bases for the thresholds in two to three years.[70]

Commenters on the debt threshold were most concerned about the types of Start Printed Page 44730securities included in the calculation and whether it was appropriate to include only debt issued in registered offerings.[71] Some commenters requested that the debt calculation be based on a broader category of fixed income securities including debt securities and non-convertible preferred securities.[72] Commenters suggested that non-investment grade debt be included in the calculation.[73] These commenters also suggested that securities issued in exchange offers, such as “Exxon Capital” exchange offers, be included in the debt calculation. Some commenters suggested that the debt calculation be based on all debt and non-convertible preferred stock sold, whether or not in registered offerings.[74] Finally, some commenters requested that issuers meeting the well-known seasoned issuer definition based on their debt offerings be allowed to use the automatic shelf registration procedure for registering offerings of equity securities as well as debt securities.[75]

We have retained the $700 million public float threshold and the $1 billion debt threshold. As the discussion above reflects, in reaching our determination to use the $700 million public float amount, we considered trading volume, institutional ownership, and market capitalization.

In response to comments, we have clarified that the basis for determining the public float calculation is worldwide public float of voting and non-voting common equity. In response to comments,[76] we also are providing an interpretation, as set forth above, regarding the inclusion in the calculation of certain participating preferred stock of non-U.S. issuers that is substantially economically equivalent to common equity.

While we are not revising the dollar amount of the thresholds for public equity float or for issued debt, the definition as adopted addresses a number of the other issues that commenters raised. For example, we have expanded the $1 billion debt threshold to include any non-convertible security, other than common equity, that has been issued in a registered offering for cash during the prior three years.[77] Further, the offering of the security included in the calculation could have been registered on any form (other than Form S-4 or Form F-4) and the security need not be investment grade. In addition, a parent issuer may count the aggregate amount of its registered full and unconditional guarantees of non-convertible securities, other than common equity, of its majority-owned subsidiaries issued for cash during the three-year period.

While we have not changed the dollar amounts of the thresholds, we do agree with commenters that it would be appropriate to revisit the thresholds in a few years. We, therefore, are directing the staff of the Division of Corporation Finance and OEA to undertake a study in three years after full implementation of the rules to evaluate the operation of the definition we adopt today and any material changes in the data upon which the thresholds are based and report back to us and recommend any potential changes to the thresholds based on such new data.

Although some commenters had suggested expanding the categories of eligible issuers beyond those contained in the proposed definition,[78] and others suggested narrowing the categories of eligible issuers or otherwise imposing more stringent eligibility conditions,[79] we have adopted the definition as proposed in that regard. As a result, well-known seasoned issuer status is not available to voluntary filers, asset-backed issuers, or Schedule B issuers.[80] Voluntary filers are not required to file reports under the Exchange Act, and we believe that such issuers should be required to register under the Exchange Act, and thus become subject to all of the results of registration for all purposes, if they wish to avail themselves of the benefits of reporting issuer, seasoned issuer, or well-known seasoned issuer status.[81] For Schedule B issuers, we expect that the staff will continue to consider disclosure and other shelf issues affecting Schedule B issuers in the same manner that they do today. Finally, we have recently adopted rules and regulations covering the offering of and reporting by asset-backed issuers.[82] This new regulatory structure is not yet fully operational. The advantages of a reporting history under the Exchange Act that influenced our decision to create the well-known seasoned issuer category are essentially absent for asset-backed issuers.

Commenters wanted market participants to have greater certainty that issuers were eligible as well-known seasoned issuers.[83] We have modified the timing for determination of well-known seasoned issuer status to provide more certainty. We have provided generally for an approximately annual determination of well-known seasoned issuer status. We also are adopting a change to Form 10-K and Form 20-F that will modify the cover page of those forms to include a check box for issuers to indicate if they are considered well-known seasoned issuers at the time of the filing of the Form 10-K or Form 20-F.

B. Other Categories of Issuers

We also are using existing categories of issuers, including seasoned issuers, unseasoned Exchange Act reporting issuers, and non-reporting issuers, in the new rules regarding communications and the registration process. A seasoned issuer is an issuer that is eligible to use Form S-3 or Form F-3 to register primary offerings of securities pursuant to General Instruction I.B.1 of such Forms or is registering securities in reliance on General Instruction I.B.2, I.B.5, or I.C. of Form S-3 or General Instruction I.A.5 or I.B.2 of Form F-3.[84] Majority-owned subsidiaries registering offerings of their securities on Form S-3 or Form F-3 pursuant to General Instruction I.C. of Form S-3 or I.A.5. of Form F-3 also are considered seasoned issuers.[85] As commenters requested, we are clarifying that issuers of asset-backed securities Start Printed Page 44731eligible for registration on Form S-3 also are considered seasoned issuers.[86]

An unseasoned issuer is an issuer that is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities. A non-reporting issuer is an issuer that is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, regardless of whether it is filing such reports voluntarily.

A number of commenters suggested that the rules treat voluntary filers as seasoned issuers even though they are not required to file reports pursuant to Exchange Act Section 13 or Section 15(d).[87] As we note above with respect to eligibility for well-known seasoned issuer status, voluntary filers are not required to file reports under the Exchange Act, and we believe that such issuers should be required to register under the Exchange Act if they wish to avail themselves of the benefits accorded seasoned issuers under the rules we are adopting today.

III. Communications Rules

A. Communications Requirements Prior to Today's Rules and Amendments

The Securities Act restricts the types of offering communications that issuers or other parties subject to the Act's provisions (such as underwriters) may use during a registered public offering. The nature of the restrictions depends on the period during which the communications are to occur. The restrictions do not depend on the accuracy of the information contained in the communication. Before the registration statement is filed, all offers, in whatever form, are prohibited.[88] Between the filing of the registration statement and its effectiveness, offers made in writing (including by e-mail or Internet), by radio, or by television are limited to a “statutory prospectus” that conforms to the information requirements of Securities Act Section 10.[89] As a result, the only written material that is permitted in connection with the offering of the securities during the period between filing and effectiveness of a registration statement is a preliminary prospectus meeting the requirements of Section 10, which must be filed with us. Even after the registration statement is declared effective, offering participants still may make written offers only through a statutory prospectus, except that they may use additional written offering materials if a final prospectus that meets the requirements of Securities Act Section 10(a) is sent or given prior to or with those materials.[90] Violations of these restrictions generally are referred to as “gun jumping,” and we use the term “gun-jumping provisions” in this release to describe the statutory provisions of the Securities Act that set forth these restrictions.

B. Need for Modernization of Communications Requirements

1. General

As we noted in the Proposing Release, the gun-jumping provisions of the Securities Act were enacted at a time when the means of communications were limited and restricting communications (without regard to accuracy) to the statutory prospectus appropriately balanced available communications and investor protection. The gun-jumping provisions were designed to make the statutorily mandated prospectus the primary means for investors to obtain information regarding a registered securities offering.

The capital markets, in the United States and around the world, have changed very significantly since those limitations were enacted. Today, issuers engage in all types of communications on an ongoing basis, including, importantly, communications mandated or encouraged by our rules under the Exchange Act, rules or listing standards of national securities exchanges, and comparable requirements in foreign jurisdictions. Modern communications technology, including the Internet, provides a powerful, versatile, and cost-effective medium to communicate quickly and broadly.[91] The changes in the Exchange Act disclosure regime and the tremendous growth in communications technology are resulting in more information being provided to the market on a more non-discriminatory, current, and ongoing basis. Thus, while investor protection remains a paramount interest, the gun-jumping provisions of the Securities Act impose substantial and increasingly unworkable restrictions on many communications that would be beneficial to investors and markets and would be consistent with investor protection.

The following factors, combined with the advances in technology described above, lead us to believe that investors and the market will benefit from access to greater permissible communications where protection for investors is maintained through the appropriate Securities Act liability standards for materially deficient disclosures in prospectuses and oral communications:

  • Much of our recent rulemaking is intended to encourage reporting issuers to provide additional materially accurate and complete information to the market on a more current basis.[92] The Securities Act's constraints on communications during an offering, however, have caused issuers to be concerned about the treatment of their ongoing communications and whether, if they are engaged or will soon be engaged in capital raising, their customary disclosures will be considered an impermissible offer of securities; [93]
Start Printed Page 44732
  • The multiplicity of means of communication has led us to recognize that restricting written offers to a statutory prospectus inhibits desirable methods of timely communication of information;
  • There are many more offerings of increasingly complex securities where written communications, such as detailed descriptions of securities and offerings, would enhance significantly the offering process for the benefit of investors; [94] and
  • The continuing trends towards globalization of securities markets and multinationalization of issuers and offerings and corresponding increase in information and information requirements increase the need for a regulatory framework that accommodates more flexible communications.

As we discussed in the Proposing Release, in view of the many recent changes to the Exchange Act reporting system that are designed to produce more timely and extensive disclosures and greater scrutiny of, and confidence in, those reports, it is appropriate at this time to adopt communications and offering reforms.[95]

2. Definition of Written Communication

a. “Written Communication” and “Graphic Communication”

As a starting point for reform, we are defining all methods of communication, other than oral communications, as written communications for purposes of the Securities Act. While we have addressed the issue of electronic communications in a number of different contexts, at this time we are adopting rules making it clear that all electronic communications (other than telephone and other live, in real-time communications to a live audience, as discussed below) are graphic and, therefore, written communications for purposes of the Securities Act. In this manner, we intend to encompass new technologies. Accordingly, we are adopting new definitions of “graphic communication” and “written communication” to promote consistent understanding of what constitutes such a communication in view of the technological developments since the enactment of the Securities Act and to significantly reduce remaining uncertainty regarding the permitted means for delivery of information under the Securities Act.

We are adopting the proposed revisions to the definition of “graphic communication” with some modifications. As adopted, the definition of “graphic communication” includes any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet web sites, and computers, computer networks, and other forms of computer data compilation.[96]

The definition of graphic communication does not include a communication that, at the time of the communication, originates live, in real-time, to a live audience and does not originate in recorded form or otherwise as a graphic communication.[97] Any such communication is not a graphic communication even if it is transmitted through a means of graphic communication. A basic concept of the definition we adopt today is that communications that are graphic communications when they are transmitted are treated as graphic communications under the definition and communications that are live, in real-time communications to a live audience when they are transmitted are not treated as graphic communications. We believe that live, in real-time communications to a live audience, including those transmitted by graphic means, have less of the permanence of communications that originate in graphic form or that appear on the printed page. Accordingly, we believe that the distinctions in the definitions we are adopting today are appropriate updatings of the Securities Act's distinctions between oral and written communications.

As adopted, “written communication” means any communication that is written, printed, or television or radio broadcast (regardless of the transmission means), or a graphic communication. All communications that fall outside the definition are oral communications, including for purposes of Securities Act Section 12(a)(2). It also excludes live telephone calls (through whatever means by which they are transmitted, including the Internet) and, as discussed above, other live, in real-time communications to a live audience transmitted by graphic means. The definition as adopted clarifies that television or radio broadcasts will be covered regardless of the transmission means.

We thus make a clearer distinction between communications that are broadcast and those that are graphic communications. We have clarified that a television or radio broadcast in Securities Act Section 2(a)(10) and in our definition of written communication encompasses all radio or television broadcasts, regardless of the means of transmission of the signals. For example, a cable television show will be considered a television broadcast that is a written communication, and a television show or radio program that may be seen or heard through the Internet on a computer will also be considered a television or radio broadcast that is a written communication. A communication may fall outside the definition of graphic communication because it originates live, in real-time to a live audience but such communication (for example, a live business news program broadcast by traditional means or on cable) may be a television or radio broadcast. On the other hand, a live, in real-time communication that is transmitted by graphic means to a live audience would be an oral communication. Given the potentially unlimited and uncontrolled nature of dissemination of broadcast communications and the language of the Securities Act, we believe that this is an appropriate distinction.

The following are examples of the application of these definitions:

  • A live telephone call is not a written communication;
  • A live telephone call that is recorded by the recipient is not a written communication;
  • E-mails, facsimiles, and electronic postings on web sites, by their nature, Start Printed Page 44733originate in graphic form and, therefore, are graphic communications;
  • A live, in-person road show to a live audience is not a written communication;
  • A live, in real-time road show to a live audience that is transmitted graphically is not a graphic communication;
  • A live, in real-time road show to a live audience that is transmitted to an “overflow room” is not a graphic communication;
  • A webcast or video conference that originates live and in real-time at the time of transmission and is transmitted through video conferencing facilities or is webcast in real-time to a live audience is not a graphic communication;
  • The ability of a member of the audience to record a webcast or video conference that is presented live and in real-time to a live audience would not affect the status of that webcast or video conference;
  • A live telephone call or video or webcast conference that is recorded by or on behalf of the originating party or parties and then transmitted, or is otherwise transmitted other than live and in real-time, will be a graphic communication and therefore a written communication;
  • A live telephone call or video or webcast conference that is recorded by the recipient and then re-transmitted by the recipient is a graphic communication by the recipient when it is re-transmitted; and
  • An interview with an issuer's chief executive officer conducted live as part of a television program is a written communication regardless of how the television signal is transmitted (whether over the airwaves, or through cable, satellite, or Internet) and regardless of how it is received by the recipient (whether a television set or a computer).

With respect to road shows, as explained below, we also have added a Note to Rule 433 that states that a communication that is provided or transmitted simultaneously with a road show and is provided or transmitted in a manner designed to make the communication available only as part of the road show and not subsequently is deemed to be part of the road show.

b. Comments Regarding Proposals

Commenters raised several questions about the proposed definitions, particularly as the definitions affected live audio transmissions, live telephone calls, and live road shows transmitted over the Internet.[98] Commenters were concerned that the definitions of written communication and graphic communication did not explicitly address the treatment of live telephone calls, regardless of the medium of transmission, although the Proposing Release provided that live telephone calls (other than blast voice mails) would not be considered written communications.[99]

We believe that the modifications that we made to the definitions of graphic communication and written communication will address commenters' issues regarding live, in real-time communications, including telephone calls, conference calls, videocasts, and live webcasts.

C. Overview of Communications Rules

Today, we are adopting rules that relate to the following:

  • Regularly released factual business information;
  • Regularly released forward-looking information;
  • Communications made more than 30 days before filing a registration statement;
  • Communications by well-known seasoned issuers during the 30 days before filing a registration statement;
  • Written communications made in accordance with the safe harbor in Securities Act Rule 134; and
  • Written communications (other than a statutory prospectus) by any eligible issuer after filing a registration statement.

The following table provides a brief overview of the operation of the new and amended rules. While the table clearly does not include the level of detail necessary to explain the rules, we have included it to help readers in understanding the basic scope of the new communications scheme.

Could it be an “offer” as defined in Section 2(a)(3)?Is it a “prospectus” as defined in Section 2(a)(10)?Is it a prohibited pre-filing offer for purposes of Section 5(c)?Is it a prohibited prospectus for purposes of Section 5(b)(1)?
Regularly Released Factual Business InformationYesNoRule defines it as not an offer for Section 5(c) purposesSection 5(b)(1) relates only to “prospectuses”—it is not applicable.
Regularly Released Forward-Looking InformationYesNoRule defines it as not an offer for Section 5(c) purposesSection 5(b)(1) relates only to “prospectuses”—it is not applicable.
Communications Made More than 30 Days Before Filing of Registration StatementYesPossibly, based on facts and circumstancesRule defines it as not an offer for Section 5(c) purposesSection 5(b)(1) does not apply in the pre-filing period—it is not applicable.
Well-Known Seasoned Issuers—Oral Offers Made Within 30 Days of Filing of Registration StatementYesNoIs exempted from prohibition of Section 5(c)Section 5(b)(1) does not apply in the pre-filing period—it is not applicable.
Well-Known Seasoned Issuers—Written Offers Made Within 30 Days of Filing of Registration StatementYesYes. It also is a free-writing prospectusIs exempted from prohibition of Section 5(c)Section 5(b)(1) does not apply in the pre-filing period—it is not applicable.
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Well-Known Seasoned Issuers—Free Writing Prospectuses Used Before Filing of Registration StatementYesYesIs exempted from prohibition of Section 5(c)Section 5(b)(1) does not apply in the pre-filing period—it is not applicable.
Identifying Statements in Accordance with Rule 134YesNoSection 5(c) is not applicable, as Rule 134 relates only to the period after the filing of a registration statementSection 5(b)(1) relates only to “prospectuses”—it is not applicable.
All Eligible Issuers—Free Writing Prospectuses Used After Filing of Registration StatementYesYesSection 5(c) is not applicable, as it does not apply in the post-filing periodSection 5(b)(1) will be satisfied, as the free writing prospectus will be a permitted Section 10(b) prospectus.

The communications rules we are adopting recognize the value of ongoing communications as well as the importance of avoiding unnecessary restrictions on offers during a registered offering. In particular, the new and revised rules will eliminate requirements that can interrupt unnecessarily an issuer's normal and routine communications into the market while an issuer is engaging in a securities offering, and will enhance the ability of issuers and other offering participants to make written offers outside the statutory prospectus.

The new and revised rules we are adopting establish a communications framework that, in some cases, will operate along a spectrum based on the type of issuer, its reporting history, and its equity market capitalization or recent issuances of fixed income securities. Thus, under the rules we are adopting, eligible well-known seasoned issuers will have freedom generally from the gun-jumping provisions to communicate at any time, including by means of a written offer other than a statutory prospectus. Varying levels of restrictions will apply to other categories of issuers. We believe these distinctions are appropriate because the market has more familiarity with large, more seasoned issuers and, as a result of the ongoing market following of their activities, including the role of market participants and the media, these issuers' communications have less potential for conditioning the market for the issuers' securities to be sold in a registered offering. Disclosure obligations and practices outside the offering process, including under the Exchange Act, also determine the scope of communications flexibility the rules give to issuers and other offering participants.[100]

The cumulative effect of the rules under the gun-jumping provisions is the following:

  • Well-known seasoned issuers are permitted to engage at any time in oral and written communications, including use at any time of a free writing prospectus,[101] subject to enumerated conditions (including, in specified cases, filing with us).[102]
  • All reporting issuers are permitted, at any time, to continue to publish regularly released factual business information and forward-looking information.[103]
  • Non-reporting issuers are permitted, at any time, to continue to publish regularly released factual business information that is intended for use by persons other than in their capacity as investors or potential investors.[104]
  • Communications by issuers more than 30 days before filing a registration statement are not prohibited offers so long as they do not reference a securities offering that is or will be the subject of a registration statement.[105]
  • All issuers and offering participants are permitted to use free writing prospectuses after the filing of the registration statement, subject to enumerated conditions (including, in specified cases, filing with us).[106]
  • A broader category of routine communications regarding issuers, offerings, and procedural matters, such as communications about the schedule for an offering or about account-opening procedures, are excluded from the definition of “prospectus.” [107]
  • The exemptions for research reports are expanded.[108]

As discussed below, a number of these rules include conditions of eligibility. Most of the new and amended rules, for example, are not available to blank check companies, penny stock issuers, or shell companies.[109]

The rules we are adopting today ensure that appropriate liability standards are maintained. For example, all free writing prospectuses have liability under the same provisions as apply today to oral offers and statutory prospectuses.[110] Written communications not constituting prospectuses will not be subject to disclosure liability applicable to prospectuses [111] under Securities Act Section 12(a)(2). This result will not affect their status for liability purposes under other provisions of the federal Start Printed Page 44735securities laws, including the anti-fraud provisions.[112]

D. Communications Rules

1. Permitted Continuation of Ongoing Communications During an Offering

a. Overview

We are adopting substantially as proposed two separate, non-exclusive safe harbors from the gun-jumping provisions for continuing ongoing business communications. The first safe harbor permits a reporting issuer's continued publication or dissemination of regularly released factual business and forward-looking information at any time, including around the time of a registered offering.[113] The second safe harbor permits a non-reporting issuer's continued publication or dissemination of regularly released factual business information that is intended for use by persons other than in their capacity as investors or potential investors.[114] The safe harbors are not exclusive and do not create a presumption that any communication that falls outside the safe harbor is an offer. Accordingly, reliance on one of the safe harbors does not affect the availability of any other exemption or exclusion under the Securities Act. Further, attempted compliance with one of the safe harbors does not act as an exclusive election. For example, attempted reliance on one of the exemptive rules or exclusions we adopt today will not preclude reliance on another available exemption or exclusion. In particular, it will not preclude reliance on the argument that under general securities law principles and our earlier interpretive guidance the communication in question is not an offer under Securities Act Section 2(a)(3).

Investment companies registered under the Investment Company Act of 1940 and business development companies are ineligible to use the safe harbors for factual business information and forward-looking information. These issuers are subject to a separate framework governing communications with investors.[115]

b. Exception for Regularly Released Factual Business and Forward-Looking Information—Available to Reporting Issuers

We are adopting substantially as proposed the safe harbor for reporting issuers, as well as asset-backed issuers and certain non-reporting foreign private issuers, from the gun-jumping provisions for continued publication or dissemination of communications of regularly released factual business and forward-looking information.[116] This safe harbor is a “use” safe harbor in that it applies to communications of factual business and forward-looking information that have been regularly released in the ordinary course by or on behalf of a reporting issuer.[117]

Commenters supported the proposed safe harbor with certain suggested changes to its scope.[118] Commenters suggested that the safe harbor should be available to voluntary filers, non-reporting foreign private issuers, asset-backed issuers, registered investment companies, and business development companies.[119] As adopted, the rule is available to non-reporting foreign private issuers meeting certain conditions and to asset-backed issuers (and to a depositor, sponsor, servicer, or affiliated depositor, whether or not the issuer) with regard to registered offerings of asset-backed securities.[120] We believe that non-reporting foreign private issuers qualifying under the safe harbors, like reporting issuers in the United States, are providing information to the markets even though they are not reporting companies in the United States. Similarly, asset-backed issuers and issuers that are affiliated depositors provide and are encouraged to provide information on an ongoing basis in a manner consistent with that covered by Rule 168. The reference to depositors, sponsors, servicers, and affiliated depositors, whether or not the issuer, is intended to permit communication of information regarding pre-existing transactions or asset pools within the safe harbor where its conditions are satisfied.

As we note above, voluntary filers are not required to report under the Exchange Act and therefore do not fall within Rule 168. Voluntary filers will have available to them the safe harbor for non-reporting issuers in new Rule 169.[121] We also note above that registered investment companies and business development companies are subject to a separate framework governing communications with investors, and we believe that it would be more appropriate to consider investment company issues in the context of a broader reconsideration of this separate framework.

i. Factual Business Information

(A) Scope of the Safe Harbor

We believe it is important to provide increased certainty regarding when the gun-jumping provisions will be inapplicable to the continuing ongoing communication of specified factual business information. We are adopting Securities Act Rule 168, which provides a non-exclusive safe harbor that such a communication is not an impermissible prospectus and does not violate the prohibition on pre-filing offers.[122] We want to encourage reporting issuers and other issuers eligible to rely on the safe harbor to continue to provide this information. For purposes of Rule 168, Start Printed Page 44736factual business information is defined as: [123]

  • Factual information about the issuer, its business or financial developments, or other aspects of its business;
  • Advertisements of, or other information about, the issuer's products or services; and
  • Dividend notices.

This information includes without limitation in each case such factual business information contained in reports or materials filed with, furnished to, or submitted to us pursuant to the Exchange Act.[124]

(B) Comments on the Scope of the Safe Harbor

Some commenters suggested broadening the categories of factual business information,[125] including the suggestion that only offering-related information be excluded from the definition of factual business information.[126] We are adopting the definition of factual business information that in substantive respects is substantially as proposed. The simplification of the definition in the Rule as adopted does not narrow the information included in the definition. We believe that the purpose of the safe harbor is to permit reporting issuers to continue their ordinary course factual business communications, not to define when an offer is considered to occur in all cases. As we have noted, whether or not a communication that is outside the safe harbor would be an offer is a facts and circumstances determination.

We have modified the definition from the proposal to make clear that factual business information may be communicated within the safe harbor by including it in any report or material filed with, furnished to, or submitted to us. The other conditions of the safe harbor, for example, the “regularly released,” condition of course also must be satisfied. In addition, in response to commenters' concerns, we have made clear in a preliminary note that the safe harbor addresses use and relates to a communication, and, therefore, that another communication of the information in an offering-related manner will not affect the ability to rely on the safe harbor for the protected communication.

ii. Forward-Looking Information

(A) Scope of the Safe Harbor

As we stated in the Proposing Release, our view of the value of forward-looking information in the market has evolved through the years. Through the 1970's we were most concerned with the potentially misleading effect that forward-looking information could have on investors.[127] Since the 1980's, we have encouraged issuers to disclose forward-looking information and, in some situations (such as the disclosures in MD&A), required them to do so.[128] The existing safe harbors for the content of forward-looking statements are designed to encourage the provision of forward-looking information.[129]

Where an issuer regularly releases forward-looking information in the ordinary course, we indicated in the Proposing Release that we believe that the purpose of such communication is to keep the market informed about the issuer and its future prospects and, thus, the continued release or dissemination of this information in the ordinary course is not for the purpose of offering securities or conditioning the market for new issuances of the issuer's securities. Many issuers disclose earnings forecasts and other forward-looking information publicly to provide more information to the markets and to enable them to continue to have discussions to which Regulation FD applies. We do not believe that it is beneficial to investors or the markets to force reporting issuers to suspend their ordinary course communications of regularly released information that they would otherwise choose to make because they are raising capital in a registered offering.

We are adopting the definition substantially as proposed to provide for the use of such a communication a safe harbor from being an impermissible prospectus and from violating the prohibitions on pre-filing offers. As adopted, the safe harbor in Rule 168 will apply to the release or dissemination of communications containing some or all of the following forward-looking information if the release or dissemination satisfies the other conditions of the Rule: [130]

  • Projections of the issuer's revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items;
  • Statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer; Start Printed Page 44737
  • Statements about the issuer's future economic performance, including statements of the type contemplated by MD&A described in Item 303 of Regulation S-K and Regulation S-B, or Item 5 of Form 20-F; and
  • Assumptions underlying or relating to any of the foregoing information.

As with factual business information, we have clarified that any such information may be communicated by including it in a report filed with, or furnished to, or submitted to us. The safe harbor for forward-looking information also addresses “use,” and the preliminary note discussed above applies.

iii. Conditions of Safe Harbor in Rule 168

(A) “By or on Behalf of” the Issuer

(1) Definition

Under the Rule as adopted, factual business and forward-looking information will be considered released or disseminated by or on behalf of an issuer if the issuer or an agent or a representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the release or dissemination of the communication before it is made.[131] Satisfaction of this condition is separate from the “regularly released” condition. The safe harbor is not available for information released in a manner intended to circumvent either the conditions to use or the permitted manner of use of the information.

(2) Comments on Definition

Commenters supported the concept of “by or on behalf of” the issuer.[132] Commenters also supported placing the definition of the term in a single rule, rather than a separate definition in each safe harbor.[133] Some commenters suggested further clarifications of the definition, such as identifying the persons authorized or approved to speak on behalf of the issuer, eliminating any issuer responsibility for communications by unauthorized persons, and providing that the communication either be authorized or approved but not both.[134]

We have considered these suggestions carefully and have made some revisions to the definition of “by or on behalf of” the issuer. We have determined not to provide a single definition, instead including an appropriate definition in each relevant rule. We also have not taken the suggestions that the Rule provide that issuers are responsible only for communications made by authorized or approved speakers. The circumstances under which issuers are responsible for the acts of individuals may be determined in accordance with principles not addressed in today's rules. In addition, we have not defined further who may be considered an agent or representative of the issuer, other than to specifically exclude offering participants who are underwriters and dealers. The definition could cover legitimate representatives or agents of the issuer such as, for example, advertising agencies and public relations companies who normally release or disseminate product advertising or promotional communications containing such information on behalf of an issuer. We also have modified the definition to provide that the communication does not have to be both approved and authorized for it to be considered to be made by or on behalf of the issuer.

A few commenters suggested that the Rule not include the preliminary note that contains the “scheme to evade” language because they believed it would cause uncertainty about the ability to rely on the safe harbors.[135] The preliminary note to the Rule is substantially the same preliminary note contained in a significant number of exemptions under the Securities Act upon which market participants have relied and we are adopting the Rule with the preliminary note regarding the “scheme to evade” language as proposed.[136]

(B) Regularly Released Information

(1) Regularly Released Condition

As we discussed in the Proposing Release, the purpose of the safe harbor is to enable a reporting issuer to continue its past ordinary course practice of releasing or disseminating publicly factual business and forward-looking information. Communications of both factual business information and forward-looking information must satisfy the same conditions regarding regular release.

We are adopting the regularly released condition substantially as proposed. Under Rule 168, information will be considered regularly released or disseminated if the issuer has previously released or disseminated the same type of information in the ordinary course of its business, and the release or dissemination is consistent in material respects in timing, manner, and form with the issuer's similar past release or dissemination of such information.[137] The method of releasing or disseminating the information, thus, also must be consistent in material respects with prior practice. These conditions seek to ensure that the information is not being released to condition the market for the registered offering of the issuer's securities.

While the Rule does not establish or require any minimum time period to satisfy the regularly released element, the safe harbor requires the issuer to have some track record of releasing the particular type of information. One prior release or dissemination could establish this track record. Issuers should consider the frequency and regularity with which they have released the same type of information. For example, an issuer's release of new types of financial information or projections just before or during a registered offering will likely prevent a conclusion that the issuer regularly released that type of forward-looking or financial information in the ordinary course of its business.

(2) Comments on Regularly Released Condition

Commenters on the regularly released condition suggested that we further clarify the concept of regularly released information by elaborating on the meaning of timing, manner, and form.[138] Some of these commenters were concerned about the availability of the safe harbor for non-scheduled releases of information and information distributed using new or different technologies.[139] Other commenters on this point, however, desired greater flexibility with no definition of “ordinary course.” [140]

Start Printed Page 44738

We have not changed the “regularly released” language from the proposal because we do not believe that a bright-line test of “regularly released” is appropriate. We believe that it is more appropriate to provide issuers the flexibility to use the means and timing they believe is appropriate for their ongoing business communications. We would note, however, that there are circumstances in which communications made outside a predetermined schedule or not at regular intervals would be covered by the safe harbor. The Rule is not intended to cover only scheduled releases of information but also could cover communications, such as product advertising and product release information or earnings guidance changes, that are made on an unscheduled or episodic basis, provided that the issuer has previously provided such communications containing factual business and forward-looking information in that manner. Thus, for unscheduled or episodic releases, the nature of the event triggering the communication would be taken into account in determining whether the regularly released condition is satisfied. For example, if an issuer only gives guidance upon the occurrence of certain types of developments, a release of guidance when a materially similar event occurs could be materially consistent, even if not done at regular intervals. As another example, if an issuer launches a product only episodically, disclosure or advertising of a product launch still could be materially consistent.

Merely using new or different technologies will not be necessarily inconsistent in material respects under the conditions of the Rule. An issuer will have to determine whether its use of new or different technologies to release information falls within the safe harbor, including whether the release or dissemination is consistent in material respects with how the issuer is already releasing or disseminating its communications containing factual business or forward-looking information using analogous methods. For example, whether the new or different technology makes a material difference in terms of the breadth of dissemination to investors or other reach of the communication to investors is relevant in determining whether the manner or form is consistent in material respects.

(C) Exclusion for Offering-Related Information

(1) Scope of Exclusion

We are adopting as proposed the exclusion from the safe harbor of any information about the registered offering itself. Publication of information about a registered offering outside the registration statement or a prospectus is limited to statements allowed under other exemptions or exclusions, including Rule 134 and Rule 135.[141]

As we discussed in the Proposing Release, because the safe harbor is a “use” exemption intended to facilitate continued release or dissemination of regularly released ordinary course factual business and forward-looking communications, it also excludes the release of that information as part of the offering activities in the registered offering. For example, while the safe harbor could be available for factual business information contained in an Exchange Act report at the time it is initially filed, the safe harbor will not be available for the distribution of that information to investors or potential investors as part of offering activities, such as incorporation by reference into a prospectus that is part of a registration statement, disclosure at a road show, or disclosure in a free writing prospectus. As another example, as permitted by the “regularly released” condition, an issuer could rely on the safe harbor for the publication of an earnings release consistent with past practice, including the posting of and maintaining the release on an issuer's web site, whether or not located in a separate section of the web site for historical information. The distribution of that earnings release, however, as part of the marketing activities to potential investors will be outside the scope of the safe harbor.

(2) Comments on Exclusion

Commenters requested further clarification that release of a communication containing information in reliance on the safe harbor will not be affected by release of the same information in offering-related communications.[142] We have made clear in a preliminary note in the adopted Rule that the release of communications containing information outside the safe harbor will not affect the availability of the safe harbor for any other release or dissemination of a communication containing the same information that is (or was) within the scope of the safe harbor.

Some commenters requested that we define “offering-related” or “part of the offering activities.” [143] We decline to do so. An issuer must determine, based upon the particular facts and circumstances, whether or not a communication contains information about the registered offering or is being used as part of the offering activities.

Certain commenters requested that we clarify the impact Rule 168 and Rule 169 (as discussed below) would have on our guidance regarding the filing requirement for ordinary or routine business communications that refer to a business combination transaction in a non-substantive way.[144] We believe that guidance is unaffected by the adoption of the safe harbors of Rule 168 and Rule 169, regardless of whether the communication falls within the scope of such safe harbors or our other interpretive guidance regarding ongoing factual and business communications.[145]

c. Exception for Regularly Released Factual Business Information—Available to Non-Reporting Issuers

i. Scope of the Safe Harbor

We are adopting substantially as proposed a non-exclusive safe harbor from the gun-jumping provisions for regularly released factual business information that, unlike Rule 168, is available to all eligible issuers, including non-reporting issuers.[146] The Rule provides a non-exclusive safe harbor for the issuer's release or dissemination of regularly released ordinary course factual business information intended for use by persons other than in their capacity as investors or potential investors, such as customers and suppliers.[147] Under the safe harbor, a non-reporting issuer's release or dissemination of factual business Start Printed Page 44739information that satisfies the conditions of the Rule would not be an impermissible prospectus and would not violate the prohibition on pre-filing offers.[148] As we noted in the Proposing Release, because a condition of the safe harbor involves the manner and timing of the communication, the same issuer employees or agents who historically have been responsible for providing the information for intended use by customers and suppliers must communicate the information provided in reliance on this safe harbor.

Under the safe harbor, factual business information is defined as:

  • Factual information about the issuer, its business or financial developments, or other aspects of its business; and
  • Advertisements of, or other information about, the issuer's products or services.[149]

As with the safe harbor for reporting issuers, the safe harbor requires that the information be regularly released in the ordinary course of business, released or disseminated by or on behalf of the issuer, and not include information about the registered offering or information released or disseminated as part of the offering activities in the registered offering. We have made the same modifications to these conditions and to the preliminary note to Rule 169 as in new Rule 168 for reporting issuers.

As we discussed in the Proposing Release, because non-reporting issuers generally are not releasing information in connection with securities market activities, we believe it is appropriate to limit the scope of the safe harbor to the specified regularly released ordinary course factual business information.[150] Further, we are not adopting a safe harbor for forward-looking information for non-reporting issuers because of the lack of such information or history for these issuers in the marketplace. In those circumstances, we believe that the potential for abuse in permitting a safe harbor for the continued release of forward-looking information as a way to condition the market for the issuer's securities outweighs the legitimate utility to the issuer of the safe harbor.

ii. Comments on the Safe Harbor

Commenters supported the proposed safe harbor and suggested certain expansions and clarifications.[151] Commenters wanted us to clarify that information that was directed to customers, suppliers, etc., would be covered by the safe harbor even if the information became available to other persons, including investors or potential investors.[152] As we discuss above, the Rule is aimed at assuring that the communication is intended for use by an audience that is other than an investor audience, not at ensuring that the communication is not received by or available to an investor or potential investor. We have modified the Rule to clarify this point. For example, a widely disseminated communication (such as a press release) intended for use by a non-investor audience and otherwise meeting the conditions of the safe harbor will not lose protection if it is available to or received by investors or potential investors.

We had requested comment in the Proposing Release as to whether the safe harbor also should cover forward-looking information and whether the safe harbor for forward-looking statements contained in Securities Act Section 27A should be extended to initial public offerings. We further requested comment on whether we should require projections or other forward-looking information to be included in initial public offering registration statements. In response, some commenters supported extending the Section 27A safe harbor for forward-looking statements to initial public offerings but did not support requiring projections to be included in registration statements.[153] Some commenters were concerned that, because of the relatively untested nature of companies engaging in initial public offerings, there was limited basis to assess the reasonableness of assumptions underlying the projections about the issuer's business.[154] We appreciate commenters' input on these points and, in light of the fact that these companies are generally untested, as commenters noted, we have determined not to include forward-looking statements in the Rule 169 safe harbor we are adopting today or to extend the safe harbor for forward-looking statements in Securities Act Section 27A to initial public offerings.

2. Other Permitted Communications Prior to Filing a Registration Statement

Beyond the continuing ongoing release of information discussed above, there is an increased amount of information disseminated to the market about issuers, including through the Internet. We believe that the availability of this information should be encouraged, subject to appropriate standards of liability. At times when the risk of conditioning the market for a securities offering is sufficiently remote, it is important to provide issuers with greater certainty that the release of information will not be considered an impermissible offer under the Securities Act. Such an approach will avoid hindering issuer communications except where necessary for investor protection. We are, therefore, adopting rules that clarify the Securities Act application to communications that might not fall within the safe harbors for regularly released factual business and forward-looking information.

a. 30-Day Bright-Line Exclusion From the Prohibition on Offers Prior to Filing a Registration Statement—All Issuers

i. Scope of Exclusion

We are adopting, substantially as proposed, Rule 163A to provide all issuers a bright-line time period, ending 30 days prior to filing a registration statement, during which issuers may communicate without risk of violating the gun-jumping provisions. Such communications will be excluded from the definition of offer for purposes of Securities Act Section 5(c).[155] As we noted in the Proposing Release, a bright-line test will provide greater certainty in the offering process and avoid unnecessary limitations on issuer Start Printed Page 44740communications more than 30 days prior to the filing of the registration statement. Further, we believe that the 30-day timeframe adequately assures that these communications will not condition the market for a securities offering by providing a sufficient time period to cool any interest in the offering that might arise from the communication.[156]

As adopted, the 30-day bright-line exclusion from the gun-jumping provisions is subject to the following conditions:

  • A communication made in reliance on the Rule cannot reference a securities offering that is or will be the subject of a registration statement; [157]
  • A communication made in reliance on the Rule will have to be made “by or on behalf of the issuer”; and
  • The issuer will have to take reasonable steps within its control to prevent further distribution or publication of the communication during the 30-day period immediately before the issuer files the registration statement.

We have made minor revisions to the Rule from the proposals. We have made clear that the exemption is non-exclusive. In addition, we have revised the definition of “by or on behalf of” the issuer in the same manner as in Rules 168 and 169 to explicitly exclude offering participants who are underwriters or dealers from being considered agents or representatives of the issuer for purposes of the Rule. We have narrowed the restriction on references to securities offerings to apply to a securities offering that is or will be the subject of a registration statement.

The Rule is designed to preclude issuers and offering participants from circumventing the registration requirements of the Securities Act. Because the Rule does not permit information about a securities offering that is or will be the subject of a registration statement, the communications made in reliance on the Rule are less likely to be used to condition the market for the issuer's securities. In addition, the communications are still subject to provisions addressing deficient disclosure, including the anti-fraud provisions.[158] Finally, the safe harbor is available only for communications made by or on behalf of the issuer so that other potential offering participants cannot use the exemption. Communications within the scope of Rule 163A made prior to the 30 days before filing are protected by the safe harbor. Communications made during the 30 days before the filing are outside the safe harbor. Because of these factors and the bright-line nature of the Rule, we have eliminated the proposed preliminary note that indicated that the exemption was not available for schemes to evade the registration requirements of the Securities Act because we do not believe it is necessary.

The 30-day bright-line exclusion is not available for enumerated categories of offerings and for specified issuers that pose the greatest risk of abuse of that exclusion. Specifically, Rule 163A is not available to communications made in connection with:

  • Offerings by a blank check company;
  • Offerings by a shell company; or
  • Offerings of penny stock by an issuer.[159]

The Rule as adopted also excludes communications regarding business combination transactions from being able to rely on the exclusion, as those communications are regulated separately.[160] The Rule also is not available for communications regarding offerings made by a registered investment company or a business development company.

ii. Comments on 30-day Bright-Line Exclusion

Commenters expressed strong support for the Rule and suggested certain expansions and clarifications.[161] Some commenters wanted the Rule to provide an exemption from the definition of offer for all purposes under the Securities Act.[162] We do not believe that it is appropriate to exclude from the definition of offer for all purposes any communications occurring more than 30 days from the date of filing the registration statement. The Rule contains no content restriction, other than a prohibition against referencing a securities offering that is or will be the subject of a registration statement. The intent of the Rule is to provide certainty that an issuer will not be considered to be “gun jumping” by engaging in communications more than 30 days before it files its registration statement, not to provide certainty that it will not be liable for material disclosure deficiencies in its communications.[163]

Commenters also suggested that we provide more guidance as to what actions will constitute “reasonable steps within the issuer's control,” particularly with respect to information posted on web sites prior to 30 days before the filing of the registration statement.[164] The “reasonable steps” condition is already contained in Rule 165 for business combination transactions. We do not believe that it is appropriate to provide bright lines as to when an issuer will be considered to have taken reasonable steps within its control to prevent further dissemination of the communication.[165] As to the treatment Start Printed Page 44741of information posted on an issuer's web site, we do not expect that an issuer will necessarily remove the information from the Web site and, provided that the information is appropriately dated, otherwise identified as historical material, and not referred to as part of the offering activities, we will not object to an issuer maintaining the information on the Web site.

Commenters also suggested that registered investment companies and business development companies should be permitted to rely on Rule 163A.[166] We are not adopting this suggestion because we believe that it would be more appropriate to consider changes to our requirements as they apply to registered investment companies and business development companies in the context of a broader reconsideration of the separate framework applicable to such issuers.

b. Permitted Pre-Filing Offers for Well-Known Seasoned Issuers

i. Overview

The rules we are adopting today, when taken together, provide exemptions generally from the applicability of the gun-jumping provisions for eligible well-known seasoned issuers. The safe harbors for regularly released factual business and forward-looking information and the exemption from the prohibition on offers for purposes of Securities Act Section 5(c) for communications more than 30 days prior to filing of a registration statement are available to well-known seasoned issuers. In addition, as discussed below, the broadened exemption for routine offering-related communications and the availability of an exemption for eligible issuers from the gun-jumping provisions for free writing prospectuses, in both cases after filing of a registration statement, also are available to well-known seasoned issuers. However, because the gun-jumping provisions prohibit all offers—written or oral—before the filing of a registration statement, we believe well-known seasoned issuers could be unnecessarily constrained in their capital formation activities.[167]

ii. Exemption for Pre-Filing Offers

To address communications made in the 30 days prior to filing a registration statement that are not otherwise excluded from the gun-jumping provisions and to complete the set of rules permitting all communications by well-known seasoned issuers under the gun-jumping provisions, we are adopting essentially as proposed an exemption from the prohibition on offers before the filing of a registration statement for offers made by or on behalf of eligible well-known seasoned issuers.[168] The exemption permits these issuers to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions. These communications, while exempt from the gun-jumping provisions, are still considered offers and subject to liability standards applicable to such offers.[169] The exemption is available only for communications made “by or on behalf of” the issuer.[170] Moreover, any communication for which disclosure is required under Securities Act Section 17(b) will be deemed to be a communication that is an offer for purposes of the Rule and, if written, the communication will be a free writing prospectus of the issuer.[171] As with the other exemptions, exclusions, and safe harbor rules we are adopting today, we have made clear that the exemption is non-exclusive.

We also have modified the Rule to eliminate the preliminary note regarding the unavailability of the exemption if it is part of a scheme to avoid or evade the requirements of the gun-jumping provisions. We have not included this preliminary note in the adopted Rule because we believe that the Rule provides an exemption for the communication from the gun-jumping provisions only for well-known seasoned issuers and because the disclosure liability and anti-fraud provisions of the federal securities laws continue to apply.

In view of the automatic shelf registration process we describe below, we expect that well-known seasoned issuers usually will have a registration statement on file that it can use for any of its registered offerings. Consequently, it generally will be unusual for these issuers to make offers prior to the filing of a registration statement;[172] however, we have provided this exemption from the prohibition on pre-filing offers to liberalize communications for these issuers to the appropriate extent. A written offer made by or on behalf of a well-known seasoned issuer under the exemption will, however, meet our definition of “free writing prospectus” and will need to include a legend and be filed promptly by the issuer when and if the issuer files its registration statement.[173] We also have provided in the Rule as adopted that filing is not required if the communication has previously been filed with or furnished to us (for example pursuant to Regulation FD on Form 8-K). The Rule as adopted also provides that filing is not required if filing would not be required under Rule 433 regarding free Start Printed Page 44742writing prospectuses, discussed below, if the communication was a free writing prospectus used after filing of the registration statement. Finally, the filing conditions of Rule 163 will be satisfied if the filing conditions of Rule 433 (other than timing of filing) are satisfied. As a result, for example, the accommodations provided in Rule 433 regarding media publications that are free writing prospectuses also will apply under Rule 163.[174]

Any written communication used in reliance on this exemption will be subject to the same provisions applicable to free writing prospectuses used after a registration statement is filed with regard to the ability to “cure” a failure to meet the legend or filing condition in reliance on our rules governing free writing prospectuses discussed below.[175]

iii. Comments on Exemption for Pre-Filing Offers

Commenters broadly supported the proposed exemption for pre-filing offers by well-known seasoned issuers.[176] One commenter thought the exemptions should be expanded to cover all seasoned issuers, not just well-known seasoned issuers.[177] Some commenters suggested that the filing condition for free writing prospectuses apply only when and if the registration statement is filed.[178] In addition, commenters wanted clarification that the availability of the exemption does not depend on the issuer filing the free writing prospectus within a particular time frame.[179] Finally, commenters requested clarification that media publications, as with other free writing prospectuses, do not need to be filed until the registration statement is filed.[180] One commenter also suggested that Regulation FD should not apply to offering-related information communicated in reliance on the exemption.[181]

We believe it is appropriate at this time to limit the exemption for pre-filing offers to well-known seasoned issuers only and not expand the benefits to all seasoned issuers. The level of following of well-known seasoned issuers by market participants lessens our concerns that these issuers, in general, will use the exemption to evade the registration requirements of the Securities Act. Accordingly, we are limiting this exemption to well-known seasoned issuers.

We have not made any revisions to the provisions of Rule 163 regarding the applicability of Regulation FD to offering-related information. Well-known seasoned issuers thus must comply with the provisions of Regulation FD with regard to communications made pursuant to Rule 163 to which Regulation FD would apply.[182]

In response to commenters' suggestions, we have clarified the filing condition to apply only when and if a registration statement or amendment covering the offered securities is filed. Accordingly, if no such registration statement or amendment is filed, a free writing prospectus used pursuant to Rule 163 does not have to be filed. Finally, media publications that are permissible free writing prospectuses pursuant to Rule 433 will be treated the same as other communications under Rule 163, and will therefore only be subject to filing if a registration statement is filed.

3. Relaxation of Restrictions on Written Offering-Related Communications

The rules we are adopting today will expand the amount and types of permitted written offering-related communications that may be made by offering participants under the gun-jumping provisions after a registration statement is filed.[183] The two main elements of these rules are expansion of information that Securities Act Rule 134 permits to be communicated and the permitted use of free writing prospectuses in connection with a registered offering.

a. Rule 134

Rule 134 provides a safe harbor from the gun-jumping provisions for limited public notices about an offering made after an issuer files its registration statement.[184] The Rule was intended originally to provide an “identifying statement” that could be used to locate persons that might be interested in receiving a prospectus. All issuers, including well-known seasoned issuers, are precluded from relying on Rule 134 until the issuer files a registration statement that includes a statutory prospectus.[185]

i. Expansion of Permitted Information

We are modifying and expanding the information permitted under Rule 134 to include information that issuers, underwriters, and investors will find helpful and to permit the types of written communications during an offering that we do not consider raise the risk of offering abuses. We are adopting a limited expansion of the information permitted in the notice about the issuer and the registered offering. The amendments to Rule 134 will:

  • Permit increased information about an issuer and its business, including where to contact the issuer;
  • Permit more information about the terms of the securities being offered; [186]
  • Expand the scope of permissible factual information about the offering Start Printed Page 44743itself, including underwriter information, more details about the mechanics of and procedures for transactions in connection with the offering process, the anticipated schedule of the offering, and a description of marketing events; [187]
  • Allow more factual information about procedures for account opening and submitting indications of interest and conditional offers to buy the offered securities; [188]
  • Allow more factual information regarding procedures for directed share plans and other participation in offerings by officers, directors, and employees;
  • Permit the correction of inaccuracies in permissible information previously disclosed pursuant to the Rule;
  • Expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned.

While we have expanded the amount of information regarding the terms of an offering that may be included in a Rule 134 notice, the expansion does not permit use of a Rule 134 notice to provide a detailed description of securities being offered. There is increased ability under our rules to provide such a detailed description, such as a term sheet, as a free writing prospectus, as discussed below.

Commenters suggested a number of additional items of information that they believed should be included in the Rule 134 safe harbor.[189] This additional information generally focused on more extensive information about the terms of the securities being offered. As we have noted, Rule 134 is not intended as a substitute for a detailed description of the securities, such as a term sheet, or information included in a prospectus. We have expanded the information categories from those in the proposal to include items that provide more procedural information about the offering or the securities.[190]

ii. Section 10 Prospectus Requirement

We have modified the changes to Rule 134 from the proposals in one significant regard. We had proposed that Rule 134 explicitly condition the availability of the Rule on the issuer filing a statutory prospectus meeting the requirements of Securities Act Section 10 which, in the case of an initial public offering, would include a bona fide estimate of the initial offering price range and the maximum amount of securities to be offered. While commenters recognized that the registration statement had to be filed, a number of commenters were concerned that including an explicit requirement of a bona fide price range and maximum amount of securities to be offered would change current practice and would not permit a number of communications, including press releases announcing the filing of the registration statement and naming underwriters, or even lead managers, and other notices that would be appropriate before the commencement of marketing efforts.[191] These commenters noted that, in many cases, the bona fide price range is not included in registration statements for initial public offerings until a later point in time that is closer to the commencement of marketing activities for the offering.[192]

We are modifying the Rule to provide that much of the information permitted under the Rule may be disclosed under the Rule before the inclusion of a bona fide price range in the registration statement. This modification does not mean, however, that the prospectus in an initial public offering satisfies Section 10 without the bona fide price range. Rather, the purpose of the modification is to permit notices to contain information that is not dependent on the price range or amount of securities being offered prior to inclusion of that information. In addition, information related to the pricing and rating of the security can be provided only if a price range is included where required.

The amended Rule also provides that the Rule is available for certain other information only if it also is disclosed at that time in the filed registration statement. For example, notices including information about the use of proceeds of the offering can be provided only after information about the use of proceeds is included in the filed registration statement.[193] Rule 134(d) continues to require that a price range be included where required. We are not modifying the provisions of Rule 134(d). The procedures that market participants have developed with the staff of the Division of Corporation Finance to facilitate offerings of securities using Internet facilities are not affected by the amendments to Rule 134 that we are adopting today.

iii. Changes to Required Information

We are modifying the information that must be included in a Rule 134 notice, as proposed. First, we are eliminating the reference in the legend to state securities laws, as we believe that other provisions of the Rule already address any state securities law requirements, as applicable.[194] Second, we are eliminating the requirement to specify whether the financing is a new financing or refunding, as we believe that such information is no longer necessary because it will be provided where appropriate by the issuer's disclosure of the use of the proceeds of the offering.

One commenter suggested that the Rule 134 requirement that issuers alert investors where they can obtain a copy of the statutory prospectus should include a means for receipt of a prospectus by electronic delivery.[195] Several commenters also suggested that we allow issuers to satisfy the requirement that certain Rule 134 notices be accompanied or preceded by a statutory prospectus through the inclusion of a hyperlink in the Rule 134 notice to the statutory prospectus.[196] While we are not expanding “access equals delivery” to Rule 134, we are amending Rule 134(c)(1) to allow persons providing notices relying on Rule 134 to include a uniform resource locator (“URL”) address to the statutory prospectus that alerts investors where they can obtain a statutory prospectus.[197] For purposes of Rule 134, Start Printed Page 44744including a URL address to the statutory prospectus that is not an active hyperlink in an electronic communication does not mean that the prospectus has been delivered. However, an active hyperlink to a statutory prospectus in an electronic Rule 134 notice will satisfy the requirement that the prospectus accompany or precede that notice.[198]

b. Permissible Use of Free Writing Prospectuses

i. Overview

After the filing of a registration statement, the gun-jumping provisions permit issuers and other offering participants to make written offers only in the form of a statutory prospectus. After effectiveness of a registration statement, written offers other than a statutory prospectus may be made only if a final prospectus meeting the requirements of Securities Act Section 10(a) is sent or given prior to or at the same time as the written offer.[199] We believe that written communications during the offering process are unnecessarily restricted, even with the substantial relaxations in restrictions on communications resulting from the rules we discuss above. The rules we are adopting permit written offers, including electronic communications, outside the statutory prospectus beyond those currently permitted by the Securities Act, if certain conditions are met. We are defining such a written offer outside of the statutory prospectus as a “free writing prospectus.”[200]

Under the rules we are adopting today, a free writing prospectus that satisfies specified conditions can be used by a well-known seasoned issuer at any time.[201] Further, a free writing prospectus that satisfies the specified conditions can be used by any other eligible issuer or offering participant after a registration statement has been filed.[202] In general, the rules we are adopting will allow offering participants to use free writing prospectuses in conjunction with most registered primary and secondary offerings, although we do not treat all issuers and offerings the same.[203]

The issuer and any other offering participant in an eligible issuer's registered securities offering satisfying the conditions of our rules can use a free writing prospectus after a registration statement is filed to communicate information about a registered offering of securities.[204] This will permit affiliates, underwriters, dealers, and others acting on behalf of the parties to the transaction to use a free writing prospectus without violating the gun-jumping provisions. The conditions to the use of a free writing prospectus will depend on the nature of the issuer and the offering. A free writing prospectus can take any form and is not required to meet the informational requirements otherwise applicable to prospectuses.

ii. Definition of Free Writing Prospectus

(A) Scope of Definition

We are adopting the proposed definition of “free writing prospectus.” A free writing prospectus is, except as otherwise provided specifically or otherwise required by the context, a written communication that constitutes an offer to sell or a solicitation of an offer to buy securities that are or will be the subject of a registration statement and is not:

  • A prospectus satisfying the requirements of Securities Act Section 10(a);
  • A prospectus satisfying our rules permitting the use of preliminary or summary prospectuses or prospectuses subject to completion;
  • A communication made in reliance on the special rules for asset-backed issuers permitting the use of ABS informational and computational materials; [205] or
  • A prospectus because a final prospectus meeting the requirements of Section 10(a) was sent or given with or prior to the written communication.[206]

Further, the definition makes clear that, although a free writing prospectus will not be filed as part of a registration statement, it will still be considered to relate to a registered public offering of securities that is or will be the subject of a registration statement, regardless of the method of its use or distribution.

A written communication will be a free writing prospectus only where it constitutes an offer by an offering participant of a security under the Securities Act. Whether a particular communication constitutes such an offer will continue to be determined based on the particular facts and circumstances.[207] While the definition of “offer” is broad, not all communications relating to an offering are offers or offers by an offering participant. As a non-exclusive illustration, the gun-jumping provisions have been administered in a manner that excludes from categorization as an offer a media publication or television or radio broadcast that is based solely Start Printed Page 44745on information that is filed with us or available on an unrestricted basis or on other information the dissemination of which did not represent an offer by an issuer or other offering participant, where there is no other involvement or participation by an offering participant. On that basis, for example, a newspaper article about an initial public offering that is based on the filed registration statement, on a press release that is filed with or furnished to us, on a filed free writing prospectus, or on filed issuer information where the issuer and other offering participants have refused to comment and not otherwise been involved, would not be categorized as an offer under the gun-jumping provisions.

(B) Comments on Definition

Commenters supported the concept of free writing prospectuses.[208] Commenters suggested that we exclude offshore communications and rating agency reports from the scope of the definition.[209] We are not including any specific provision in the rules regarding offshore communications and, as such, the treatment of offshore communications under the free writing prospectus rules will be no different than the treatment of any offshore communication prior to the Rules we adopt today.[210] We also have not revised the Rule in response to commenters' request for clarification of the treatment of rating agency reports. Our treatment of NRSROs is currently the subject of rulemaking and other consideration.[211]

iii. Permitted Use of a Free Writing Prospectus After the Filing of a Registration Statement Under Rule 433

(A) Overview

We are adopting Rule 164 and Rule 433 substantially as proposed. Rule 164 will permit the use of a free writing prospectus where an eligible issuer has filed a registration statement, the other requirements of Rule 164 are met, and the conditions of Rule 433 are satisfied.[212] The Rules permitting the use of free writing prospectuses are not available for any communication that, while in technical compliance with the Rule, is part of a plan or scheme to evade the requirements of Securities Act Section 5.[213]

(B) Issuer Eligibility

For any offering participant to use free writing prospectuses, other than free writing prospectuses that consist only of descriptions of the securities in the offering or of the offering, the issuer may not be an ineligible issuer.[214] We have modified the consequences of ineligibility in the context of use of free writing prospectuses to permit ineligible issuers, other than blank check companies, shell companies, and penny stock issuers, to use free writing prospectuses that are limited to descriptions of the terms of the securities being offered and the offering because we believe that the permitted use of such free writing prospectuses can provide advantages to investors that justify the risks of use of such materials by some classes of ineligible issuers. Such use would be subject to all of the other requirements of the new rules.

We have revised the definition of ineligible issuer from the proposals in response to comments. As adopted, ineligible issuers are, as of the relevant date of determination: [215]

  • Reporting issuers who are not current in their Exchange Act reports and other materials required to be filed during the prior 12 months (or such shorter period that the issuer was required to file such reports and materials), other than reports on Form 8-K required solely pursuant to an item specified in General Instruction I.A.3(b) of Form S-3; [216]
  • In the case of asset-backed issuers, the depositor, or any issuing entities previously established, directly or indirectly by the depositor who are not current in their Exchange Act reports and other materials required to be filed during the prior 12 months (or such shorter period that the issuer was required to file such reports and materials), other than reports on Form 8-K required solely pursuant to an item specified in General Instruction I.A.4 of Form S-3; [217]
  • Issuers who are or during the prior three years were or any of their predecessors were:

○ Blank check companies;

○ Shell companies (other than business combination related shell companies);

○ Issuers for an offering of penny stock;

  • Issuers who are limited partnerships offering and selling their securities other than through a firm commitment underwriting; [218]
Start Printed Page 44746
  • Issuers who have filed for bankruptcy or insolvency during the past three years; [219]
  • Issuers who have been or are the subject of refusal or stop orders under the Securities Act during the past three years, or are the subject of a pending proceeding under Securities Act Section 8 [220] or Section 8A; [221] or
  • Issuers who, or whose subsidiaries at the time they were subsidiaries of the issuer, have been convicted of any felony or misdemeanor described in certain provisions of the Exchange Act, have been found to have violated the anti-fraud provisions of the federal securities laws, or have been made the subject of a judicial or administrative decree or order (including a settled claim or order) prohibiting certain conduct or activities regarding the anti-fraud provisions of the federal securities laws  [222] during the past three years. The definition as adopted provides that ineligibility of an issuer based on a settlement will be prospective only and thus arise only for settlements entered into after the effective date of the new rules.[223]

The categories of ineligible issuers include issuers that at the time of the eligibility determination are not current (with specified Form 8-K exceptions) for 12 months in their Exchange Act reporting obligations, issuers that may raise greater potential for abuse, and issuers that have violated the anti-fraud provisions of the federal securities laws. Certain of these issuers have been viewed historically as unsuited for short-form registration or ineligible for disclosure-related relief. For instance, we have repeatedly stated our belief that blank check companies, shell companies, and penny stock issuers may give rise to disclosure abuses.[224] In addition, Congress determined not to extend the safe harbors for forward-looking statements to issuers of blank check and penny stock securities, as well as issuers previously convicted of certain felonies and misdemeanors and issuers subject to a decree or order involving a violation of the anti-fraud provisions of the federal securities laws.[225]

We are adopting as proposed the exclusion of registered investment companies and business development companies from eligibility for use of Rules 164 and 433 because they are already subject to separate rules permitting use of a Section 10(b) prospectus.[226] Securities Act Rule 482 permits investment companies to advertise investment performance data and other information, and Securities Act Rule 498 permits open-end management investment companies to use a profile. We also are adopting as proposed the exclusion of offerings that are business combination transactions subject to Regulation M-A. We also are excluding all offerings registered on Form S-8, except for those by well-known seasoned issuers.

We have revised the Rules from the proposal to change the time of determination of status as an ineligible issuer. We have concluded that eligibility, in most cases, should not be determined at the time of reliance on our new Rules for each free writing prospectus. We have adopted an approach to eligibility determination that generally looks to the commencement of an offering and will not result in a change of status during an offering. As adopted, eligibility determinations will be made:

  • If the offering is registered pursuant to Rule 415, our shelf registration rule, the earliest time after the filing of the registration statement covering the offering at which the issuer, or in the case of an underwritten offering the issuer or another offering participant, makes a bona fide offer, including without limitation through the use of a free writing prospectus, in the offering; or
  • Otherwise at the time of filing of a registration statement covering the offering.

This timing of determination as to eligibility to use a free writing prospectus (with the enumerated exceptions from the prohibition) applies to all issuers, including well-known seasoned issuers. The timing of determination of whether an issuer is a well-known seasoned issuer, described above, is different and is made on an approximately annual basis.

(1) Comments on Ineligible Issuer Definition

Commenters expressed a number of concerns about the ineligibility conditions, including those relating to prior securities law violations and settlements,[227] going concern opinions in audit reports covering financial statements,[228] and certain involuntary bankruptcy petitions.[229] Commenters also requested clarification of the time frame for which the issuer must be current in its reports for purposes of the definition.[230] Commenters did not believe that issuers should be ineligible based on disclosure of material weaknesses in internal controls over financial reporting.[231] Commenters also stated that offering participants should be able to rely on the various exemptions based on a reasonable belief that the issuer was not an ineligible issuer.[232]

With regard to the ineligibility based on securities law violations or settlements of alleged violations, commenters believed that the disqualifying violations were too broad and should be limited to violations of the anti-fraud provisions, not any provision of the federal securities laws.[233] Moreover, commenters stated Start Printed Page 44747that the disqualification based on settled allegations of violations of the securities laws should be prospective only, because the settling parties would not have known, at the time of the negotiated settlement, also to negotiate a waiver of the ineligible issuer disqualifications.[234] Commenters did not believe that the settlement of an alleged violation should be a disqualification.[235] Other commenters did not believe that a securities law violation or settlement by a subsidiary should affect the eligibility of an issuer to use the various exemptions and safe harbors that we proposed.[236]

Commenters addressing ineligibility based on bankruptcy were concerned that an involuntary bankruptcy disqualification could disadvantage issuers in their relationships with their creditors.[237] They were concerned that a creditor could cause an issuer to be an ineligible issuer by filing an involuntary bankruptcy petition against the issuer. These commenters suggested that the involuntary bankruptcy petition be a disqualification only after the lapse of a period of time or conversion of the petition to a voluntary petition, enabling issuers to attempt to resolve the issues with their creditors.

We have revised the definition of “ineligible issuer” to address many of commenters' concerns. Under the definition we are adopting, an issuer must be current, but not necessarily timely, in its required filings under the Exchange Act for the past twelve months or such shorter period that the issuer is subject to the Exchange Act reporting requirements. We have limited the ineligibility condition for securities law violations to those involving the anti-fraud provisions and have eliminated the separate provision regarding settlements because they are subsumed within the ineligibility provision based on a settled judicial or administrative decree or order. In addition, we have provided that ineligibility based on actions of a subsidiary must have arisen at the time that the entity was a subsidiary of the issuer. We also have eliminated the ineligibility condition based on a going concern opinion covering the issuer's most recent audited financial statements. In addition to the revisions to the specific ineligibility provisions, we also have revised Rule 164 and Rule 433 to provide that persons relying on those Rules, other than issuers, must have a reasonable belief that an issuer is not ineligible.[238] We also have provided that ineligibility based on settlements will apply only to judicial or administrative decrees or orders entered into after the effective date of the new rules.

(C) Conditions to Permitted Use of a Free Writing Prospectus

Rule 164 as adopted provides that, after the filing of a registration statement, a free writing prospectus that meets the requirements of Rule 164 and satisfies the conditions of Rule 433 will be a permitted prospectus under Section 10(b) for purposes of Securities Act Section 5(b)(1). The Rule 433 conditions on the use of free writing prospectuses relate to:

  • The delivery or availability of the statutory prospectus at the time the free writing prospectus is used;
  • The information contained in the free writing prospectus;
  • The legend that is to be included in the free writing prospectus;
  • Filing of the free writing prospectus; and
  • Record retention for the free writing prospectus.

(1) Prospectus Delivery or Availability

The ability of any person participating in the offer and sale of the securities to use free writing prospectuses under Rules 164 and 433 generally is conditioned on the filing of a registration statement that includes a prospectus satisfying the requirements of Securities Act Section 10.[239] Further, in specified cases, Rule 433 conditions the use of a free writing prospectus on prior or concurrent delivery of the issuer's most recently filed statutory prospectus.

(a) Prospectus Delivery Conditions for Non-Reporting Issuers and Unseasoned Issuers

In an offering of securities of an eligible non-reporting issuer, including an initial public offering, or securities of an eligible unseasoned issuer, the use by an offering participant of free writing prospectuses is conditioned on:

  • Filing of the registration statement for the offering; and
  • The free writing prospectus being preceded or accompanied by the most recent statutory prospectus that satisfies the requirements of Section 10 if: [240]

○ The free writing prospectus is prepared by or on behalf of or used or referred to by an issuer or prepared by or on behalf of or used or referred to by other offering participants;

○ Consideration has been or will be given by the issuer or an offering participant for the dissemination (in any format) [241] of any free writing prospectus (including any published article, publication, or advertisement); or

○ Securities Act Section 17(b) [242] requires disclosure that consideration has been or will be given by the issuer or an offering participant for any activity described therein in connection with the free writing prospectus.

In these cases, issuers and offering participants must assure that the most recent statutory prospectus is actually provided to anyone who might receive a free writing prospectus. Accordingly, the use of broadly disseminated free writing prospectuses in registered offerings by these types of issuers and offering participants in these offerings may not be feasible unless they are in electronic form and contain a hyperlink to the statutory prospectus. We believe that this is an appropriate result, as conditioning the use of the free writing prospectus on its being preceded or accompanied by the statutory Start Printed Page 44748prospectus will assure that an investor has a balanced disclosure document of an issuer with no or limited reporting history against which to evaluate the free writing prospectus and to place the statements made in context. The condition that the statutory prospectus precede or accompany the free writing prospectus will not require that it be provided through the same means, so long as it is provided at the required time. Referring to its availability will not satisfy this condition.

In the following situations, for example, the most recent statutory prospectus must precede or accompany the free writing prospectus or the communication cannot be made in reliance on Rules 164 and 433: [243]

  • A direct written communication by an issuer or offering participant;
  • A written communication or a television or radio broadcast prepared by or on behalf of or used or referred to by an issuer or an offering participant;
  • The dissemination, in any format including publication or broadcast, of any free writing prospectus (including any published article, publication, or advertisement) for which

○ Consideration is or will be given by the issuer or an offering participant; or

○ Securities Act Section 17(b) requires disclosure of a payment made or consideration given by an issuer or other offering participant; or

  • A paid published or broadcast advertisement by an issuer or offering participant.

Once the required statutory prospectus is provided to an investor, additional free writing prospectuses can be provided to that investor without having to provide an additional statutory prospectus, unless there is a material change in the most recent statutory prospectus from the provided prospectus.[244] For example, once an investor has been sent a preliminary prospectus, absent a material change, the Rule permits subsequent e-mail communications to that investor by an offering participant that constitute free writing prospectuses without the user having to hyperlink to or otherwise redeliver a statutory prospectus with each communication. After effectiveness and availability of a final prospectus meeting the requirements of Securities Act Section 10(a), no earlier statutory prospectus may be provided, and such final prospectus, as revised or supplemented, must precede or accompany any free writing prospectus provided after such availability, whether or not an earlier statutory prospectus has been previously provided to the recipient.[245]

(b) Prospectus Availability Condition for Seasoned Issuers and Well-Known Seasoned Issuers

In offerings of securities of eligible seasoned issuers (including asset-backed issuers eligible to use Form S-3) and eligible well-known seasoned issuers, we are adopting as proposed the provision that these issuers and other offering participants in their offerings can use a free writing prospectus after the filing of a registration statement containing a statutory prospectus.[246] For shelf offerings, this statutory prospectus can be a base prospectus.[247] For offerings of securities of eligible seasoned issuers (including eligible well-known seasoned issuers), the Rule does not condition use of the free writing prospectus on actual delivery of the most recent statutory prospectus. Instead, the user of the free writing prospectus must notify the recipient, through a required legend, of the filing of the registration statement and the URL for our web site where the recipient can access or hyperlink to the preliminary or base prospectus. The Rule as adopted permits the use of a generic rather than an issuer-specific legend. The legend must contain a toll-free telephone number, and may contain an e-mail address, through which the statutory prospectus may be requested.[248]

(c) Comments on Prospectus Delivery or Availability Conditions

Some commenters believed that the requirement that a statutory prospectus precede or accompany a free writing prospectus in offerings of securities of non-reporting or unseasoned issuers should be able to be accomplished by the availability of the prospectus on our Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”),[249] while others thought it should be limited only to non-reporting companies engaging in their initial public offerings [250] or that there should be cure provisions for failure to provide timely a statutory prospectus.[251] We do not believe that it is appropriate at this time to have access or filing of a registration statement on EDGAR satisfy this delivery obligation for statutory prospectuses in all cases. In addition, as we note above, we believe that investors should have the statutory prospectus for unseasoned issuers when they evaluate free writing prospectuses involving offerings of securities of such issuers.

(2) Information in a Free Writing Prospectus

(a) Information Conditions

We are adopting substantially as proposed the provisions that will permit a free writing prospectus meeting the conditions of Rule 433 to be a Section 10(b) prospectus without having line-item disclosure requirements or otherwise requiring that the free writing prospectus contain any particular information, other than the legend. The Rule permits information in a free writing prospectus to go beyond information the substance of which is contained in the prospectus included in the registration statement. However, the information in the free writing prospectus must not conflict with the information in the registration statement, including Exchange Act reports incorporated by reference into the registration statement. We believe that exempting free writing prospectuses meeting the conditions of Start Printed Page 44749Rule 433 from limitations on any particular content should not diminish investor protection. In that regard, we believe that the liability provisions applicable to free writing prospectuses, particularly Securities Act Section 12(a)(2) and the anti-fraud provisions of the federal securities laws, provide protection against material misstatements in and material omissions from information contained in such free writing prospectus.

Although the proposal stated that the information in the free writing prospectus did not have to be in the registration statement, some commenters requested further clarification of the proposed condition that the free writing prospectus cannot contain information that is “inconsistent” with the information in the prospectus filed as part of the registration statement.[252] In revising the provision to preclude information that “conflicts” with that in the registration statement, we have clarified that information in the free writing prospectus may be different from or additional or supplemental to that in the registration statement, so long as it does not “conflict” with the latter.

Commenters requested clarification as to how information in the free writing prospectus would be treated in relation to other information that was filed with us or was otherwise publicly available.[253] Commenters believed that liability for free writing prospectuses should not be considered in isolation but should take into account other information that is conveyed for purposes of the total mix of information available.[254] Free writing prospectuses may incorporate or refer investors to other information, so that investors will be advised to consider the information presented in the free writing prospectus in context. We note that the legend that must be included in a free writing prospectus will direct investors to the filed prospectus contained in the registration statement. As we discuss below, a free writing prospectus cannot include language that deems an investor to have read or have knowledge of or rely on the content of other documents incorporated in or referred to in the free writing prospectus. Whether such other information is conveyed to the investor will be determined based on the facts and circumstances.[255]

Treating a free writing prospectus satisfying the conditions of Rule 433 as a Section 10(b) prospectus provides for additional continuing Commission oversight and enforcement authority over the contents and use of the free writing prospectus. As we discussed in the Proposing Release, we will retain the ability to halt the use of any materially false or misleading free writing prospectus in accordance with Section 10(b). Under the amendments to Securities Act Rule 418 we are adopting today, our staff will be able to request any free writing prospectus that has been used in connection with a securities offering.

(b) Amendment to Rule 408

Finally, we are amending Securities Act Rule 408 as proposed to make clear that not including information that is included in a free writing prospectus in a prospectus filed as part of a registration statement will not, solely by virtue of inclusion of the information in a free writing prospectus, be considered an omission of material information required to be included in the registration statement.

(c) Legend Condition

(i) Discussion

We are not adopting any content requirement for free writing prospectuses other than to condition the use of a free writing prospectus on inclusion of a legend indicating where a prospectus is available for the offering to which the communication relates and recommending that potential investors read the prospectus (including Exchange Act documents incorporated by reference).[256] In addition, the legend also advises investors that they can obtain the registration statement including the prospectus and any incorporated Exchange Act documents for free through the Commission's web site at www.sec.gov, and that they may request the prospectus from the issuer, any underwriter or any dealer by calling a toll-free number.[257] The legend also indicates that the free writing prospectus relates to a registered public offering. As suggested by commenters, we are adopting a generic, rather than issuer-specific legend condition.[258] We believe this modification should assist issuers and offering participants in including a legend in a free writing prospectus without much added cost.[259]

(ii) Cure for Unintentional or Immaterial Failure To Include a Legend

Rule 164 permits a user to cure an unintentional or immaterial failure to include the specified legend in any free writing prospectus, as long as a good faith and reasonable effort is made to comply with the condition and the free writing prospectus is amended to include the specified legend as soon as practicable after discovery of the omitted or incorrect legend.[260] In addition, if a free writing prospectus has been transmitted to potential investors without the specified legend, the free writing prospectus must be retransmitted, with the appropriate legend by substantially the same means as and directed to substantially the same investors to whom it was originally transmitted.[261]

The legend condition is intended to identify more clearly materials as free writing prospectuses used in relation to a registered offering. We believe that this legend will put investors on notice and assist them in evaluating the content of the free writing prospectus.

(iii) Impermissible Legends or Disclaimers

As we discussed in the Proposing Release, we understand that issuers or other users of written communications may sometimes include legends or disclaimers in offering materials that may be inappropriate. In particular, disclaimers of responsibility or liability that are impermissible in a statutory prospectus or registration statement also are impermissible in free writing prospectuses. Examples of impermissible legends or disclaimers, which are not exclusive, that will cause the materials not to be permissible free writing prospectuses or not to be Start Printed Page 44750effective as to any purchaser for liability purposes include:

  • Disclaimers regarding accuracy or completeness or reliance by investors;
  • Statements requiring investors to read or acknowledge that they have read or understand the registration statement or any disclaimers or legends;
  • Language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation or an offer to buy; and
  • For information that must be filed with us, statements that the information is confidential.[262]

(3) Filing Conditions

(a) General Conditions

(i) Scope of General Conditions

We are adopting substantially as proposed the provisions conditioning use of a free writing prospectus on the filing of that prospectus or information contained in that prospectus,[263] unless exempt from filing, in the following circumstances: [264]

  • Where a free writing prospectus is prepared by or on behalf of, or used or referred to by, the issuer, known as an “issuer free writing prospectus,” the issuer shall file that free-writing prospectus;
  • Where a free writing prospectus prepared by or on behalf of or used by an offering participant other than the issuer contains material information about the issuer or its securities that has been provided by or on behalf of an issuer, known as “issuer information,” that is not already included or incorporated in the prospectus or a filed free writing prospectus, the issuer shall file the issuer information; [265]
  • Where a free writing prospectus used or referred to by an offering participant other than the issuer is distributed by or on behalf of such offering participant in a manner reasonably designed to lead to its broad unrestricted dissemination, the offering participant shall file the free writing prospectus; and
  • Where a free writing prospectus or portion thereof prepared by or on behalf of the issuer or other offering participant comprises a description of the final terms of the issuer's securities in the offering or of the offering, the issuer must file such free writing prospectus or portion thereof after such terms have been established for all classes of the offering.[266]

In most cases, there is no condition that underwriters and dealers file the free writing prospectuses that they prepare, use, or refer to. This includes information prepared by underwriters and others on the basis of or derived from, but not containing, issuer information. Such information can be, but is not limited to, information that is proprietary to the preparer.

We are adopting as proposed the exception to the general principle that underwriter free writing prospectuses do not need to be filed where a free writing prospectus is used or referred to by and distributed by or on behalf of an offering participant, other than the issuer, in a manner that is reasonably designed to lead to its broad unrestricted dissemination. Accordingly, such use of a free writing prospectus is conditioned on such person filing the free writing prospectus on or before the date of first use. For example, the filing condition applies where:

  • An underwriter includes a free writing prospectus on an unrestricted web site or hyperlinks from an unrestricted web site to information that would be a free writing prospectus; [267] or
  • An underwriter sends out a press release regarding the issuer or the offering that is a free writing prospectus.

Offering participants include selling security holders. A selling security holder who is unaffiliated with the issuer and who uses a free writing prospectus is treated for purposes of Rule 164 and Rule 433 as any other offering participant who may be an underwriter of the issuer's securities. If the selling security holder is an affiliate of the issuer and the selling security holder prepares, uses, or refers to a free writing prospectus, it should consider, in addition to underwriter status, whether it is acting by or on behalf of the issuer. Further, the issuer and such affiliated selling security holder should evaluate whether the selling security holder has access to material information about the issuer and whether it is including such material issuer information in that free writing prospectus.[268]

(ii) Conditions Specific to Final Terms of the Securities or Offering

We also have adopted with modifications the provision that a description of the final terms of the securities in the offering or of the offering contained in a free writing prospectus must be filed by the issuer, regardless of whether it was prepared by or on behalf of the issuer or other offering participant prepared or used it. As modified, the provision applies to final terms of the securities in the offering and of the offering, whether or not they are the only matters included in the free writing prospectus. Terms are required to be filed only if they reflect the final terms of the securities or of the offering. The issuer has to file the description of the terms contained in the free writing prospectus within two days after the later of the date such terms became final for all classes of the offering or the date of first use.[269] We believe this filing condition is appropriate for the final terms of a security or offering contained in a free writing prospectus. Preliminary term sheets and other descriptive material containing only the terms of the securities or the offering that do not reflect final terms of securities or transactions are not subject to filing. All such written offering materials, whether or not filed, are, however, free writing prospectuses. As we note above, we have revised the Rule as adopted to permit most issuers, whether or not ineligible issuers, to use free writing prospectuses that consist only of descriptions of the terms of the issuer's Start Printed Page 44751securities in the offering or of the offering.[270]

(iii) Asset-Backed Issuers

Asset-backed issuers and other parties to asset-backed transactions specified in Rule 167(c) potentially have two sets of rules on which they may rely in using written offering materials. Under the special rules for asset-backed securities we adopted in December 2004, if the offering is registered on Form S-3, these persons may use ABS informational and computation materials as defined in Item 1101 of Regulation AB as permitted by Rule 167 and Rule 426. Rule 426 in particular includes filing conditions for the use of such materials using a Form 8-K. The filed materials become part of the registration statement for the offering of asset-backed securities in question.

These persons may also use free writing prospectuses as permitted by Rules 164 and 433 that we are adopting today. Use of free writing prospectuses is not limited to offerings registered on Form S-3. Free writing prospectuses are prospectuses subject to the provisions of Section 12(a)(2) of the Securities Act but are not filed as part of or included in the registration statement. The contents of free writing prospectuses are not limited to ABS informational and computational materials. Rule 433 requires filing by issuers of free writing prospectuses prepared by or on behalf of or used or referred to by, issuers or, depositors, sponsors, servicers, or affiliated depositors, whether or not the issuer, but not by underwriters or dealers, unless they contain issuer information or are distributed in a manner reasonably designed to lead to its broad unrestricted dissemination. Issuers also must file issuer information contained in other free writing prospectuses.[271]

Under Rule 426, filing is required for ABS informational and computational materials provided to prospective investors after final terms of all classes of securities in the offering have been established. Filing also is required of such materials relating to a class of securities, whether or not final terms of all classes had been established, as to which a prospective investor had indicated an interest. Filing is required by the later of the due date for filing the final prospectus with us under Rule 424(b) or two days after the date of first use.

Under Rule 433, the issuer must file a free writing prospectus or portion thereof comprising a description of final terms of securities in the offering or of the offering within two days after the later of the date final terms have been established for all classes of the offering or the date of first use. Filing is not required of descriptions of securities or of the offering that do not reflect final terms, even if a prospective investor had indicated an interest.

Under Rule 164, ineligible issuers may not use free writing prospectuses, except that most categories of ineligible issuers may use free writing prospectuses comprising only descriptions of terms of securities and offerings. Rule 164 provides that for offerings of asset-backed securities, ineligible issuers may use free writing prospectuses limited to certain categories of ABS informational and computational materials.[272] There is no such ineligible issuer restriction on the use of ABS informational and computational materials under Rules 167 and 426.

To coordinate the operation of the two available approaches to use of written offering communications, Rule 433 as adopted today provides that a free writing prospectus or portion thereof required to be filed under Rule 433 containing only ABS informational and computational materials, as defined in Item 1101(a) of Regulation AB, may be filed under Rule 433 but within the time frame required for satisfaction of the conditions of Rule 426, and that such filing will satisfy the conditions of Rule 433. Start Printed Page 44752

Rule 433 as adopted today also provides that where a free writing prospectus is used in reliance on Rules 164 and 433 and the conditions of those Rules (including the special filing election for free writing prospectuses or portions thereof comprising ABS informational and computational materials) are satisfied, the conditions of Rules 167 and 426 do not need to be satisfied. It similarly provides that where ABS informational and computational materials are used in reliance on Rules 167 and 426 and the conditions of those Rules are satisfied, the conditions of Rules 164 and 433 do not need to be satisfied.

Special considerations apply with respect to providing static pool information in offerings of asset-backed securities. Rule 312 of Regulation S-T [273] provides that static pool information provided on an Internet web site can be included in the prospectus included in the registration statement if certain conditions are satisfied, including the inclusion of the specific web site address in the prospectus.

Static pool information also can be provided on an Internet web site as part of ABS informational and computational materials if certain conditions are satisfied, including provision of the specific web site address in the materials. Those materials are filed on Form 8-K and become part of the registration statement pursuant to Rule 167.

In addition, static pool information provided on an Internet web site can be included in a free writing prospectus. The web site address can be referred to in a written communication, and in the case of an electronic communication an active hyperlink can be provided. In either case the static pool information will be part of the free writing prospectus. Where filing is required under Rule 433, the Rule provides that filing of the free writing prospectus containing the address or hyperlink satisfies the filing requirement. Where static pool information provided in a free writing prospectus is separately included in the prospectus included in the registration statement, the filing in the prospectus included in the registration statement is accomplished pursuant to Rule 312 of Regulation S-T.

(iv) Comments on Filing Condition

Some commenters did not believe there should be any filing requirements for free writing prospectuses.[274] Other commenters did not believe that filing should be a condition to the use of a free writing prospectus because the failure to comply with the filing requirements would give rise to a Section 5 violation with related rescission rights.[275] Some commenters requested further clarification of the cure provisions, including what constitutes “unintentional,” a “good faith and reasonable effort” to comply with the filing conditions, and a “discovery” of a failure to file a free writing prospectus.[276] We have retained the filing condition and cure provisions as noted. We have not provided further elaboration of the terms in the cure provisions which also are contained in the rules affecting business combination transactions and asset-backed securities offerings.[277]

With regard to filing descriptions of the final terms of the securities in the offering or of the offerings, some commenters expressed concern that issuers and offering participants would not know when the terms were final to be able to file the final term sheet in a timely manner.[278] We believe that because a description of the final terms of the securities or the offering does not have to be filed until after the deal terms are final for all classes, there will not be a situation where there is uncertainty when a description of the final terms is a final term sheet. In addition, some commenters thought that only issuer prepared term sheets should have to be filed.[279] Because the final terms represent the description of the issuer's securities and of the offering, we have retained the condition that the issuer must file the final terms, regardless of who has prepared it.

Commenters also requested clarification of the interplay between new Rule 433 and the rules applicable in business combination transactions where there is a capital formation transaction occurring at the same time as a business combination transaction, whether or not related.[280] Rule 165, which is applicable to communications in connection with business combination transactions, is not available for a communication whose primary purpose or effect relates to a capital formation transaction. The rules we are adopting today applicable to registered capital formation transactions generally will apply to registered capital formation transactions even if they have some connection to or are proximate in time to a business combination transaction. As a result, if an issuer undertakes a registered capital formation transaction that is related to, or takes place at around the same time as, a business combination transaction, then the issuer can, if the conditions to the applicable rules are satisfied, rely on the rules we adopt today that apply to the registered capital formation transaction and Rules 165 and 166 for the business combination transaction. This is true whether the two transactions are connected (for example, the purpose of the capital formation transaction is to finance a contemporaneous business combination transaction) or independent of each other. If a communication relates to both a capital formation and business combination transaction, then the communication may be subject to both Rules 425 and 433.[281] We have revised the filing condition of Rule 433 to provide that the filing condition of the Rule will be satisfied if a filing is made pursuant to Rule 425 and the Rule 425 filing includes the Rule 433 legend and indicates on the cover page the registration statement number for the capital formation transaction and that it also is being filed pursuant to Rule 433.

Some commenters addressed issues regarding asset-backed securities offerings. Some commenters questioned the interplay between the free writing prospectus rules and rules affecting communications in asset-backed offerings, particularly as it affected the use of informational and computational materials and final term sheets.[282] These commenters were concerned about filing deadlines and the treatment of certain disclosures, such as static pool data disclosed on a website, under the Start Printed Page 44753definition of free writing prospectus.[283] As noted above, we are revising Rule 433 and have provided additional guidance as appropriate to address these issues.

(b) Immaterial or Unintentional Failures To File

(i) Scope of Cure Provision

We are adopting as proposed the ability to cure any unintentional or immaterial failure to file free writing materials.[284] Rule 164 provides that the material must be filed as soon as practicable after discovery of the failure to file.

Rule 164 provides an issuer and any other person relying on the Rule the ability to cure any immaterial or unintentional failure to file or delay in filing the free writing prospectus, without losing the ability to rely on the Rule. This cure provision is available if a good faith and reasonable effort is made to comply with the filing condition and the free writing prospectus is filed as soon as practicable after the discovery of the failure to file. As in the business combination rules, we are including the cure provision to avoid potential chilling of communications due to uncertainty over filing status.

(ii) Comments on Cure Provision

Some commenters requested further clarification of the cure provisions, including what constitutes “unintentional,” a “good faith and reasonable effort” to comply with the filing conditions, and a “discovery” of a failure to file a free writing prospectus.[285] The filing cure provisions are the same as those contained in the asset-backed rules we adopted in 2004 and in the business combination rules, which have operated without further elaboration on these issues since we adopted the rules in 1999.[286] As we discuss above under Rule 163, we are not including any further clarification of what constitutes the elements of the cure provisions.[287]

(4) Record Retention Condition

(a) Discussion

We are adopting, with some modifications, the proposed record retention condition in Rule 433. As adopted, Rule 433 conditions the use of a free writing prospectus on issuers and offering participants retaining for three years any free writing prospectuses they have used from the date of the initial bona fide offering of the securities in question that have not been filed with us. This record retention condition applies to all offering participants.[288] The three-year retention period is consistent with retention periods for brokers and dealers to retain securities sale confirmations.[289]

We believe this record retention condition is appropriate for several reasons. First, it will give us the ability to review free writing prospectuses used in reliance on Rules 164 and 433 under our authority in Securities Act Section 10(b) and the amendments to Rule 418, among other rules. Second, offering participants and purchasers will benefit from the availability of the free writing prospectuses.

(b) Immaterial or Unintentional Failure To Retain a Free Writing Prospectus

Some commenters were concerned that the lack of a cure provision for failure to retain free writing prospectuses could cause retroactive violations of Securities Act Section 5 for three years.[290] In response to these concerns, we have included a provision in Rule 164 that provides that solely for purposes of that Rule, but not any other record retention obligation of any issuer or other offering participant, an immaterial or unintentional failure to retain a free writing prospectus will not result in a violation of Securities Act Section 5(b)(1) or the loss of the ability to rely on the exemption so long as a good faith and reasonable effort was made to comply with the record retention condition. Whether or not there has been a good faith and reasonable effort to comply with the record retention condition will be a facts and circumstances determination. We have included this provision because we believe that there can be circumstances in which a free writing prospectus is inadvertently not retained even after a good faith and reasonable effort. We also have modified the record retention condition so that it does not apply in cases where the free writing prospectus is filed with us.

(D) Road Shows

(1) Definition of Electronic Road Show

Issuers and underwriters frequently conduct presentations known as “road shows” to market their offerings to the public. These road shows are a primary means by which issuers are involved directly and actively in a selling effort to investors. Historically, these presentations were conducted in person and limited to institutional investors. Today, due to advances in electronic media, road shows also are being conducted or re-transmitted over the Internet or other electronic media and in some cases to broader audiences.

We indicated in the Proposing Release that we intended to clarify the treatment of all electronic communications, including electronic road shows, as graphic communications under the Securities Act. Under the proposed rules, all electronic road shows would have been written offers and prospectuses, but also would have been permitted subject to conditions, as free writing prospectuses.

As discussed above, we have revised the definition of graphic communication from the proposal to exclude a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it may be transmitted through graphic means. This revision applies in the context of road shows. Under the definition, a live, in real-time road show to a live audience that is transmitted graphically will not be a graphic communication, and therefore not a written communication, or a free writing prospectus. It will still, however, be an offer subject to Securities Act Section 12(a)(2) and the other liability provisions of the federal securities laws.[291] Thus, as we discuss below, information that is presented as part of the live, in real-time road show to a live audience will not be a free writing prospectus. As discussed below, we have added a note to the effect that where a communication (such as slides or other visual aids) is provided or Start Printed Page 44754transmitted simultaneously as part of a live road show that is not a written communication, including a live, in real-time graphically transmitted road show, and that communication is provided or transmitted in a manner designed to make it available only as part of the road show and not separately, that communication is deemed part of the road show. Such a communication is thus deemed also not to be a written communication.[292]

Road shows that do not originate live, in real-time to a live audience and are graphically transmitted are electronic road shows that will be considered written communications and, therefore, free writing prospectuses. Under our new Rules, they are, of course, permitted if the conditions of our new Rules for free writing prospectuses are satisfied. As we noted in the Proposing Release, issuer involvement or participation in an electronic road show that is a written communication will make it an issuer free writing prospectus.[293]

(2) Treatment of Electronic Road Shows

Electronic road shows have to date proceeded in reliance on a series of no-action letters granted by the staff of the Division of Corporation Finance.[294] The rules we are adopting today permit the use of electronic road shows without many of the conditions in the electronic road show no-action letters.[295] As we discussed in the Proposing Release, the electronic road show no-action letters for registered public offerings are withdrawn as of the effective date of Rule 433.[296]

For road shows that are free writing prospectuses, the filing conditions of Rule 433 do not apply, with one exception. In the case of an issuer that is not required to file reports under Exchange Act Section 13 or Section 15(d) at the time of filing the registration statement and is registering an offering of common equity or convertible equity securities, the filing condition applies to a road show that is a free writing prospectus unless the issuer makes at least one version of a bona fide electronic road show [297] for the offering in question readily available without restriction electronically to any potential investor. If there is more than one version of a road show that is a written communication, the unrestrictedly available bona fide electronic road show must be available no later than the other versions.

We also have modified the filing conditions from the proposal to eliminate the specific obligation to file any material issuer information provided at an electronic road show. The filing condition for electronic road shows is as described above. We have added a note that a where a communication that is provided or transmitted simultaneously with a live road show that is not a written communication and that communication is provided or transmitted in a manner designed to make it available only as part of the road show and not separately, that communication is deemed to be part of the road show.[298] Therefore, as discussed above, if the road show is not a written communication, such a communication, such as slides or visual aids, even if it would otherwise be a graphic or other written communication is deemed to be part of the road show and thus not to be written. This provision also would cover, for example, a communication of visual aids provided in a separate feed from a live, in real-time road show to a live audience transmitted by graphic means, where the separate communication is provided or transmitted in a manner such that the separate communication can only be seen as part of the road show. If the road show is written and not required to be filed, such a simultaneous communication is also not required to be filed. This provision also would cover visual aids transmitted in a manner designed to make them available simultaneously only as part of an electronic road show. If the electronic road show is not subject to filing, neither are the visual aids. Otherwise, graphic or other written communications provided separately, for example by graphic means in a separate file designed to be available to be copied or downloaded separately, will be treated as a written communication and, if an offer, will be a free writing prospectus.

Whether or not road shows are written communications, all road shows Start Printed Page 44755that are offers are subject to Securities Act Section 12(a)(2) liability. In addition, all road shows that are offers that are written communications are free writing prospectuses, whether or not required to be filed.

(3) Comments on Electronic Road Shows

Commenters generally supported permitting electronic road shows.[299] While commenters supported the filing exclusion for electronic road shows, a significant number of commenters were concerned about the proposed rules conditions affecting electronic road shows.[300] Most of the comments related to the treatment of live, real-time road shows transmitted electronically as graphic communications.[301] These commenters believed that all live, real-time road shows, including those that are transmitted graphically to “overflow rooms,” should be treated as oral communications.[302] The commenters also argued that all materials provided or made available at these live graphically transmitted road shows, including slides and other materials used but not retained by participants should be treated as oral communications and should not be required to be filed with us under Rule 433.[303] Many commenters were concerned that putting greater restrictions on these road shows would eliminate the ability of out of town investors to participate in these road shows and view PowerPoint® and similar presentations which would, therefore, reduce the amount of information that these investors receive.[304]

We have addressed many of these comments and concerns through our modification of the definition of graphic communications, which as adopted excludes communications originating live, in real time to a live audience, even if transmitted by graphic means. The materials presented as part of these road shows, such as slides or PowerPoint® presentations will similarly not be graphic communications unless they are separately transmitted as graphic communications. As a result, live communications, such as live road shows transmitted electronically (whether to an overflow room or another city) are not graphic communications and thus not free writing prospectuses. They will be treated as oral communications and will be subject to liability under Securities Act Section 12(a)(2) and the anti-fraud provisions.

We also have revised the filing conditions applicable to electronic road shows in response to certain suggestions of commenters. Commenters generally supported the definition of “bona fide electronic road show,” [305] although two commenters suggested limiting the requirement for a bona fide electronic road show only to initial public offerings [306] and another suggested limiting it to equity but not debt offerings.[307]

WR Hambrecht.

Within the category of road shows that are graphic under our rules as adopted, we have retained the concept of bona fide electronic road show only for initial public offerings of common equity or convertible equity securities. We have excluded the concept for all other registered securities offerings. We believe that it is appropriate to limit the filing condition to require a bona fide electronic road show to initial public offerings of common equity or convertible equity securities, due to the greater potential for involvement and interest of the retail investor in these types of offerings and securities of the issuer. We believe this change addresses commenters' concerns that an unrestricted bona fide electronic road show should not be required in what are essentially registered institutional offerings. Finally, we believe the note added to Rule 433(d)(8) as adopted will clarify the characterization and treatment of materials provided or transmitted as part of or simultaneously with road shows, oral or written.

Some commenters also did not support requiring the filing of any issuer information used at any road show,[308] while two commenters thought that all electronic road shows should be filed and available to anyone.[309]

We believe that our treatment of road shows, including electronic road shows, strikes the appropriate balance between the need to market an issuer's securities to institutional investors and the desires of retail and other investors to have access to issuer information, such as management presentations, that are normally available only at road shows that often have not been open to retail investors generally. We also believe that the Rule as adopted addresses some of the concerns that important information about an issuer or an offering can be communicated at electronic (as well as live) road shows, rather than in the statutory prospectus. In this regard, as we noted in the Proposing Release, the Report and Recommendations of the NASD/NYSE IPO Advisory Committee recommended that issuers be required to make a version of their IPO road show available electronically to unrestricted audiences.[310] While we are not requiring that road shows be made available to unrestricted audiences, issuers and underwriters are free to make road shows available to all investors and we believe that our new rules will encourage issuers to do so where retail interest justifies such unrestricted availability.

(E) Treatment of Communications on Web Sites and Other Electronics Issues

(1) General

The communications rules we are adopting will enable issuers and market participants to take significantly greater advantage of the Internet and other electronic media to communicate and deliver information to investors. We have addressed previously the circumstances under which an issuer Start Printed Page 44756retains responsibility for information included on its web site; [311] however, the rules we are adopting today expand possibilities in this regard due to the ability to communicate outside the statutory prospectus, including posting information on web sites that will be free writing prospectuses.

We are adopting Rule 433(e) as proposed to make clear that an offer of an issuer's securities that is contained on an issuer's web site or that is contained on a third party web site hyperlinked from the issuer's web site is considered a written offer of such securities made by the issuer and, unless otherwise exempt, will be a free writing prospectus of the issuer. Accordingly, the requirements of Rule 433 will apply to these free writing prospectuses.[312]

(2) Historical Information on an Issuer Web Site

As we discussed in the Proposing Release, we recognize the importance of an issuer's web site as a means to communicate with the public, not just with potential investors in an offering, about its business. In this regard, commenters on our 2000 Electronics Release expressed concerns regarding the possibility that historical issuer information on an issuer's web site that is accessed at a later time would be considered “republished” at that later date, with attendant securities law liability.[313]

We believe that the availability of historical issuer information provides investors with more readily accessible information about the issuer. We also believe that issuers in registration should be able to maintain historical information on their web site in a manner by which that information will remain accessible to the public but will not be considered to be reissued or republished for purposes of the Securities Act.

Historical information that is not an offer under the Securities Act, either because its use and content are such that it does not fall within the Securities Act definition of that term or, for example, because it falls within a safe harbor (such as those we are adopting today), will not become an offer if accessed at a later time, unless it is updated or used or referred to (by hyperlink or otherwise) in connection with the offering.[314] We believe it is appropriate, however, to provide additional certainty regarding the treatment of historical information on web sites as “offers” under the Securities Act. Accordingly, Rule 433, as adopted, includes an exception to its general standard. This exception, contained in Rule 433(e)(2), provides that historical information will not be considered a current offer of the issuer's securities and, therefore, will not be a free writing prospectus, if that historical information is:

  • Separately identified as such; and
  • Located in a separate section of the issuer's web site containing historical information.

The use of that historical information will become a current offer if it is:

  • Incorporated by reference into or otherwise included in a prospectus of the issuer for the offering; or
  • Otherwise used or referred to in connection with the offering.

While Rule 433(e)(2) addresses particular situations in which information retained on a web site will not be considered a free writing prospectus, other information located on or hyperlinked to a web site might similarly not be considered a current offer of the issuer's securities and, therefore, not a free writing prospectus, where it can be demonstrated that the information was published previously.[315] For example, certain information that, while not contained in a separate section of an issuer's web site, is dated or otherwise identified as historical information and is not referred to in connection with the offering activities may not be a current offer, depending on the particular facts and circumstances.

(3) Comments on Treatment of Communications on Web Sites and Other Electronics Issues

Commenters supported the provisions of proposed Rule 433 clarifying the treatment of information contained on or hyperlinked to web sites of issuers and offering participants.[316] Some commenters requested that the Commission provide greater explanation of what might constitute “historical” information, including whether and how information is archived.[317] Commenters also desired further clarification of the treatment under the free writing prospectus rules of information on an issuer's web site hyperlinked from a third party's web site.[318]

Rule 433(e)(2) addresses particular situations in which information on an issuer's web site will not be considered a current offer or a free writing prospectus. Whether or not other information is historical information of the issuer will depend on the facts and circumstances. Further, we have not provided additional detail regarding the nature of “archiving” information because we believe that the provision in Rule 433(e)(2) regarding separately located, identified historical information provides issuers with the necessary flexibility in operating their web sites within the federal securities laws. Finally, information that is an offer and is contained on the web site of an offering participant or contained on the web site of another person hyperlinked from the web site of an offering participant could be a free writing prospectus of that offering participant.

(F) Media Publications or Broadcasts

(1) Overview

As we discussed in the Proposing Release, we believe it is important to identify the circumstances under which information released or disseminated to the media by an issuer or offering Start Printed Page 44757participant in connection with a registered offering will be considered the use of a free writing prospectus under the new rules. We recognize that the financial news media are a valuable source of information about issuers to the public at large. Issuers and offering participants use the media to disseminate important information about themselves, such as through the use of press releases and interviews. The media plays an integral role, therefore, in providing information about issuers to the market.

We want to encourage the role of the media as an important communicator of information and some media publications regarding an offering are not categorized as offers, under the gun-jumping provisions, by issuers or other offering participants. However, we do not want issuers and offering participants to avoid responsibility for their offering or marketing efforts by using the media. We, therefore, believe that it is appropriate to address in our new rules offers that take place using the media as a communication vehicle. Under the rules we are adopting today, where an issuer or any offering participant provides information about the issuer or the offering that constitutes an offer, whether orally or in writing, to a member of the media and where the media publication of that information is an offer by the issuer or other offering participant, we will consider the publication to be a free writing prospectus of the issuer or offering participant in question.

(2) Application of Rule 164 and Rule 433 to Media Publications

As we proposed, under the rules we are adopting today, the treatment of a media publication that constitutes an offer and therefore a free writing prospectus of the issuer or other offering participant will depend on whether the issuer or other offering participant prepares the publication or television or radio broadcast or pays for or provides other consideration for the publication or broadcast, or whether unaffiliated media prepares and publishes or broadcasts the communication for no consideration or payment from an issuer or offering participant.

(a) Prospectus Delivery or Availability

(i) Where Media Publications Are Prepared or Consideration Paid by Issuer or Offering Participant

If an issuer or offering participant prepares, pays for, or gives consideration for the preparation, publication or dissemination of or uses or refers to a published article, television or radio broadcast, or advertisement, the issuer or other offering participant will have to satisfy the conditions to the use of any other free writing prospectus of that offering participant at the time of the publication or broadcast. For example, in the case of a non-reporting issuer or reporting unseasoned issuer a statutory prospectus will have to precede or accompany the communication. As a consequence of this requirement, in offerings by non-reporting and unseasoned issuers, issuers and offering participants will not be able to prepare or pay for published or broadcast written advertisements, “infomercials,” or broadcast spots or similar written communications about the issuer, its securities, or the offering that includes information beyond that permitted by Rule 134. Well-known seasoned and other seasoned issuers and offering participants will have to comply with the other applicable conditions for the free writing prospectus. For seasoned issuers that are not well-known seasoned issuers and offering participants, a registration statement including a statutory prospectus (which can be a base prospectus) will have to be on file with us. These conditions may also include filing with us not later than the date of first use.

(ii) Unaffiliated Media Publications

Where, however, the free writing prospectus is prepared and published or broadcast by persons in the media business that are unaffiliated with the issuer and another offering participant,[319] and the preparation, publication, or broadcast is not paid for by the issuer or other offering participant, our rules include certain accommodations. In these cases, an issuer or offering participant would not have to have a statutory prospectus precede or accompany the media communication, although a filed registration statement including a statutory prospectus would be necessary, except in the case of a well-known seasoned issuer.[320] Therefore, an interview or other media publication or television or radio broadcast where an issuer or offering participant participates (but does not prepare or pay for the event or article) could be a free writing prospectus, but because of the media intervention, we conclude that its use should not be conditioned on prior or simultaneous delivery of the statutory prospectus. For example, an underwriter or issuer will be permitted to invite the press to a live road show or an electronic road show, but, in most cases, we will consider an article including information obtained at that road show to be a free writing prospectus of the issuer or underwriter and subject to the rules regarding free writing prospectuses.[321] As another example, if a chief executive officer of a non-reporting issuer gives an interview to a financial news magazine without payment to the magazine for the article, the publication of the article after the filing of the registration statement will be a free writing prospectus of the issuer that will be subject to the filing conditions by the issuer after publication. In that case, there will be no requirement that a statutory prospectus precede or accompany the article at the time of the publication.

(b) Filing

We are adopting the filing condition applicable to free writing prospectuses that are media publications or television or radio broadcasts with some modifications from the proposals in response to comments. Rule 433(f) provides that the filing condition of Rule 433(d) will be satisfied where a free writing prospectus including information about the issuer, its securities, or the offering provided, authorized, or approved by or on behalf of the issuer or an offering participant, that is prepared and published or disseminated by persons in the media business who are not affiliated with or paid by the issuer or an offering participant (with certain exceptions for issuers in the media business), is filed by the issuer or offering participant involved within four business days after Start Printed Page 44758the issuer or offering participant becomes aware of its publication or first broadcast.[322] Persons in the media have no filing or other responsibilities under these provisions.[323]

We have made certain modifications to the filing conditions from the proposals. First, Rule 433 permits issuers and offering participants to satisfy the filing condition by filing:

  • The media publication;
  • All of the information provided to the media in lieu of the publication; or
  • A transcript of the interview or similar materials that the issuer or other offering participant provided to the media, provided that all the information provided is filed.

We also have provided that an issuer or other offering participant does not have to file the media publication if the substance of the written communication has been previously filed with us. Finally, the issuer or offering participant may file, together with or after the media publication is filed, information that the issuer reasonably believes is necessary or appropriate to correct information included in the media publication.[324] We believe that these additional provisions will give issuers and offering participants the ability to file the publications on a timely basis, to file the underlying materials in lieu of the publication, and to file correcting materials after publication, television or radio broadcast, or other dissemination, if there is concern about the accuracy of the publication.[325]

(c) Issuers in the Media Business

In response to comments about the impact the condition that the media entity is unaffiliated with the issuer has on issuers that are in the media business,[326] we have provided a limited exclusion that would permit issuers that are in the media business to be able to rely on the unaffiliated media condition if the media issuer or its affiliated media business:

  • Is the publisher of a bona fide newspaper, magazine, or business or financial publication of general and regular circulation or bona fide broadcaster of news including business and financial news; [327]
  • Has established policies and procedures for the independence of the content of the publication or broadcast from the offering activities of the issuer; and
  • Publishes or broadcasts the communication in the ordinary course.

(3) Responses to Comments on Treatment of Media Publications

Among the issues commenters raised, many focused on the treatment of media reports under the proposed rules regarding free writing prospectuses.[328] They expressed concern as to whether the issuer or offering participants were obligated to monitor media releases and provide correcting information.[329] These commenters were concerned about the ability to satisfy the conditions of the exemption if the media reports or publicity about the issuer or its securities occurred prior to the filing of a statutory prospectus. Commenters also suggested that the filing condition be limited to the specific publication that was granted an interview or, if statements from that interview were carried by different media outlets, the issuer or offering participant should be able to file a representative statement.[330] Additionally, some commenters suggested that if the media publication was based on a press release or other specifically authorized communication, then only the press release or other authorized communication should satisfy the filing condition.[331] One commenter suggested that media publications based on publicly disseminated information should be excluded from the definition of free writing prospectuses.[332] Commenters also suggested that the filing occur after a senior officer has actual knowledge of the publication and that the filing deadline be extended to three business days.[333]

We believe that the modifications we have made to the filing conditions and other provisions of Rule 433 should address most of the commenters' concerns regarding unaffiliated media publications. We would observe first that, as discussed above, not every media publication about an offering is an offer or a free writing prospectus of the issuer or other offering participant. In particular, we have administered the gun-jumping provisions so that where there is no other involvement of an issuer or other offering participant, media publications based on information filed with us or available on an unrestricted basis are not offers of the issuer or other offering participant. This should substantially eliminate the need to monitor media publications unless offering participants are directly communicating offering information or otherwise involved with the media in connection with the offering. Further, the Rule only applies to written offers prepared, published, or disseminated by the media where an issuer or offering participant provides, authorizes, or approves the information. In addition, we have made the following modifications:

  • Extended the filing due date to four business days after the issuer or other offering participant becomes aware of the publication or first broadcast;
  • Permitted the filing of information reasonably believed necessary or appropriate to correct information included in the communication;
  • In lieu of filing the article, permitted the filing of the transcript of the entire interview or other materials that formed the basis for the article; and
  • Provided that where the substance of the information provided by or on behalf of the issuer or other offering participants contained in the Start Printed Page 44759publication is already filed with us no filing is required.

We also have made accommodations so that issuers in the bona fide media business will be able to rely on these provisions.

As in the case of the safe harbors for factual business information, some commenters also requested that we revise the definition of “by or on behalf of” an offering participant to include only those communications that were made by specific authorized persons and to provide that the issuer or other offering participant is not liable for unauthorized communications.[334] For the reasons noted above, we are not modifying the definition of “by or on behalf of” to limit it to specified persons.

(G) Liability Issues Affecting Free Writing Prospectuses

(1) General

Even when filed, a free writing prospectus will not be part of a registration statement subject to liability under Securities Act Section 11, unless the issuer elects to file it as a part of the registration statement. Regardless of whether a free writing prospectus is filed, any seller offering or selling securities by means of the free writing prospectus will be subject to disclosure liability under Securities Act Section 12(a)(2). A free writing prospectus also can, of course, be the basis for liability under the anti-fraud provisions of the federal securities laws.

(2) Filed Free Writing Prospectus Not Part of Registration Statement

A free writing prospectus used after a registration statement is filed complying with Rule 433 will be governed by the provisions of Securities Act Section 10(b), which provides that a prospectus permitted under that section is filed as part of the registration statement, but is not subject to Section 11 liability. We are adopting as proposed the modification to the Section 10(b) filing requirement to provide that a free writing prospectus filed pursuant to Rule 433 must identify the registration statement to which it relates, but Rule 433 provides that it will not have to be filed as part of the registration statement. We believe that the modified filing condition will enhance investor protection because it should facilitate filing of the free writing prospectus on a timely basis and more readily identify the filed information as a free writing prospectus.[335]

(3) Cross-Liability Issues

As we discussed in the Proposing Release, we provided that the filing condition applied only to an issuer free writing prospectus and issuer information or to information in a free writing prospectus broadly disseminated, to address the concerns that commenters on our 1998 proposals had about cross liability under Securities Act Section 12(a)(2) for free writing materials of other offering participants.[336] As we discuss above, we are adopting the filing condition substantially as proposed so that it does not extend to a free writing prospectus prepared by an underwriter, even one including information prepared on the basis of or derived from issuer information that does not include issuer information, unless the free writing prospectus falls into the “broad dissemination” category. Free writing prospectuses sent directly to customers of an offering participant, without regard to number, are not broadly disseminated for purposes of the Rule.

Although we attempted in the proposals to address the cross-liability concerns by restricting the filing obligations only to limited situations, commenters on our proposals continued to express concern about cross liability for another participant's free writing prospectus, whether or not the participant used that free writing prospectus. Commenters requested clarification that use of a free writing prospectus by one offering participant will not subject other offering participants who do not use the free writing prospectus to liability under Securities Act Section 12(a)(2).[337] Some commenters recommended that the party should be considered to have offered and sold “by means of” a free writing prospectus, and liability for the free writing prospectus should arise, only if a party has used, prepared, or referred to the free writing prospectus.[338]

In response to commenters' continuing concerns about cross liability for free writing prospectuses used by an issuer and other offering participants, we have included a new provision in Rule 159A that will clarify when an offering participant, other than the issuer, is considered to offer and sell securities “by means of” a free writing prospectus. Under the new provisions of Rule 159A, an offering participant other than the issuer will not be considered to offer or sell securities to a person “by means of” a free writing prospectus unless:

  • The offering participant used or referred to the free writing prospectus in offering or selling the securities to that person;
  • The offering participant offered or sold the securities to that person and participated in planning for the use of that free writing prospectus by other offering participants and such free writing prospectus was used or referred to in offering or selling securities to that person by one or more of such other offering participants; [339] or
  • Under the conditions for use of the free writing prospectus in Rule 433, the offering participant is required to file the free writing prospectus with us pursuant to Rule 433.[340]

The Rule, as revised, also provides that a person will not be considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed the free writing prospectus with us. As a result of these provisions, we believe that offering participants will be able to determine when they will be considered to have offered or sold securities by means of any particular free writing prospectus.

c. Interaction of New Communications Rules With Regulation FD

i. Amendments to Regulation FD

As a consequence of our new rules to liberalize communications during the offering process and encourage continuing ongoing regular Start Printed Page 44760communications by reporting issuers, we are revisiting the exclusions from Regulation FD for communications made during a registered offering of securities.[341] The communications regime that we are adopting today contemplates that, in connection with an offering, certain material non-public issuer information can be made public through the prospectus filed as part of a registration statement or the issuer's filing of free writing prospectuses. Oral communications of an issuer made in connection with a registered offering after the registration statement is filed will continue not to be subject to any filing or public disclosure requirement. As we stated in the Proposing Release, we continue to believe that subjecting oral communications that occur in connection with a registered offering in a capital formation transaction to a public disclosure requirement could adversely affect the capital formation process.

We are amending Regulation FD substantially as proposed to specify the circumstances, both in terms of the type of offering and the means of communication, in which issuer communications will be excluded from the operation of that Regulation in connection with a registered securities offering.

First, as amended, Regulation FD will not apply to disclosures made in the following communications in connection with a registered securities offering that is of the type excluded from the Regulation:

  • A registration statement filed under the Securities Act, including a prospectus contained therein;
  • A free writing prospectus used after filing of the registration statement for the offering or a communication falling within the exception to the definition of prospectus contained in clause (a) of Securities Act Section 2(a)(10);
  • Any other Section 10(b) prospectus;
  • A notice permitted by Securities Act Rule 135;
  • A communication permitted by Securities Act Rule 134; or
  • An oral communication made in connection with the registered securities offering after filing of the registration statement for the offering under the Securities Act.

Second, prior to our actions today, Regulation FD applied to offerings of the types described in Rule 415(a)(1)(i) through (vi).[342] Rule 415(a)(1)(i) provides for offering by selling security holders. We are amending Regulation FD to clarify that, as to offerings of the type described in Rule 415(a)(1)(i) where the registered offering also includes a registered offering, whether or not underwritten, for capital formation purposes for the account of the issuer, Regulation FD does not apply, unless the issuer's offering is included for the purpose of evading Regulation FD.[343] The amendments do not otherwise change the types of registered offerings that are excluded from, or subject to, the operation of the Regulation.

In view of our new rules to expand permissible communications, we believe it is appropriate to clarify that the communications excluded from the operation of Regulation FD are, in fact, those communications that are directly related to a registered securities offering. Communications not contained in our enumerated list of exceptions from Regulation FD—for example, the publication of regularly released factual business information or regularly released forward-looking information or pre-filing communications—are subject to Regulation FD.

ii. Comments on Amendments to Regulation FD

Most commenters on the proposed changes to Regulation FD supported the inclusion of the specific enumeration of communications in connection with offerings that are not subject to the provisions of Regulation FD.[344] Commenters expressed concern that the proposed changes limited the Regulation FD exclusion only to registered offerings involving capital formation transactions.[345] Some commenters believed that the Regulation FD exclusion should cover all secondary offerings (those on behalf of selling security holders), regardless of whether conducted as part of an issuer capital raising transaction.[346]

We have clarified the modifications to Regulation FD from the proposals. We have not changed the types of offerings in which disclosures are subject to Regulation FD. The only change we are making from the current language is to provide that disclosures made in connection with registered offerings by selling security holders of the type described in Rule 415(a)(1)(i) are excluded from the application of Regulation FD if the offering also includes a registered primary offering that is a capital formation transaction for the account of the issuer.

The change to Regulation FD does not, as some commenters may have misinterpreted, mandate that all registered securities offerings be for capital formation purposes as a condition of exclusion from the operation of Regulation FD. The exclusions prior to and after the change have the general effect of excluding capital formation transactions, but there was, and after the change will be, no separate “capital formation” requirement for the exclusions. Rather, the change will provide that secondary offerings will be excluded from Regulation FD if the offering also includes a registered capital formation transaction for the account of the issuer.

4. Use of Research Reports

a. Current Regulatory Treatment of Research Reports

The veracity and reliability of research reports, particularly those issued by full service broker-dealers, have received significant attention in recent years. The Sarbanes-Oxley Act,[347] Regulation AC,[348] the self-regulatory organization rules we approved,[349] and the global research analyst settlement [350] have addressed many of the abuses identified with analyst research and have required structural reforms and increased Start Printed Page 44761disclosures.[351] As a direct result of these initiatives and actions, we expect that analyst research reports used by market participants will better disclose conflicts of interest relating to research of which investors should be aware.

The value of research reports in continuing to provide the market and investors with information about reporting issuers cannot be disputed. Research analysts study publicly traded issuers and provide information about the securities of those issuers, often through the issuance of research reports.

We believe it is appropriate to limit the restrictions on research under the gun-jumping provisions of the Securities Act to those we believe are appropriate to avoid offering abuses. Given the ongoing flow of information into the market, particularly with respect to reporting issuers and the enhancements to the environment for research imposed by recent statutory, regulatory, and enforcement developments, we believe it is appropriate to make measured revisions to the research rules that are consistent with investor protection but that will permit dissemination of research around the time of an offering under a broader range of circumstances.

b. Amendments to Exemptions for Research

Rules 137, 138, and 139 under the Securities Act describe circumstances in which a broker or dealer may publish research constituting an offer around the time of a registered offering without violating the Section 5 prohibitions on pre-filing offers and impermissible prospectuses. We are adopting measured amendments that will make incremental modifications to these rules.[352] As adopted, the rules will, for the first time, contain a definition of research report. The rules also expand the circumstances in which offering participants and persons who are not offering participants will have safe harbor exemptions for dissemination of research reports during a registered offering.[353]

The amendments we are adopting today are designed to ensure that appropriate investor protections are maintained. In that regard, we have maintained our current approach with respect to liability for research, which includes general anti-fraud liability, used in reliance on these rules.[354]

i. Definition of Research Report

Based on comments, we believe it is important to have a significant measure of consistency between Regulation AC and the research safe harbors contained in Rules 137, 138, and 139. We do not believe, however, that absolute consistency is appropriate in recognition of the differences in the purposes of the rules. Accordingly, we are adopting a definition of research report that builds on the definition of “research report” in Regulation AC, while preserving the purposes of Rules 137, 138, and 139.

(A) Definition

As adopted, “research report” is defined as a written communication, as defined in Securities Act Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.[355] This definition is intended to encompass all types of research reports, whether issuer-specific or industry research separately identifying the issuer.

Unlike the proposals, the definition does not require that the research report contain sufficient information on which to base an investment decision. As with the current research rules, the definition is limited to research, including information, opinions, or recommendations, contained in written communications.[356]

Under the definition of “research report” we are adopting today, there could be some differences in the types of communications that will constitute a research report under the research safe harbors as compared to Regulation AC. In light of the different purposes of the rules, we believe the distinctions are appropriate and will not raise investor Start Printed Page 44762protection concerns. For example, for purposes of Rule 139, it is possible that particular documents, such as industry reports, will be research reports under our new definition, even if they fall outside of the definition of “research report” under Regulation AC.

The definition of research report we are adopting today retains the condition that the research be in a written communication. A publication element has been a condition of the research safe harbors since the rules were first contemplated and adopted. From the earliest Commission statements in the 1960's, the Commission did not want to discourage the ongoing publication of research reports by market professionals, provided they were provided within the scope of the restrictions of Securities Act Section 5.[357] The research safe harbors have always been aimed at written reports due to the Section 5 restrictions on written offers.

The research safe harbors are not intended to protect oral communications that might be offers from the liability provisions of Securities Act Section 12(a)(2).[358] Similarly, in our new definition, we are not expanding the scope of the research safe harbors to cover oral communications because we believe that the appropriate liability provisions should continue to apply to such oral communications. Whether oral communications relate to general research or are in connection with an offering may also involve distinctions that are too fine to be appropriate for the research exemptions. Whether a particular oral communication about an issuer or its securities by an offering participant is an offer will thus continue to depend on the facts and circumstances.

(B) Comments on Definition of Research Report

While commenters supported the proposed amendments to the research safe harbors,[359] they were concerned that the proposed definition of research report would narrow the types of research that would be eligible for the safe harbors.[360] In particular, commenters requested that the research report definition not be the same as in Regulation AC requiring that the research report contain information sufficient upon which to make an investment decision.[361] Rather, the commenters requested that, as today, the research safe harbors be available for information, opinions, and recommendations about an issuer or its securities.[362] Some commenters also requested that the definition of research permit the use of oral, rather than just written, research in reliance on the safe harbors.[363]

As we discuss above, we have revised the proposed definition of research report for purposes of Rules 137, 138, and 139 to make clear that it continues to apply to information, opinions, or recommendations contained in written communications. We agree with commenters that for purposes of Rules 137, 138, and 139 a research report does not have to contain information sufficient to make an investment decision for the research safe harbors to be available and have revised the definition accordingly. We have not, however, expanded the scope of the research safe harbors to encompass oral communications.

ii. Rule 137

Rule 137 provides that a broker or dealer that is not an offering participant in a registered offering but publishes or distributes research reports with respect to an issuer's securities will not be considered to be engaged in a distribution of the issuer's securities and would therefore not be an underwriter in the offering. We are expanding the exemption, as proposed, to apply to securities of any issuer, including non-reporting issuers, with exceptions for blank check companies, shell companies, and penny stock issuers. Rule 137 will continue to be available only to brokers and dealers who:

  • Are not participating in the registered offering of the issuer's securities;
  • Have not received compensation from the issuer, its affiliates, or participants in the securities distribution, among others, in connection with the research report; and
  • Publish or distribute the research report in the regular course of business.

Commenters supported the proposed changes to Rule 137 but requested that the rule make clear that the prohibition on consideration from the issuer would apply only to consideration paid in connection with the publication or distribution of the research report.[364] Other commenters suggested that the safe harbor be expanded to permit dealers to rely on the safe harbor for the publication and distribution of research reports after the effectiveness of the registration statement.[365]

We are adopting as proposed, and as is in current Rule 137, the provision prohibiting compensation in connection with the publication or distribution of the research report. In response to commenters' concerns regarding compensation, however, we have clarified the compensation language in Rule 137 to provide that the prohibition on compensation applies to compensation for the particular research report. While the safe harbor covers research reports provided after effectiveness of the registration statement, it continues to be an exemption from the definition of underwriter.

iii. Rule 138

Rule 138 permits a broker or dealer participating in a distribution of an issuer's common stock and similar securities to publish or distribute research that is confined to that issuer's fixed income securities, and vice versa, if it publishes or distributes that research in the regular course of its business. We believe it is appropriate to permit research on a broader group of reporting issuers under Rule 138 in Start Printed Page 44763view of the regulatory reforms and the role of independent research. Further, we believe the current limitation on the type of issuers under this Rule is no longer necessary to protect investors.

(A) Amendments to Rule 138

We are amending Rule 138 substantially as proposed to expand the categories of eligible issuers. As adopted, the Rule generally will cover research reports on all reporting issuers that are current in their periodic Exchange Act reports on Forms 10-K, 10-KSB, 10-Q, 10-QSB, and 20-F at the time of reliance on the exemptions, rather than only issuers who are Form S-3 or Form F-3 eligible, as is currently the case. In addition, in response to commenters' suggestions, we are expanding the Rule as it applies to foreign private issuers to allow broker-dealers publishing or distributing research reports on non-reporting foreign private issuers that either have had equity securities traded on a designated offshore market or have a $700 million worldwide public float to rely on the Rule.[366] Like the amendments regarding Rules 137 and 139 that we are adopting today, the Rule excludes research reports on issuers that have historically posed certain risks of abuse, including blank check companies, shell companies, and penny stock issuers.

We also are adopting as proposed the condition to the Rule 138 exemption that the broker or dealer must have previously published or distributed research reports on the types of securities that are the subject of the reports in the regular course of its business.[367] As we stated in the Proposing Release, we believe that it is appropriate to include this condition because it is important that the broker or dealer have a history of publishing or distributing a particular type of research. This condition does not mean, however, that the broker or dealer must have a history of publishing research reports about the particular issuer or its securities. If a broker or dealer begins publishing research about a different type of security around the time of a public offering of an issuer's security and does not have a history of publishing research on those types of securities, we are concerned that such publication or distribution might be a way to provide information about the publicly offered securities in order to circumvent the provisions of Section 5 and the permissible free writing rules we are adopting today.

(B) Comments on Rule 138 Amendments

Commenters generally supported the expansion of the safe harbor to a broader class of issuers.[368] Some commenters suggested that the safe harbor also be available to research reports on voluntary filers and Schedule B issuers and that it apply to all private offerings.[369] A number of commenters requested a further change to the existing provisions of Rule 138 to eliminate the foreign private issuer eligibility condition regarding trading on a designated offshore securities market.[370] Finally, some commenters requested clarification of the condition that the broker or dealer be publishing reports on the same types of securities to be able to rely on the safe harbor, while others recommended eliminating this condition.[371]

We have adopted the amendments to Rule 138 substantially as proposed. We do not believe it is appropriate at this time to further expand the categories of eligible issuers under the Rule, other than for certain non-reporting foreign private issuers that have a significant worldwide public float. We have clarified that the broker dealer does not have to be publishing or distributing research reports about a particular issuer or its securities to rely on the Rule, only that the research reports cover the same types of securities. We have not expanded the scope of the research safe harbor to cover all private offerings.

iv. Rule 139

Rule 139 permits a broker or dealer participating in a distribution of securities by a seasoned issuer or by certain non-reporting foreign private issuers to publish research concerning the issuer or any class of its securities, if that research is in a publication distributed with reasonable regularity in the normal course of its business. Rule 139 also provides a safe harbor for industry reports covering smaller seasoned issuers, if the broker or dealer complies with restrictions on the nature of the publication and the opinion or recommendation expressed in that publication.

(A) Issuer-Specific Reports

(1) Amendments Regarding Issuer-Specific Reports

We are adopting the amendments to Rule 139 to allow reports about a specific issuer that, at the time of reliance on the Rule, is current in its Exchange Act periodic reports and:

  • At the later of the time of filing its most recent registration statement on Form S-3 or Form F-3 or the time of filing of its most recent amendment to such registration statement for purposes of complying with Securities Act Section 10(a)(3), is eligible to register a primary offering of securities on Forms S-3 or F-3, based on the $75 million minimum public float eligibility provision of those forms; or
  • At the time of reliance on the Rule, the issuer's registration statement covers an offering of the issuer's securities in reliance on General Instruction I.B.2 of Form S-3 or Form F-3.

As with Rule 138, we are allowing reports on a broader category of non-reporting foreign private issuers also to be covered by the Rule.[372] Research reports on penny stock issuers, blank check companies, and shell companies are excluded from Rule 139.

In the amendments we are adopting today, we are retaining the requirement that the broker or dealer publish or distribute the research report in the regular course of its business. We are not retaining the requirement of publication with reasonable regularity. As we stated in the Proposing Release, we do not believe that the reasonable regularity requirement has added any particular degree of investor protection and has raised concerns as to when the condition is satisfied. We are, however, requiring that the broker or dealer must, at the time of reliance on the Rule, have distributed or published at least one research report about the issuer or its securities, or have distributed or published at least one such report following discontinuing coverage. This requirement, we believe, retains the most important element of the “reasonable regularity” requirement, namely that the report initiating (or re-Start Printed Page 44764initiating) coverage of an issuer not benefit from an exemption under Rule 139.

As we noted previously, we are not requiring any minimum time period for the broker or dealer to have distributed or published research reports, only that the particular broker or dealer have initiated or re-initiated coverage. In addition, the amendment as adopted does not require that the previously published or distributed research report cover the same securities that are the subject of the registered offering.

(2) Comments on Issuer-Specific Reports

Commenters supported extending the safe harbor to a broader class of issuers and recommended further extension to all reporting issuers, investment companies, and business development companies.[373] We have not extended the safe harbor to a broader class of issuers than we proposed, other than for certain non-reporting foreign private issuers with a significant public float. Commenters also requested clarification that the proposed changes would only require the publication or distribution of one prior research report in order to be able to rely on the safe harbor.[374] As noted above, we have clarified the Rule in this regard to require only that coverage be initiated or re-initiated.

(B) Industry-Related Reports

(1) Amendments Regarding Industry-Related Reports

As adopted, industry reports under Rule 139 can cover issuers required to file reports pursuant to Exchange Act Section 13 or Section 15(d) and issuers satisfying the conditions regarding non-reporting foreign private issuers. The safe harbor for industry reports is not available if the issuer is or during the last three years was or any of its predecessors was a blank check company, shell company (other than business combination related shell company), or penny stock issuer. As adopted, the amendments extend the safe harbor for industry reports to registered offerings of any reporting issuer.

Today's amendments remove the prohibition on a broker or dealer making a more favorable recommendation than the one it made in the last publication. As in the proposals, we are not requiring that the research report include any prior recommendations regarding the issuer or its securities. We are adopting as proposed the requirement that the research reports contain similar types of information about the issuer or its securities as contained in prior reports.

We believe that the recently adopted safeguards regarding analyst recommendations make it appropriate to remove the “no more favorable” recommendation conditions in current Rule 139. We believe the Rules, as amended, are consistent with our recent actions affecting research analysts and research reports and will result in enhanced opportunity to provide information to investors regarding issuers and their securities.

In the instruction regarding projections, we are requiring that projections be provided for substantially all the issuers listed in the comprehensive list of securities contained in the report.

(2) Comments on Industry-Related Reports

Commenters supported the safe harbor for industry-related reports for all reporting issuers and suggested expanding the safe harbor further to include all issuers, whether or not reporting, including voluntary filers.[375] Commenters also supported the elimination of the previous publication condition in the safe harbor.[376] Some commenters thought that the disqualification for research reports on blank check, shell companies, and penny stock issuers should remain at two years, not three, and that Rules 137 and 138 should have only a two-year disqualification.[377]

We have not expanded the coverage of the safe harbor to all issuers or to include voluntary filers. In addition, we have provided that the disqualification for blank check companies, shell companies (other than business combination related shell companies), and penny stock issuers is for three, rather than two, years to be consistent with all of the Rules we are adopting today that have similar disqualification provisions.

v. Rule 139a

In the Asset-Backed Securities Adopting Release, we noted that we were considering amendments to Rules 137, 138 and 139 in connection with these reform proposals and:

To the extent these existing safe harbors are modified, we also will consider similar modifications to the ABS safe harbor. We also encourage ABS market participants to comment specifically on the proposals in that release regarding any appropriate changes to the existing safe harbors or the ABS safe harbor.[378]

In light of the modifications we are making to Rule 139 today to eliminate the requirement that in an industry report a recommendation regarding the registrant or its securities can only be included if a recommendation as favorable or more favorable had appeared in the last publication of the broker-dealer, we are eliminating paragraph (c) of Rule 139a, which contains a comparable provision for recommendations in reports on asset-backed securities.

Commenters suggested the elimination of paragraph (c) and also suggested that the “reasonable regularity” requirement in Rule 139a be eliminated. While we have eliminated the latter requirement in Rule 139, we have added a requirement that the research report not represent the initiation or reinitiation of research coverage. In Rule 139a the “reasonable regularity” requirement extends to reports on multiple issuers and transactions. We have therefore decided to retain the “reasonable regularity” requirement in Rule 139a.

vi. Research Report Amendments in Connection With Regulation S and Rule 144A Offerings

We are concerned that the restrictions in Regulation S on directed selling efforts and offshore transactions [379] and in Rule 144A on offers to non-qualified institutional buyers (“QIBs”) and general solicitation [380] have resulted in brokers and dealers unnecessarily Start Printed Page 44765withholding regularly published research.[381] Accordingly, we are adopting as proposed amendments providing that research reports meeting the conditions of Rule 138 and Rule 139 will not be considered offers or general solicitation or general advertising in connection with offerings relying on Rule 144A.[382] The amendments also provide that these research reports will not constitute directed selling efforts or be inconsistent with the offshore transaction requirements of Regulation S.[383]

We do not believe that the publication of research in reliance on Rules 138 and 139 will jeopardize the interests of investors in transactions relying on Rule 144A or Regulation S. On the other hand, limiting the ability to rely on these exemptions when research on the issuers may otherwise be available could, we believe, negatively impact information available to investors. Commenters supported the proposals to exempt research reports meeting the conditions of the safe harbor from the restrictions in Regulation S and Rule 144A.[384]

vii. Research and Proxy Solicitations

We are adopting with one modification from the proposal a codification of a Commission staff position [385] that the publication or distribution of research under the conditions set forth in Rules 138 and 139 is permitted in connection with a transaction that is subject to the proxy rules under the Exchange Act.[386] The new Rule provides that distribution of research in accordance with Rule 138 or Rule 139 is a solicitation to which Rules 14a-3 through 14a-15 (other than Rule 14a-9) of the proxy rules [387] does not apply. Commenters supported the proposal to codify the staff position and one requested that the exemption not be restricted to use only in connection with transactions registered under the Securities Act.[388] We are adopting Rule 14a-2(b)(5) without the requirement that the exemption be limited to transactions registered under the Securities Act.

IV. Liability Issues

A. Information Conveyed by the Time of Sale for Purposes of Section 12(a)(2) and Section 17(a)(2) Liability

1. Interpretation and Rule

Under the Securities Act, purchasers of an issuer's securities in a registered offering have private rights of action for materially deficient disclosure in registration statements under Section 11 and in prospectuses and oral communications under Section 12(a)(2). Section 11 liability exists for untrue statements of material facts or omissions of material facts required to be included in a registration statement or necessary to make the statements in the registration statement not misleading at the time the registration statement became effective. Under Section 12(a)(2), sellers have liability to purchasers for offers or sales by means of a prospectus or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading.[389] Securities Act Section 17(a) is a general anti-fraud provision which provides, among other things, that it shall be unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.[390]

The term “sale” under the Securities Act includes any contract of sale.[391] As we discussed in the Proposing Release, we believe that we should address the discrepancies in time between the time of the contract of sale for securities (when an investor becomes committed to purchase the securities) on the one hand, and the later time of availability of a prospectus (and perhaps other information) on the other hand. The Securities Act registration regime permits final prospectuses to become available after an investor becomes committed to purchase a security.[392] This availability, therefore, does not necessarily address the receipt by an investor of information at the time of its contractual commitment.

We provided an interpretation of Section 12(a)(2) and Section 17(a)(2) in our Proposing Release and we are reaffirming that interpretation. Securities Act Section 12(a)(2) and Section 17(a)(2) do not require that oral statements or the prospectus or other communications contain all information called for under our line-item disclosure rules or otherwise contain all material information.[393] Rather, under these provisions, the determination of liability is based on whether the communication includes a material misstatement or fails to include material information that is necessary to make the communication, under the circumstances in which it is made, not misleading. Under our interpretation, the time at which an investor has taken the action the investor must take to become committed to purchase the securities, and has therefore entered into a contract of sale, Start Printed Page 44766is one appropriate time [394] to apply the liability standards of Section 12(a)(2) and Section 17(a)(2).[395]

We interpret Section 12(a)(2) and Section 17(a)(2) as meaning that, for purposes of assessing whether at the time of sale (including a contract of sale) a prospectus or oral communication or statement includes or represents a material misstatement or omits to state a material fact necessary in order to make the prospectus, oral communication, or statement, in light of the circumstances under which it was made, not misleading, information conveyed to the investor only after the time of sale (including a contract of sale) should not be taken into account.[396] For purposes of Section 12(a)(2) and Section 17(a)(2), whether or not information has been conveyed to an investor at or prior to the time of the contract of sale currently is a facts and circumstances determination, and our actions today do not affect that determination. Such information could include information in the issuer's registration statement and prospectuses for the offering in question, the issuer's Exchange Act reports incorporated by reference therein or information otherwise disseminated by means reasonably designed to convey such information to investors. Such information also could include information directly communicated to investors (including, under the rules we are adopting today, through the use of free writing prospectuses).[397]

As noted above, liability under Section 12(a)(2) attaches to an oral communication or prospectus by means of which an offer or sale is made that contains a material misstatement or omits to state a material fact necessary to make the statements, in light of the circumstances in which they were made, not misleading. Liability under Section 17(a)(2) attaches to an untrue statement of a material fact or an omission to state a material fact necessary to make the statements made, in light of the circumstances in which they were made, not misleading, by means of which money or property is obtained.

Under our interpretation, the liability determination under Section 12(a)(2) or Section 17(a)(2) as to an oral communication, prospectus, or statement, as the case may be, does not take into account information conveyed to a purchaser only after the time of sale (including the contract of sale), including information contained in any final prospectus, prospectus supplement, or Exchange Act filing that is filed or delivered subsequent to the time of sale (including the contract of sale) where the information is not otherwise conveyed at or prior to that time.[398]

In furtherance of our interpretation discussed above, we also are adopting as proposed an interpretive rule, Rule 159, under Section 12(a)(2) and Section 17(a)(2). We intend that the effect of our interpretive rule will be the same as our interpretation. Our new Rule provides the following:

  • For purposes of Section 12(a)(2) and Section 17(a)(2) only, and without affecting any other rights under those sections, for purposes of determining at the time of sale (including the time of the contract of sale), whether a prospectus, oral statement, or a statement,[399] includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading,[400] any information conveyed to the purchaser only after that time of sale will not be taken into account; and
  • For purposes of Section 12(a)(2) only, a purchaser's “knowing of such untruth or omission” in respect of a sale (including a contract of sale) means knowing at the time of such sale.

We find that our interpretation and interpretive rule are in furtherance of the objectives of Section 12(a)(2) and Section 17(a) and are necessary for the protection of the rights of investors intended to be provided by those sections.

We do not believe that our interpretation or interpretive rule should result in “speed bumps” or otherwise slow down the offering process. Particularly in light of the new rules we are adopting today regarding communications, issuers and underwriters should have sufficient flexibility to convey information in a manner that does not slow the offering process. At the same time, in our view, the interpretation that liability under Section 12(a)(2) and Section 17(a)(2) should be determined based on information conveyed at the time of sale (including a contract of sale) is unassailable.

2. Comments and Guidance Regarding Our Interpretation and Rule 159

With regard to our interpretation of Securities Act Section 12(a)(2) and Securities Act Section 17(a)(2) and proposed Rule 159, commenters raised concerns in the following areas:

  • The Section 12(a)(2) and Section 17(a)(2) analysis of the information conveyed; [401]
  • The manner in which the time of “sale” is determined; [402] and
Start Printed Page 44767
  • The manner in which a purchaser and seller may terminate an old contract and enter into a new contract of sale based on new information.[403]

a. The Section 12(a)(2) and Section 17(a)(2) Analysis of the Information Conveyed

Securities Act Section 12(a)(2) and Section 17(a)(2) do not require that oral statements or the prospectus or other communication contain all information called for under our line-item disclosure rules or otherwise contain all material information. Rather, under these provisions, the determination of liability is based on whether the communication includes a material misstatement or fails to include material information that is necessary to make the communication not misleading in light of the circumstances in which the communication is made. In that regard, where in our discussion of our interpretation in the Proposing Release we referred to “materially accurate and complete information,” we were referring to the standards contained in Securities Act Section 12(a)(2) and Section 17(a)(2)—a communication that contains no material misstatements, and no material omissions that would cause the communication to be misleading in light of the circumstances in which it is made. Accordingly, liability for omissions under Section 12(a)(2) and Section 17(a)(2) is not based on the mere omission of required prospectus information or other material information, but on the omission of material information as a result of which the information conveyed is misleading, under the circumstances in which the communication in question is made. As a result, for example, a statement prior to the time of a contract of sale that a transaction is “the same as the XYZ transaction” or “just like the XYZ transaction” with specified modifications can, if there are no material omissions that would make that statement misleading under the circumstances in which it is made, meet the standards of Section 12(a)(2) and Section 17(a)(2). As another example, in an area cited by a number of commenters,[404] in the asset-backed securities market there are a number of forward-sale transactions where contracts of sale are entered into based on “portfolio profiles” or similar communications specifying important characteristics of asset pools within given ranges or market standards. Where the characteristics enumerated in the portfolio profiles do not exclude material elements of the pool's characteristics the omission of which would make the profiles misleading and where the final pools fall within the ranges or market standards disclosed in the portfolio profiles, this kind of disclosure prior to the time of a contract of sale can, depending on the facts and circumstances and even if all disclosure required in a statutory prospectus by our line-item requirements is not included, meet the standards of Section 12(a)(2) and Section 17(a)(2).

b. Determination of Time of Sale

Some commenters argued that the parties to the transaction should be able to determine by contract, by reference to state law, when the contract of sale is entered into, without regard to any provision of the federal securities laws,[405] including the anti-waiver provisions of Securities Act Section 14.[406] Other commenters argued that the iterative nature of their particular type of offerings meant that the parties could not identify the precise point when the purchaser became bound to acquire the securities.[407]

As we discuss above, we believe that one appropriate time to assess whether a purchaser has a claim under Section 12(a)(2), or whether there has been a violation of Section 17(a)(2), is the time of the contract of sale of the securities. State law contract principles are significant with regard to contract formation, and we are not aware of any current significant conflicts between state contract law and federal law regarding the elements of formation of a contract. Of course, a contract of sale under the federal securities laws can occur before there is an unconditional bilateral contract under state law, for example when a purchaser has taken all actions necessary to be bound but a seller's obligations remain conditional under state law.[408] If such conflicts were to arise in the future, we would have to consider at that time the appropriate actions to take, if any, to preserve the important federal interests in the determination of the time of a contract of sale. Importantly, beyond the elements of formation of a contract, federal law governs any waiver of a right or claim arising under the federal securities laws.[409] Thus, contracts for sales of securities may not contain provisions that operate to waive a purchaser's substantive rights under the federal securities laws. For example, conditional contracts that bind the purchaser at an earlier date but provide that no contract of sale occurs until the final prospectus is provided would not be consistent with the definition of sale under the Securities Act nor the anti-waiver provisions of Securities Act Section 14.[410]

c. Termination of an Old Contract and Creation or Reformation of a New Contract

We recognize that there may be circumstances where a seller wishes to convey information to a purchaser after the time of a contract of sale that had not been conveyed before that time. In the Proposing Release, we made clear our view that sellers could convey additional or changed information after the time of the contract of sale, terminate the old contract by agreement with the purchaser, and enter into a new contract of sale based on the new information. Any rights to damages with respect to material defects in information in respect of the original contract of sale would cease to exist as a result of the termination and formation of a new contract. Commenters expressed uncertainty regarding how this renegotiation and new contract would be effected.[411]

In light of commenters' concerns, we are providing guidance on the circumstances under which purchasers and sellers can reassess their purchase commitment based on new or changed information and enter into a new Start Printed Page 44768contract of sale, consistent with the purchaser's rights, including under Section 12(a)(2), under the original contract and the anti-waiver provisions of the federal securities laws. Commenters expressed uncertainty regarding the termination of a contract of sale and the creation of a new contract and the ability, consistent with the federal securities laws, including the anti-waiver provisions, to agree contractually on a procedure to terminate and reform a contract of sale and thus provide a new time of sale at the time of the reformation of the contract.[412] In our view, any such procedure must be the substantive equivalent of the termination by mutual agreement of the prior contract of sale and the entering into a new contract of sale. Any such procedure would, as pointed out above, result in a right to damages under the old contract ceasing to exist. It follows from this position that any such procedure would conflict with federal law unless:

  • The investor is provided adequate disclosure of the contractual arrangement;
  • The investor is provided with adequate disclosure of its rights under the existing contract at the time termination is sought;
  • The investor is provided with adequate disclosure of the new information that the seller seeks to convey; and
  • The investor is provided with a meaningful ability to elect to terminate or not terminate the prior contract and to elect to enter into or not enter into the new contract.

Whether the investor is given such adequate disclosure and meaningful ability will depend on the particular facts and circumstances. An evaluation of the facts and circumstances would include but not be limited to the following:

  • The manner and prominence of the disclosure of the contractual arrangements and the investor's rights under the old contract. Insufficient disclosure as to the provisions would not necessarily put the purchaser on notice of the arrangement and of its rights, and thus may be viewed as an unacceptable anticipatory waiver of the purchaser's substantive rights.
  • The process by which the new or changed material information will be conveyed to the purchaser. As noted above, whether information is conveyed is a facts and circumstances determination. However, in our view, in the context of providing new information following a contract of sale, factors to consider in determining whether the new information has been conveyed could include whether it is identified as new or changed or is otherwise sufficiently prominent.
  • The method by which the purchaser is required to make or communicate its decisions. For the contractual provision to be consistent with the anti-waiver provisions of the federal securities laws, the purchaser must knowingly terminate the prior contract if it chooses to do so. Similarly, the investor must knowingly enter into the new contract if it chooses to do so. While we are not saying that the method chosen necessarily requires an affirmative communication rather than acquiescence by silence after the lapse of a specified period of time, the concept of reaffirmation is one that earlier Commissions and Congress have struggled with since the 1940s.[413] The method chosen should give the purchaser a meaningful ability to make its contractual decisions in light of the new or changed material information.

In addition to our general observations, we note the following:

  • Any contractual provision to the effect that the seller is deemed to have communicated information to the purchaser would be a violation of the anti-waiver provisions of the federal securities laws.[414]
  • A non-conditional contract that moves the time of sale forward to a different time would effectively act as a waiver of substantive rights under the federal securities laws and is a violation of the anti-waiver provisions of the federal securities laws.[415]

3. Rule 412 and Rule 430B

Under Securities Act Rule 412, information contained in a prospectus supplement or Exchange Act filing incorporated by reference into a registration statement may modify or supersede other previously disclosed information that was contained in a document incorporated or deemed to be incorporated by reference in that registration statement. We are revising Rule 412 essentially as proposed to make it consistent with the other rules we are adopting today. The revisions provide that information contained in a document that is deemed part of and included in or incorporated by reference into a registration statement or prospectus that is contained in the registration statement would modify or supersede the information contained in the registration statement or prospectus that is part of or contained in the registration statement itself.[416] Thus, the provisions of Rule 412 regarding modified or superseded information will operate regardless of whether the new information is contained in an Exchange Act report, prospectus supplement, or prospectus that is part of or included in a registration statement.

Under Rule 430B, which we are adopting today (and in the corresponding undertakings of issuers), we have provided that subsequently provided information deemed part of and included in or incorporated by reference into a registration statement or prospectus that is part of the registration statement would not modify or supersede any information conveyed to an investor at an earlier time of sale (including the time of the contract of sale) for purposes of determining the information conveyed to an investor at or prior to that time.[417]

4. Relationship of Section 12(a)(2) and Section 17(a)(2) Interpretation and Rule 159 to Section 11 Liability

Information contained in a prospectus or prospectus supplement that is part of a registration statement that is filed after the time of the contract of sale will be part of and included in a registration statement for purposes of liability under Section 11 at the time of effectiveness, which may be at or before the time of Start Printed Page 44769the contract of sale. The date and time that the information is part of the registration statement and the time of effectiveness relate to an investor's rights under Section 11, but do not affect any rights assessed at the time of sale that the investor may have under Section 12(a)(2) or that we might enforce under Section 17(a). Thus, information that is deemed to be part of the registration statement as of the time of the contract of sale for shelf takedowns or as of effectiveness under Securities Act Rule 430A, will not, under our interpretation or Rule 159, be taken into account under Section 12(a)(2) or Section 17(a)(2), unless the information is conveyed to an investor at or prior to the time of sale (including the contract of sale). Similarly, an investor's rights under Section 11 will not be affected by information conveyed to an investor at or prior to the time of the contract of sale that is not included in or incorporated by reference into the registration statement at the time of the effectiveness of the registration statement for the securities sold to the investor.[418] The class of investors that may have a claim under Section 11 and Section 12(a)(2) may thus be different.

A free writing prospectus that is not part of a registration statement will not be subject to Section 11 liability, although it will be subject to Section 12(a)(2) and Section 17(a)(2) liability.[419] Information contained in a free writing prospectus not otherwise included in or incorporated by reference into the registration statement will not be part of the registration statement for purposes of Section 11.

B. Issuer as Seller

We believe there currently is unwarranted uncertainty as to issuer liability under Section 12(a)(2) for issuer information in registered offerings using certain types of underwriting arrangements.[420] As a result, there is a possibility that issuers may not be held liable under Section 12(a)(2) to purchasers in the initial distribution of the securities for information contained in the issuer's prospectus included in its registration statement. This also could be the case for other communications that are offers by or on behalf of an issuer, including issuer free writing prospectuses. When an issuer registers securities to be sold in a primary offering, the registration covers the offer and sale of its securities to the public. The issuer is selling its securities to the public, although the form of underwriting of such offering, such as a firm commitment underwriting, may involve the sale first by the issuer to the underwriter and then the sale by the underwriter to the public.[421] We believe that an issuer offering or selling its securities in a registered offering pursuant to a registration statement containing a prospectus that it has prepared and filed, or by means of other communications that are offers made by or on behalf of or used or referred to by the issuer can be viewed as soliciting purchases of the issuer's registered securities.[422] Therefore, we are adopting a rule providing that under Section 12(a)(2) an issuer in a primary offering of securities, regardless of the form of the underwriting arrangement, will be a seller and will be considered to offer or sell the securities to a purchaser in the initial distribution of the securities as to any of the following communications:

  • Any preliminary prospectus or prospectus of the issuer relating to the offering required to be filed pursuant to Securities Act Rule 424 or Rule 497;
  • Any free writing prospectus relating to the offering prepared by or on behalf of or used or referred to by the issuer and, in the case of an issuer that is an open-end management investment company, any profile relating to the offering provided pursuant to Securities Act Rule 498;
  • The portion of any other free writing prospectus (or, in the case of an issuer that is a registered investment company or business development company, any advertisement pursuant to Securities Act Rule 482) relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and
  • Any other communication that is an offer in the offering made by the issuer to such purchaser.[423]

This definition of the issuer as a seller is not intended to affect whether any other person offers or sells a security by means of the same prospectus or oral communication for purposes of Section 12(a)(2). A communication by an underwriter or dealer participating in an offering would also not be on behalf of the issuer solely by virtue of that participation. As today, there are circumstances where the involvement of an issuer could be sufficiently extensive (for example under adoption and entanglement theories) that a communication of another person, including an offering participant, could be by an issuer.

A number of commenters were concerned that as proposed the rule was unnecessarily broad and would encompass purchasers of the issuer's securities in the aftermarket, after the initial distribution of securities in the offering was completed.[424] These commenters were also concerned that the proposed rule would encompass oral communications made by underwriters.[425] As with certain of our other proposals, some commenters wanted to limit liability only to those situations in which the communication was made by designated persons.[426]

While we have adopted the issuer as seller provisions substantially as proposed, we have included language that clarifies that it is aimed only at liability to purchasers in the initial distribution of the securities who were offered or sold the securities by means of the particular communication.[427] Thus, the Rule, as adopted, would not cover purchasers of the issuer's securities in the aftermarket. We have also provided, as noted above, that an underwriter or dealer participating in an offering is not acting on behalf of the issuer solely by virtue of that participation.

C. Due Diligence Interpretation

We requested comment in the Proposing Release as to whether we should re-evaluate the factors discussed in Securities Act Rule 176 [428] regarding Start Printed Page 44770what constitutes a reasonable investigation and reasonable grounds under Securities Act Section 11(c), and requested an explanation of the changes that should be made and how each of those changes would work in the context of each type of registered securities offering. In response, commenters urged us to reintroduce the 1998 proposal to amend Rule 176 so that it also applies to the reasonable care standard under Section 12(a)(2).[429] Additionally, commenters asked us to reaffirm the statement from the 1998 proposals that “Section 11 requires a more diligent investigation than Section 12(a)(2),” so as to avoid any implication that our view of the matter has changed.[430] We have determined not to propose modifications to Rule 176 at this time. We believe, however, as we have stated previously, that the standard of care under Section 12(a)(2) is less demanding than that prescribed by Section 11 or, put another way, that Section 11 requires a more diligent investigation than Section 12(a)(2).[431] Moreover, we believe that any practices or factors that would be considered favorably under Section 11, including pursuant to Rule 176, also would be considered as favorably under the reasonable care standard of Section 12(a)(2).[432]

V. Securities Act Registration Rules and Amendments

A. Overview

As discussed above and in the Proposing Release, enhanced requirements for reporting under the Exchange Act for public issuers have been intended to improve the quality and currency of disclosure under the Exchange Act. Together with technological advances, these developments provide the basis for the rules we are adopting today to modernize many procedural aspects of securities offerings registered under the Securities Act.

Our new rules cover the registration procedures for seasoned and unseasoned issuers, and seek to streamline the registration process for most types of reporting issuers. These rules include:

  • A more flexible automatic registration process for well-known seasoned issuers;
  • Modifications that clarify and expand how and when information can be included in registration statements;
  • A clarification of the Securities Act liability treatment of information provided in a prospectus supplement and Exchange Act reports incorporated by reference;
  • Modification of the timing of effectiveness of shelf registration statements applicable to issuers in certain cases; and
  • Rules relating to non-shelf offerings of securities.

B. Procedural Rules

1. Procedural Changes Regarding Shelf Offerings

a. Overview

We are adopting changes to the operation of the shelf registration system under the Securities Act. These new provisions involve:

  • Clarifying and codifying the information to be included in and omitted from base prospectuses in shelf registration statements;
  • Codifying the manner of inclusion of information in the final prospectus;
  • Providing for the treatment of prospectus supplements; and
  • Liberalizing certain of the requirements under Securities Act Rule 415, including:
  • Eliminating the two-year limitation for registered securities for a delayed offering;

○ Eliminating the “at-the-market” offering restrictions for issuers registering primary equity offerings on Form S-3 or Form F-3;

○ Eliminating the prohibition against immediate takedowns off delayed shelf registration statements; and

○ Making conforming changes to Rule 424 regarding the filing of prospectus supplements.

Commenters strongly supported the proposed procedural changes to the Securities Act registration process.[433] A number of commenters on these proposed changes, while supporting the automatic shelf registration proposals for well-known seasoned issuers, believed that all seasoned issuers should be able to use certain of the elements of automatic shelf registration such as identification of selling security holders in prospectus supplements, omission of most information from base prospectuses, and addition of new securities and new registrants by automatically effective post-effective amendments.[434] As discussed in greater detail below, we are adopting the procedural changes with some modifications.

b. Information in a Prospectus

i. Mechanics

(A) Rule 430B

Rule 415 provides for continuous or delayed offerings and is, therefore, the foundation for shelf registration. Primary offerings on a delayed basis may be registered by certain seasoned issuers only. A number of other delayed or continuous offerings may be undertaken or registered by any issuer, including offerings on a continuous basis of securities issued on exercise of outstanding options or warrants or conversion of other securities, offerings on a continuous basis under dividend reinvestment plans, offerings on a continuous basis under employee benefit plans, and offerings solely on behalf of selling security holders. Rule 415 also permits registration by any issuer of a continuous offering that will commence promptly and may continue for more than 30 days from the date of initial effectiveness.[435]

Many of the types of offerings contemplated by Rule 415 can be accomplished using a prospectus that is complete at the time of effectiveness of the related registration statement and therefore may not require a supplement because there may be no additional information to include in the prospectus.[436] There are a number of Start Printed Page 44771offerings contemplated by Rule 415, however, such as a delayed offering, in which the prospectus included in the related registration statement at the time of effectiveness, usually referred to as a “base prospectus,” must be supplemented to reflect the final terms of the security and offering for each particular offering of securities. In addition, in continuous or delayed offerings employing shelf registration under Rule 415, there may be circumstances where a prospectus will be supplemented other than at the time of a takedown.

Rule 424 provides the framework for the filing of each type of prospectus and prospectus supplement. There currently is no rule, however, that specifies the relationship between the base prospectus and prospectus supplements and the information that may be omitted from or included in one or the other. We are adopting with some clarifications from the proposals a new rule, Rule 430B, which we intend to achieve that purpose by codifying existing practice in most respects and liberalizing the framework for the registration process in certain areas.[437] We also are adopting Rule 430C which addresses the treatment of prospectuses and prospectus supplements for all registered offerings not covered by Rule 430B and for prospectuses not covered by Rule 430A.

Rule 430B is a shelf offering corollary to existing Rule 430A, in that it describes the type of information that primary shelf eligible and automatic shelf issuers may omit from a base prospectus in a Rule 415 offering and include instead in a prospectus supplement, Exchange Act report incorporated by reference, or a post-effective amendment.[438]

Rule 430B covers the following types of offerings:

  • Offerings by well-known seasoned issuers registered on automatic shelf registration statements;
  • Immediate, delayed, and continuous primary offerings by primary shelf eligible issuers pursuant to Rule 415(a)(1)(x), including asset-backed issuers eligible to register their offerings on Form S-3;
  • Secondary offerings by certain primary shelf eligible issuers, including for the purpose of adding information regarding the identities of and amounts of securities to be sold by selling security holders; and
  • Offerings of mortgage-backed securities permitted by Rule 415(a)(1)(vii) that generally are registered on Form S-11.[439]

Rule 430C covers all registered offerings that are not covered by Rule 430B and prospectuses that are not covered by Rule 430A.[440]

Rule 430B generally is consistent with current requirements and practice for shelf registration statements for delayed offerings on Forms S-3 and F-3.[441] Under Rule 430B, a base prospectus in a shelf registration statement must comply with the applicable form requirements but can, as has been the case before today's new rules, continue to omit information that is unknown or not reasonably available to the registrant pursuant to Rule 409.[442]

Rule 430B provides that a base prospectus that omits information as provided in the Rule will be a permitted prospectus.[443] Thus, after a registration statement is filed, offering participants can use a base prospectus that omits information in accordance with the Rule. In addition, issuers can communicate using Rule 134 notices, and issuers and other offering participants can use free writing prospectuses under Rules 164 and 433. Commenters supported proposed Rule 430B because of the level of certainty it would provide for delayed offerings off of shelf registration statements.[444]

(B) Means for Providing Information

A base prospectus that omits statutorily required information is not a Securities Act Section 10(a) final prospectus, and today's rules do not change that fact. To satisfy the requirements of Securities Act Section 10(a), as is the case with shelf registration statements today, an issuer must include the information omitted from the base prospectus in:

  • A prospectus supplement;
  • A post-effective amendment; or
  • Where permitted as described below, through its Exchange Act filings that are incorporated by reference into the registration statement and prospectus that is part of the registration statement and identified in a prospectus supplement.

Information included in a base prospectus or in an Exchange Act periodic report incorporated into a prospectus is included in the registration statement. Rule 430B makes clear that prospectus supplements and information in them also will be deemed to be part of and included in the registration statement.[445]

The rules we are adopting today provide primary shelf eligible issuers and well-known seasoned issuers with automatic shelf registration statements the ability to add to a prospectus, by means other than a post-effective amendment to the registration statement, more additional or omitted information than is currently the case.[446] We are adopting amendments to Forms S-3 and F-3 to permit all information required in the prospectus about the issuer and its securities to be incorporated by reference from Exchange Act reports.[447] Such Start Printed Page 44772information also can be contained in the prospectus or a prospectus supplement.[448] For example, material changes in the plan of distribution, which currently are required to be included in post-effective amendments, can be amended under our new rules by incorporated Exchange Act reports or prospectus supplements.[449] Rule 430B also requires that a prospectus supplement be prepared and filed pursuant to Rule 424 if omitted information about an offering, such as the terms of the offering, the securities, the plan of distribution, or the selling security holders, is included in an Exchange Act report incorporated by reference. The prospectus supplement filed pursuant to Rule 424 must disclose the Exchange Act report or reports containing such information. This disclosure will assist investors and the markets in locating this offering-related information and will also be consistent with the treatment of other prospectus supplements filed for these purposes.

(C) Identification of Selling Security Holders Following Effectiveness

(1) Scope of Provision

As we discussed in the Proposing Release, transfers of restricted securities can occur after a private placement is completed so that the identities of the holders of those restricted securities at the time of filing the resale registration statement may not be known to the issuer.[450] Filing post-effective amendments to add new or previously unidentified security holders can impose delays. To alleviate the timing concern arising from an issuer's inability to identify selling security holders prior to effectiveness, we are including provisions to allow issuers eligible to use Form S-3 or Form F-3 for primary offerings in reliance on General Instruction I.B.1 to those Forms [451] to identify selling security holders and the amounts of securities to be registered on behalf of each of them after effectiveness.

Rule 430B and amendments to Form S-3 and Form F-3, as adopted, permit eligible seasoned issuers to add the identities of the selling security holders and all information about them, as required by Item 507 of Regulation S-K,[452] to the registration statement covering the resale of their securities after effectiveness by:

  • An amendment to that registration statement;
  • A prospectus supplement; or
  • An Exchange Act report incorporated by reference into the registration statement (subject to filing a prospectus supplement identifying such report).[453]

We have revised this provision from the proposal to clarify that this ability to identify selling security holders after effectiveness will be available only if:

  • The registration statement is an automatic shelf registration statement; [454] or
  • All of the following are satisfied:

○ The resale registration statement identifies the initial offering transaction or transactions pursuant to which the securities, or securities convertible into such securities, were sold; [455]

○ The initial offering of the securities, or the securities convertible into such securities, is completed; and

○ The securities, or the securities convertible into such securities, that are the subject of the registration statement are issued and outstanding prior to initial filing of the resale registration statement.

An issuer registering the resale of securities sold in a private offering may not rely on this provision to identify after effectiveness selling security holders who will acquire the securities directly from the issuer if the securities are not yet issued in the private offering, even where the investors are contractually bound to acquire the securities.[456] The issuer can still register the resale of the not-yet-issued securities, but it must identify the selling security holders in the registration statement at the time of filing and prior to effectiveness because the issuer will know the identities of the selling security holders who will acquire the securities from it.

We believe that it is important for issuers to be able to satisfy their contractual registration obligations to selling security holders in registering their resales, while also assuring that offerings are properly registered and the selling security holders and the securities to be sold by them are identified in the registration statement. The purpose of this provision of Rule 430B is to provide a more convenient method to identify selling security holders in registration statements, and not to change the existing responsibilities and liabilities of issuers and these selling security holders under the federal securities laws.

(2) Comments on Identification of Selling Security Holders

Commenters expressed support for the proposals to allow seasoned issuers the ability to identify selling shareholders after effectiveness.[457] As with many of the other proposals, some believed that this flexibility also should be extended to unseasoned issuers.[458] In addition, one commenter suggested that we eliminate the proposed requirement that the issuer identify any known selling security holders prior to effectiveness, because some selling security holders known to the issuer may not have consented to the inclusion of their names in the prospectus.[459]

In response to commenters' suggestions, we have clarified that the initial transaction that the issuer must disclose in the resale registration statement must be the initial offering transaction in which the securities were Start Printed Page 44773initially sold, not a resale transaction in which any particular selling security holder may have acquired the securities. The goal of the disclosure is to clearly link the securities being registered for resale to a completed initial offering. Moreover, we have revised the instructions to Form S-3 and Form F-3 to eliminate any requirement to name any selling security holders prior to effectiveness if the conditions of Rule 430B are satisfied.

Commenters also suggested that we should allow all issuers to be able to identify selling security holders after effectiveness.[460] We have determined not to extend this flexibility to all issuers. We believe that issuers that are not eligible to file a primary offering on Form S-3 or Form F-3 are more prone, in general, to engage in transactions some of which have raised disclosure and registration issues.[461] As a result, we believe it is important to have complete selling security holder information and be able to review that information in registration statements to assure compliance with Section 5 and our disclosure rules in connection with these offerings.

ii. Information Deemed Part of Registration Statement

We are adopting provisions in Rule 430B that will make clear that information contained in a prospectus supplement required to be filed under Rule 424, whether in connection with a takedown or otherwise, will be deemed part of and included in the registration statement containing the base prospectus to which the prospectus supplement relates. We also are adopting new Rule 430C that has similar provisions regarding the treatment of prospectus supplements, which applies to offerings not covered by Rule 430B and prospectuses not covered by Rule 430A. As a result of Rule 430B and Rule 430C, prospectus supplements required to be filed under Rule 424 or Rule 497(b), (c), (d), or (e) will, in all cases, be deemed to be part of and included in registration statements for purposes of Securities Act Section 11.

iii. Date of Inclusion of Prospectus Supplements in Registration Statements and New Effective Dates of Registration Statements

(A) Scope of Provisions

Rule 430B and Rule 430C, as adopted, deem information contained in prospectus supplements to be part of and included in the registration statement as follows:

  • For a prospectus supplement required to be filed other than in connection with a takedown of securities, all information contained in that prospectus supplement will be deemed part of and included in the registration statement as of the date the prospectus supplement is first used; [462] and
  • Under Rule 430B only, for a prospectus supplement required to be filed in connection with a takedown of securities pursuant to Rule 424(b)(2), (b)(5), or (b)(7), all information in that prospectus supplement will be deemed part of and included in the registration statement as of the earlier of the date it is first used or the date and time of the first contract of sale of securities in the offering to which the prospectus supplement relates.[463]

We have chosen the triggering dates for prospectus supplements to be deemed part of and included in registration statements for a number of reasons. First, under Rule 430B and Rule 430C, for a prospectus supplement filed other than in connection with a takedown, we have chosen the date of first use as the appropriate date for it to be deemed part of and included in the registration statement because that is the date on which the prospectus supplement updates the information in the registration statement.[464] Second, under Rule 430B, a prospectus supplement filed in connection with a takedown pursuant to Rule 424 will be deemed part of and included in the registration statement as of the earlier of when it is first used or the date and time of the first contract of sale of the securities to which the prospectus supplement relates. This timing, combined with the new effective date provisions discussed below, provides the appropriate timing for assessing liability under Section 11 for issuers and underwriters.

(B) New Effective Date for Section 11 Purposes

Rule 430B also establishes a new effective date for a shelf registration statement for Section 11 liability purposes only for the issuer and for a person that is at the time an underwriter.[465] That new effective date will be the date a prospectus supplement filed in connection with the takedown or takedowns is deemed part of the relevant registration statement.[466] For purposes of liability under Section 11 of the issuer and any underwriter at the time only, the new effective date will be as to the part of the registration statement relating to the securities to which such prospectus relates. The part of the registration statement will consist of all information included in the registration statement and any prospectus relating to the offering of the securities as of the new effective date and all information included in reports and materials incorporated by reference into the registration statement and prospectus as of such date relating to the offering, and in each case, not modified or superseded pursuant to Rule 412. The part of the registration statement will include information relating to the offering in a prospectus already included in the registration statement. This includes, for example, a form of prospectus containing information relating to the offering and previously filed pursuant to Rule 424(b)(3) other than in connection with the takedown in question, where the information has not been modified or superseded. These provisions also will reconcile the effective date for shelf offerings for issuers and underwriters with a comparable date for non-shelf offerings. We believe the Rule also will eliminate the unwarranted, disparate treatment of underwriters and issuers under Section 11.[467]

Start Printed Page 44774

At the same time, we believe that for other persons, including directors, signing officers, and experts, the filing of a form of prospectus should not result in a later Section 11 liability date than that which applied prior to our new rules.[468] Therefore, under Rule 430B, except for an effective date resulting from the filing of a form of prospectus for purposes of updating the registration statement pursuant to Section 10(a)(3) or reflecting fundamental changes in the information in the registration statement pursuant to the issuer's undertakings, the prospectus filing will not create a new effective date for directors or signing officers of the issuer. Any person signing any report or document incorporated by reference in the prospectus that is part of the registration statement or the registration statement, other than a document filed for the purposes of updating the prospectus pursuant to Section 10(a)(3) or reflecting a fundamental change, is deemed not to be a person who signed the registration statement as a result. The new effective date also does not apply to a person that becomes an underwriter after that effective date; in that case Securities Act Section 11(d) provides that the date the person became an underwriter is its effective date.[469]

We also are not changing the effective date for auditors who provided consent in an existing registration statement for their report on previously issued financial statements or previous reports on management's assessment of internal control over financial reporting, unless a prospectus supplement (and any Exchange Act report incorporated by reference into the prospectus and registration statement) or post-effective amendment contains new audited financial statements or other information as to which the auditor is an expert and for which a new consent is required.[470] As to any other expert, the filing of the prospectus supplement also will not trigger a new effective date, and thus will not require the filing of a consent, unless the prospectus supplement (including incorporated Exchange Act reports) includes a new report or opinion of an expert whose consent is required pursuant to Section 7 and who will have liability pursuant to Section 11. For example, a prospectus supplement filed in connection with one or more takedowns of securities that did not include other disclosure (including through incorporated Exchange Act reports) for which the consent of an expert is required pursuant to Securities Act Section 7 and Securities Act Rule 436 will not require consents to be filed.

Including information contained in prospectus supplements in registration statements and triggering new effective dates for the issuer and underwriter will provide and preserve important investor protections under the Securities Act. We believe that these modifications are appropriate to ensure issuer liability for information included in the registration statement at the time of the prospectus supplement filing.

(C) Comments on Prospectus Supplements and New Effective Dates

A number of commenters addressed the provisions providing for new effective dates of registration statements at the time of filing of prospectus supplements for takedowns off shelf registration statements.[471] Commenters supporting these proposals agreed that, as to shelf registration statement takedowns, the liability of issuers under Section 11 should be brought into line with the liability of underwriters.[472] A number of commenters were concerned with the liability of auditors, other experts, and outside directors that would arise under Section 11 as of the new effective date of the registration statement.[473] While some commenters believed that the Rule should provide that a new auditor's consent is not required in connection with the takedown and new effective dates, others believed that unless the Rule was clear that the takedown would not be a new effective date for auditors and other experts, we should require that consents of these experts be provided at the new effective date.[474]

We have revised Rule 430B in response to commenters' concerns about new effective dates as we discuss above. We believe that these changes should provide clarity for auditors, among others, that a new effective date for them is not created and that new consents and corresponding procedures are not required as a result of Rule 430B.

iv. Amendments to Rule 415

(A) Elimination of Limitation on Amount of Securities Registered

(1) Revised Provisions

Prior to today's amendments, Rule 415(a)(2) limited the amount of securities that could be registered where the registration statement pertained to offerings pursuant to Rule 415(a)(1)(viii), (ix), and (x). Rule 415(a)(2) limited the amount of securities that could be registered in Start Printed Page 44775these offerings to an amount which, at the time the registration statement became effective, was reasonably expected to be offered and sold within two years from the initial effective date of a registration statement.

For offerings under Rule 415(a)(1)(x) and continuous offerings under Rule 415(a)(1)(ix) in each case that are registered on Form S-3 or Form F-3, we are eliminating the provision in Securities Act Rule 415(a)(2) that limits the amount of securities registered. The two-year limitation was designed to ensure that the issuer had a bona fide intention to offer and sell securities in the proximate future.[475] We are eliminating this requirement for these offerings because we do not believe that it provides any significant investor protection.[476]

However, under the amendments to Rule 415 we are adopting today, that shelf registration statement can only be used for three years (subject to a limited extension) after the initial effective date of the registration statement.[477] Under the revised rule, new shelf registration statements must be filed every three years, with unsold securities and fees paid thereon allowed to be included on the new registration statement, where the shelf registration statement relates to:

  • Offerings registered on an automatic shelf registration statement; or
  • Offerings of securities described in Rule 415(a)(vii), (ix), or (x).[478]

Automatic shelf registration statements are immediately effective, as discussed below. In other cases, as long as the new shelf registration statement is filed within three years of the original effective date of the old registration statement the issuer may continue to offer and sell securities from the old registration statement for up to six months thereafter until the new registration statement is declared effective.[479] Prior to effectiveness of the new registration statement (including at the time of filing for an automatic shelf registration statement), the issuer can amend the later registration statement to include any securities (and fees attributable to such securities) remaining unsold on the older registration statement. We believe that allowing issuers to continue to offer and sell securities off the old registration statement for an additional six months after filing the new registration statement pending effectiveness of the new registration statement, and then including any securities remaining unsold on the new registration statement, will preserve the ability of these issuers to continue to use their shelf registration statements to access the capital markets. The additional six-month time period will not impact adversely our decision to have new shelf registration statements filed every three years. In addition, continuous offerings begun prior to the end of the three years can continue on the old registration statement until the effective date of the new registration statement if they are permitted to be made under the new registration statement.

We believe that, especially with our liberalization of procedures for shelf registration, particularly automatic shelf registration as described below, the precise contents of shelf registration statements may become difficult to identify over time, and that markets will benefit from a periodic updating and consolidation requirement.[480] The new registration statement will include the disclosures then required under the applicable form and our rules.

(2) Comments on Elimination of Limitation on Amount of Securities Registered

Commenters supported most of the proposed changes to Rule 415.[481] Some commenters were concerned that the requirement to file a new shelf registration statement every three years could result in a blackout period between the end of the three years and effectiveness of the new registration statement, during which issuers could not continue to sell securities off their old registration statements.[482] As noted above, we are maintaining the three-year requirement, but we are allowing the issuer to continue to offer and sell securities off its old registration statement until the earlier of the effectiveness of the new registration statement or six months after the timely filing of the new registration statement. We believe that this provision will eliminate any inappropriate blackout periods.

(B) Immediate Takedowns From a Shelf Registration Statement Filed Under Rule 415(a)(1)(x)

We are amending Securities Act Rule 415(a)(1)(x), as proposed, to allow primary offerings on Form S-3 or Form F-3 to occur immediately after effectiveness of a shelf registration statement.[483] With respect to immediate offerings from an effective registration statement, our current rules permit omission of information from the prospectus at the time of effectiveness only in reliance on Securities Act Rule 430A.[484] The changes we are adopting today affecting the treatment of prospectus supplements provides sufficient protection to investors to allow, in an immediate offering, omission of information under Rule 415 and Rule 430B.[485] Commenters on this provision expressed support for allowing immediate takedowns off of shelf registration statements in reliance on Rule 415.[486]

(C) Eliminating “At-the-Market” Offering Restrictions for Seasoned Issuers

The restrictions on primary “at-the-market” offerings of equity securities currently set forth in Rule 415(a)(4) were adopted initially to address concerns about the integrity of trading markets.[487] As discussed in the Start Printed Page 44776Proposing Release, we are eliminating these restrictions for primary shelf eligible issuers because they are not necessary to provide protection to markets or investors. The market today has greater information about seasoned issuers than it did at the adoption of the “at-the-market” limitations, due to enhanced Exchange Act reporting. Further, trading markets for these issuers' securities have grown significantly since that time. Requiring the involvement of underwriters and limiting the amount of securities that can be sold imposes artificial limitations on this avenue for these issuers to access capital. Under our revised Rule, an issuer that is registering a primary equity shelf offering pursuant to Rule 415(a)(1)(x) can register an “at-the-market” offering of equity securities without identifying an underwriter in its registration statement [488] and without a limitation on the amount of the offering. Issuers who are not eligible to register primary equity offerings using Rule 415(a)(1)(x) will still not be eligible to register “at-the-market” equity securities offerings. Commenters generally supported the removal of the restrictions on “at-the-market” offerings.[489]

v. Rule 424 Amendments

In conjunction with our other procedural rules, we are adopting certain companion modifications to Securities Act Rule 424. We are adding a separate new paragraph (b)(8) to Rule 424 for forms of final prospectuses not filed within the required timeframe under Rule 424. As we discuss below, this provision of Rule 424 will allow us to identify more readily final prospectuses not filed timely.[490] As noted above, we also are adding a separate new paragraph (b)(7) under Rule 424 for filing of prospectuses identifying selling security holders.

Commenters supported the amendments to Rule 424.[491] Some commenters suggested additional revisions to Rule 424, including deleting references to paper copies [492] and defining the phrase “date it is first used.[493] We are adopting the changes to Rule 424 essentially as proposed.[494]

vi. Elimination of Rule 434

In the Proposing Release, we requested comment as to whether we should eliminate Rule 434 in its entirety.[495] The commenters who responded to this request believed that the Rule is superfluous and should be eliminated.[496] Because we believe that Rule 434 has been used only very rarely, and because our new rules regarding free writing prospectuses permit the use of written descriptions of the terms of the issuer's securities or of the offering, such as term sheets, under more flexible circumstances, we are eliminating Rule 434.[497]

vii. Issuer Undertakings

We are adopting conforming revisions to the issuer undertakings that are required in connection with a shelf registration statement. These revisions reflect the issuer's agreement regarding the inclusion of information contained in prospectus supplements in registration statements and new effective dates of the registration statement on filing of a prospectus supplement.

(A) Treatment of Information in Prospectus Supplements

Item 512(a) of Regulation S-K currently requires an issuer that has registered securities pursuant to Rule 415 to undertake to file a post-effective amendment to the registration statement to:

  • Include in the registration statement any prospectus required by Securities Act Section 10(a)(3);
  • Reflect in a prospectus included in the registration statement any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereto) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and
  • Include in a prospectus included in the registration statement any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change in such information in the registration statement.[498]

Currently, shelf issuers can satisfy the first two of these obligations by filing Exchange Act periodic reports that are incorporated by reference into the registration statement. We are amending the Item 512(a) undertaking as proposed to clarify that, in shelf registration statements filed on Forms S-3 and F-3, all the disclosures required by this undertaking also may be contained in any filed prospectus supplement deemed part of and included in a registration statement or any Exchange Act report, instead of only in periodic reports, that an issuer files that is incorporated by reference into the registration statement.[499] As discussed below, we also are adopting as proposed the undertaking to allow automatic shelf issuers to include in this manner all other information that has been omitted from the base prospectus, subject in the case of a takedown of securities to the filing of a prospectus supplement. In the event that satisfaction of any element of the undertaking requires the filing by any of the permitted methods of a consent of an expert, that consent may be filed by post-effective amendment to Part II of the registration statement or by filing of an Exchange Act report, such as an annual report on Form 10-K or a report on Form 8-K or Form 6-K, that is incorporated by reference into the registration statement.[500]

(B) Prospectus Supplements Deemed Part of a Registration Statement and New Effective Dates

To reflect the issuer's understanding of and agreement to the changes described above regarding inclusion of prospectus supplements in registration statements and new effective dates, we are including a new undertaking in which the issuer will agree that, consistent with Rules 430B and 430C, information in prospectus supplements is deemed part of and included in registration statements and that, consistent with Rule 430B, new effective dates as to the issuer and underwriter will occur in respect of Start Printed Page 44777prospectuses related to certain shelf takedowns.[501] The new undertaking will assure that the issuer agrees that it has liability for information that is included in or deemed part of the registration statement, that the liability of the issuer will be assessed as of the date such a prospectus supplement is deemed part of and included in the registration statement.[502]

Because closed-end management investment companies use Securities Act Rule 415 to make shelf offerings under certain circumstances and provide an undertaking similar to that required by Item 512(a) of Regulation S-K in their registration statements on Form N-2, we are including a new undertaking in Form N-2 similar to that which we are including in Item 512(a) of Regulation S-K.[503] We also are amending Rule 415 to clarify that investment companies filing on Form N-2 that use the Rule must provide the undertaking required by Form N-2, rather than the undertaking required in Item 512(a) of Regulation S-K.[504]

c. Changes to Form S-3 and Form F-3

In addition to adopting changes that will allow additional Form S-3 or Form F-3 disclosures to be included through prospectus supplements and Exchange Act reports, we are amending Form S-3 and Form F-3, as proposed, to expand the categories of majority-owned subsidiaries that will be eligible to register their non-convertible securities, other than common equity, or guarantees under General Instruction I.C. of Form S-3 or General Instruction I.A.5 of Form F-3. The permitted circumstances are the same as those provided for majority-owned subsidiaries to be well-known seasoned issuers.[505] We believe that this expansion is appropriate in that it recognizes the various types of subsidiary guarantees that may be employed in registered offerings of such non-convertible securities, other than common equity, of related entities. Whether information regarding the subsidiary will have to be included in the registration statement will depend, as today, on whether the subsidiary meets the conditions of Rule 3-10 of Regulation S-X and Exchange Act Rule 12h-5.

2. Automatic Shelf Registration for Well-Known Seasoned Issuers

a. Overview

i. Rule Changes

In addition to the updating of the shelf registration process described above, we are adopting rules to establish a significantly more flexible version of shelf registration for offerings by well-known seasoned issuers. This version of shelf registration, which we refer to as “automatic shelf registration,” involves filings on Form S-3 or Form F-3. The automatic shelf registration rules are in addition to the communications exemptions we are adopting today and will allow eligible well-known seasoned issuers substantially greater latitude in registering and marketing securities. The automatic shelf registration process will continue to enable the issuer, as with other shelf registrants, to take down securities off a shelf registration statement from time to time.[506] Automatic shelf registration is not mandatory; a well-known seasoned issuer may continue to file any other registration statement it is eligible to use or engage in any exempt offering or offerings of exempt securities available to it.[507]

For well-known seasoned issuers, we believe that the modifications we are adopting will facilitate immediate market access and promote efficient capital formation, without at the same time diminishing investor protection. Most significantly, the new rules will provide the flexibility to take advantage of market windows, to structure securities on a real-time basis to accommodate issuer needs or investor demand, and to determine or change the plan of distribution of securities as issuers elect in response to changing market conditions. We hope that providing these automatic shelf issuers more flexibility for their registered offerings, coupled with the liberalized communications rules we are adopting, will encourage these issuers to raise their necessary capital through the registration process.[508]

Under our automatic shelf registration process, eligible well-known seasoned issuers may register unspecified amounts of different specified types of securities on immediately effective Form S-3 or Form F-3 registration statements. Unlike other issuers registering primary offerings on Form S-3 or Form F-3, the automatic shelf registration process allows eligible issuers to add additional classes of securities and to add eligible majority-owned subsidiaries as additional registrants after an automatic shelf registration statement is effective. They also can freely accommodate both primary and secondary offerings using automatic shelf registration. Thus, these issuers have significant latitude in determining the types and amounts of their securities or those of their eligible subsidiaries that can be offered without any potential time delay or other obstacles imposed by the registration process.

Issuers using an automatic shelf registration statement will be permitted, but not required, to pay filing fees at any time in advance of a takedown or on a “pay-as-you-go” basis at the time of each takedown off the shelf registration statement in an amount calculated for that takedown.

The rules as adopted also permit more information to be excluded from the base prospectus in an automatic shelf registration statement than from a regular shelf registration statement. The omitted information can then be included at or before the time of filing a prospectus supplement. The automatic shelf registration process, together with the loosening of the restrictions on communications, permits well-known seasoned issuers with maximum flexibility to use free writing prospectuses to structure transactions.

ii. Comments on Automatic Shelf Registration

Commenters strongly supported the concept of automatic shelf registration Start Printed Page 44778for well-known seasoned issuers.[509] Commenters also believed that automatic shelf registration should be optional and, in addition, should allow issuers to control the timing of effectiveness of their registration statements, if they did not want immediate effectiveness.[510] A number of commenters on the procedural changes, while supporting the automatic shelf registration proposals for well-known seasoned issuers, believed that all seasoned issuers should be able to use certain of the elements of automatic shelf registration such as identification of selling security holders in prospectus supplements, omission of most information from base prospectuses, and addition of new securities and new registrants by automatically effective post-effective amendments.[511]

The rules we are adopting today continue to provide the greatest flexibility to well-known seasoned issuers. We have not expanded the automatic shelf provisions to other issuers.[512] As we discussed in the Proposing Release, we believe that limiting the benefits of automatic shelf registration to well-known seasoned issuers is appropriate, at this point, as these issuers have an established Exchange Act record and a significant following in the market. As we discuss above, we are directing the staff of the Division of Corporation Finance and OEA to undertake a study in three years after the full implementation of the rules as to the operation of the definition of well-known seasoned issuers.[513]

We are not mandating that automatic shelf registration be used by any issuer meeting the conditions for being a well-known seasoned issuer and we are not modifying the immediate effectiveness provisions to permit a well-known seasoned issuer to defer effectiveness. Rather, well-known seasoned issuers may continue to file a registration statement on any form for which it is eligible if they either do not wish to file an automatic shelf registration statement or otherwise desire to delay the effective date of their registration statements.

b. Automatic Shelf Registration Mechanics

i. Eligibility

The automatic shelf registration procedure can be used in connection with registration statements on Form S-3 or Form F-3 for all primary and secondary offerings of securities of well-known seasoned issuers.[514] In general, securities of majority-owned subsidiaries of a well-known seasoned issuer parent can be included on the automatic shelf registration statement of the parent if the subsidiary satisfies the conditions for being considered a well-known seasoned issuer described above.[515] Under automatic shelf registration, as adopted, a registration statement can be amended by post-effective amendment to add an eligible subsidiary as an issuer.[516]

Under the rules we are adopting today, an issuer can file an automatic shelf registration statement if it meets the eligibility criteria for well-known seasoned issuer on the initial filing date. Thereafter, the issuer also must determine its eligibility at the time of each amendment to its shelf registration statement for purposes of providing its update under Securities Act Section 10(a)(3) (or on the due date thereof). If an issuer is no longer eligible to use an automatic shelf registration statement at the time of its determination of eligibility, it will have to either post-effectively amend its registration statement onto the form it is then eligible to use or file a new registration statement on such a form. For example, a well-known seasoned issuer that is initially eligible for automatic shelf registration, that is not eligible at the time of its annual report filing, but that retains its eligibility to file a shelf registration statement under Rule 415 on Form S-3, can file a post-effective amendment or a new registration statement on Form S-3 that designates an amount of securities to be registered and otherwise complies with requirements for seasoned issuers that are not well-known seasoned issuers.

ii. Information in a Registration Statement

(A) Information That May Be Omitted From the Base Prospectus

Our rules as adopted will allow well-known seasoned issuers using automatic shelf registration statements to omit more information from the base prospectus in an automatic shelf registration statement than is the case currently or than is the case in a regular shelf offering registration statement under new Rule 430B. A base prospectus included in an automatic shelf registration statement can, as today, omit information pursuant to Securities Act Rule 409 that is unknown and not reasonably available and, as adopted, can omit the following additional information:

  • Whether the offering is a primary or secondary offering;
  • The description of the securities to be offered other than an identification of the name or class of the securities;
  • The names of any selling security holders; and
  • The disclosure regarding any plan of distribution.

Omitting this additional information from the base prospectus will not affect the information that an investor will be provided in connection with a particular sale.[517]

(B) Mechanics for Including Information

We believe that our new rules to broaden the means by which issuers may include information in an automatic shelf registration statement will benefit both issuers and investors. These new rules provide issuers with automatic shelf registration statements the ability to add omitted information to a prospectus by means of:

  • A post-effective amendment to the registration statement;
  • Incorporation by reference from Exchange Act reports; or
  • A prospectus or a prospectus supplement that would be deemed to be Start Printed Page 44779part of and included in the registration statement.[518]

Examples of the types of information that can be added in this manner for automatic shelf registration statements include:

  • The public offering price;
  • Any updating information regarding the issuer (whether or not a fundamental change);
  • Detailed description of securities including information not contained or incorporated by reference in the base prospectus;
  • The identity of underwriters and selling security holders; and
  • The plan of distribution of the securities.

The principal exceptions to this complete flexibility will be that an issuer adding new types of securities [519] or new eligible issuers, including guarantors, and the securities they may issue to a registration statement must do so by post-effective amendment, which will be effective immediately upon filing.[520] New issuers and requisite officers and directors are required to be signatories to the post-effective amendment.[521]

(C) Registration of Securities To Be Offered

An eligible well-known seasoned issuer may register on an automatic shelf registration statement an unspecified amount of securities to be offered, without indicating whether the securities are being sold in primary offerings or secondary offerings on behalf of selling security holders. Issuers that are well-known seasoned issuers based only on their registered non-convertible security issuances can register on automatic shelf registration statements only non-convertible securities, other than common equity, unless they also are primarily eligible to use Form S-3 or Form F-3 for a primary offering because they have a public float of $75 million or more.[522] The calculation of registration fee table in the initial registration statement will not need to include a dollar amount or a specific number of securities, unless a fee based on an amount of securities is paid at the time of filing, but that table must at least list each class of security registered and indicate if the filing fee will be paid on a pay-as-you-go basis. The issuer can specify the number or dollar amount of securities in a prospectus supplement at the time it pays a fee in advance of or for each offering.[523]

The base prospectus in the initial registration statement must identify in general terms the names or classes of securities registered.[524] In addition, we are expanding the unallocated shelf procedure to allow automatic shelf issuers to register classes of securities without allocating the mix of securities registered between the issuer, its eligible subsidiaries, or selling security holders.[525] Allowing registration without separately allocating the registered classes of securities will provide, we believe, greater flexibility to well-known seasoned issuers in conducting registered securities offerings.

We are adopting revisions to remove the current restriction that would prevent well-known seasoned issuers from adding classes of securities to an automatic shelf registration statement after effectiveness.[526] Under the amended rules, a well-known seasoned issuer can add new classes of securities or securities of an eligible subsidiary to an automatic shelf registration statement at any time before the sale of those securities. In order to add new classes of securities, an issuer must file a post-effective amendment, which will be immediately effective, to register an unspecified amount of securities of the new class of security.[527] This requirement will cause the registration statement to include each new class of securities to be offered. An issuer can provide the disclosure about the new class of securities of the issuer in:

  • A post-effective amendment to the registration statement;
  • A prospectus supplement deemed part of and included in the registration statement; or Start Printed Page 44780
  • An Exchange Act report that is incorporated by reference into the registration statement.[528]

(D) Pay-as-You-Go Registration Fees

(1) Pay-as-You-Go Fee Rules

We are adopting rules to permit, but not require, issuers using automatic shelf registration statements to pay filing fees at the time of a securities offering—commonly known as “pay-as-you-go”—or prior to that time. Under the new rules, for issuers electing to use the pay-as-you-go arrangement, the issuer will not have to pay any filing fee at the time of filing the initial registration statement.[529] We have eliminated the requirement in the proposal to pay a nominal ($100) initial filing fee. The triggering event for a required fee payment is a takedown off a shelf registration statement. For each takedown, the issuer can file a prospectus supplement for the takedown that includes a calculation of registration fee table or can file a post-effective amendment including the same information. The rules provide that the issuer must pay the appropriate fee calculated in accordance with Securities Act Rule 457 within the time required to file the prospectus supplement pursuant to Rule 424, but provide an ability to cure a failure to pay the fee. The cure is available if the issuer made a good faith effort to pay the fee timely and then pays the fee within four business days of the original fee due date. The rules we are adopting today also require that the issuer file the prospectus supplement, including the fee table reflecting payment of the fee on the cover page, pursuant to Rule 424. In addition, at any time before one or more takedowns in the future (for example, in the case of a medium-term note program), the issuer can pay a filing fee in advance and file such a prospectus supplement with a fee table reflecting payment of the fee on the cover.[530]

(2) Comments on Pay-as-You-Go Fees

Commenters supported a pay-as-you-go filing fee approach.[531] Some commenters were concerned about the effect of an inadvertent failure to pay the filing fee in a timely manner.[532] Commenters also believed that issuers should continue to be able to pay filing fees in advance of an offering.[533] Some commenters requested guidance on the time at which automatic shelf issuers using the pay-as-you-go system should calculate the amount of the filing fee.[534]

We have adopted the pay-as-you-go filing fee provisions substantially as proposed, but with certain modifications to address commenters' concerns. In response to commenters' concerns, we have provided a cure provision that will allow an issuer to pay a filing fee after its original payment due date if it made a good faith effort to pay timely and then paid the fee within four business days of the original fee due date. We also have clarified that automatic shelf issuers may use any of the methods available to pay their filing fees, including paying the filing fees in advance, or paying the filing fees on a pay-as-you-go basis. We have eliminated the initial fee requirement. As a result of this clarification and the cure provisions, we believe that we have addressed commenters' concerns in this area. With regard to the time when the amount of the filing fee is calculated, as today, the amount of the filing fee is calculated based on the fee schedule in effect at the time of payment (upon filing in advance, or at the time of a takedown) in accordance with the provisions of Rule 457. Thus, the fee amount may be different depending on the time of payment.[535]

(E) Registration under Securities Act Sections 5 and 6

As we discussed in the Proposing Release, under our new rules for automatic shelf registration, compliance with Securities Act Sections 5 and 6 is tied to the timing of the necessary filings and the content of the automatic shelf registration statement (including, as we have described, amendments, incorporated documents, and prospectus supplements). Securities Act Section 5 requires registration of each securities offering unless an exemption is available. Securities Act Section 6 governs how securities may be registered, including the filing of registration statements and the payment of filing fees. Any securities offered and sold off an effective automatic shelf registration statement will satisfy the requirements of Securities Act Section 5(c) if the registration statement, as amended if applicable, includes that class of securities and is filed prior to sale and will satisfy the requirements of Securities Act Section 5(a) if such registration statement, as amended if applicable, includes that class of securities and is effective prior to sale. The securities sold in the takedown will be registered for purposes of Securities Act Section 6 if:

  • The class of securities is included in the registration statement, which is signed as required; and
  • The appropriate fee is paid as provided in our rules.

(F) Immediate Effectiveness

Under the automatic shelf registration statement rules we are adopting today, all automatic shelf registration statements and post-effective amendments thereto will become effective immediately upon filing.[536] In addition, we are adopting the proposed amendments to Securities Act Rule 401(g) to provide that an automatic shelf registration statement will be deemed to be filed on the proper form unless we notify the issuer after filing of our objection to the use of such form.[537] Therefore, until an issuer is notified by us, it can conduct offerings with certainty that it has registered the securities on the proper form. After we notify an issuer of our objection, the issuer cannot proceed with subsequent offerings (those offerings not in progress), unless it amends the registration statement to the proper form, or otherwise resolves the issue with us. If we notify an issuer that it is ineligible to use an automatic shelf registration statement, securities sold prior to our notification will not have been sold in violation of Section 5. For ongoing offerings, the issuer, once notified by us, will promptly have to file a post-effective amendment or a new registration statement to reflect that it is Start Printed Page 44781not an automatic shelf registration statement. Pending effectiveness of the post-effective amendment or a new registration statement, the ongoing offering could continue if such offering is permitted by the post-effective amendment or new registration statement.

Immediate effectiveness of automatic shelf registration statements will not raise, we believe, significant investor protection concerns. As with shelf registration statements today, most, if not all, information about the issuer is included in shelf registration statements through incorporation by reference of Exchange Act reports. Such shelf registration statements permit issuers to sell securities off the shelf registration statement without previous staff review of each offering.[538] We expect issuers to evaluate disclosure or accounting issues in Exchange Act filings before filing registration statements, including automatic shelf registration statements, and at the time of filing incorporated Exchange Act reports. Because we believe it is important that issuers address unresolved staff comments as part of its evaluation of these issues, we are adopting, as we discuss below, substantially as proposed the requirement for accelerated filers and well-known seasoned issuers to disclose written staff comments received 180 days before an issuer's fiscal year end that the issuer believes are material and that have remained unresolved at the time of filing of the Form 10-K or Form 20-F.[539]

(G) Duration

An automatic shelf registration statement will become effective immediately and will cover an unspecified amount of securities. The open-ended nature of such registration statements could result in a large number of post-effective amendments. We are, therefore, adopting as proposed a requirement for issuers to file new automatic shelf registration statements every three years that will, in effect, restate their then-current registration statement and amend it, as they deem appropriate. As adopted, issuers will be prohibited from issuing securities off an automatic shelf registration statement that is more than three years old. Our rules provide, however, that, so long as eligibility for automatic shelf registration is maintained, the new registration statement will be effective immediately and will carry forward to the new registration statement, at the issuer's election, either any unused fees paid or unsold securities registered and fees paid attributable to such registered securities under the old registration statement. As a result, an issuer's securities offerings under the registration statement can be uninterrupted.[540]

3. Unseasoned Issuers and Non-Reporting Issuers

a. Overview

We are adopting as proposed procedural changes that will affect reporting issuers that are not seasoned issuers. These include:

  • Expanding the circumstances under which issuers may incorporate information from their Exchange Act reports into their Securities Act registration statements; [541] and
  • Eliminating Form S-2 and Form F-2.

The provisions of Rule 430C also apply to prospectuses and prospectus supplements used in offerings by non-reporting issuers and unseasoned reporting issuers.[542]

b. Amendments to Form S-1 and Form F-1—Expanded Use of Incorporation by Reference

i. Eligibility

As we stated in the Proposing Release, as part of our initiatives to integrate further the Exchange Act and the Securities Act, we are adopting as proposed amendments to Form S-1 and Form F-1 to permit a reporting issuer that has filed at least one annual report and that is current in its reporting obligation under the Exchange Act to incorporate by reference into its Form S-1 or Form F-1 information from its previously filed Exchange Act reports and documents. Successor registrants can incorporate by reference if their predecessors were eligible.[543] In a change from the proposals, only the following issuers will not be able to incorporate by reference into a Form S-1 or Form F-1:

  • Reporting issuers who are not current in their Exchange Act reports; [544]
  • Issuers who are, or were or any of whose predecessors were during the past three years:

○ Blank check issuers;

○ Shell companies (other than business combination related shell companies); or

  • Issuers for offerings of penny stock.

In addition, as proposed, to enhance the availability to investors of incorporated information, the ability to incorporate by reference is conditioned on the issuer making its incorporated Exchange Act reports and other materials readily accessible on a web site maintained by or for the issuer. By conditioning the ability to incorporate by reference on the ready accessibility of an issuer's incorporated Exchange Act reports and other materials on its web site, we are providing investors the ability to obtain the information from those reports and materials at the same time that they would have been able to obtain the information if it was set forth directly in the registration statement. Issuers may satisfy this condition by including hyperlinks directly to the reports or other materials filed on EDGAR or on another third-party web site where the reports or other materials are made available in the appropriate time frame and access to the reports or other materials is free of charge to the user.[545]

ii. Procedural Requirements

Under the amendments we are adopting today, the prospectus in the registration statement at effectiveness must identify all previously filed Exchange Act reports and materials, such as proxy and information statements, that are incorporated by reference. There will be no permitted Start Printed Page 44782incorporation by reference of Exchange Act reports and materials filed after the registration statement is effective—known as “forward incorporation by reference.” Under the amended Forms, an issuer eligible to incorporate by reference its Exchange Act reports and other materials into its Securities Act registration statement must include the following in the prospectus that is part of the registration statement:

  • A list of the incorporated reports and materials;
  • A statement that it will provide copies of any incorporated reports or materials on request;
  • An indication that the reports and materials are available from us through our EDGAR system or our public reference room;
  • Identification of the issuer's web site address where such incorporated reports and other materials can be accessed; and
  • Required disclosures regarding material changes in or updates to the information that is incorporated by reference from an Exchange Act report or other material required to be filed.

iii. Comments on Form S-1 and Form F-1 Amendments

Commenters on this aspect of the proposals strongly supported the changes to allow issuers to incorporate by reference historical filings into Forms S-1 and F-1.[546] Some commenters suggested that Form S-1 and Form F-1 should allow forward incorporation by reference as well for filings made after effectiveness of a registration statement.[547] Some commenters did not believe that issuers should, as a condition to incorporating by reference into their Forms S-1 or F-1, be required to make their Exchange Act reports and other materials readily accessible on their web sites.[548]

As we discuss above, we have adopted the proposals substantially as proposed. We have narrowed the categories of ineligible issuers that can use incorporation by reference because the amended provisions still permit only incorporation of previously filed reports. Because the purpose of the proposal was not to extend short-form registration to all reporting issuers, but to further integrate disclosures under the Securities Act and Exchange Act without impacting investor protection, we have not adopted the suggestion that Form S-1 and Form F-1 permit “forward incorporation by reference” of Exchange Act reports that are filed in the future. As adopted, we also are retaining the condition that the reports and other materials that are incorporated by reference must be readily available and accessible on a web site maintained by or for the issuer and containing issuer information.

c. Elimination of Form S-2 and Form F-2

As we discussed in the Proposing Release, the purposes underlying the disclosure and delivery requirements of Form S-2 and Form F-2 are to minimize duplicative reporting, while still requiring that the incorporated information be delivered with the prospectus. It appears that the premises underlying Form S-2 and Form F-2 have become outdated in view of the introduction of EDGAR, other technological developments, and the rapid dissemination of information in the market. Also, these forms have not been widely used, particularly for the purposes they were intended.[549] Expanding the types of issuers that may incorporate by reference through our amendments to Form S-1 and Form F-1, without requiring delivery of the incorporated documents (except on request), makes Form S-2 and Form F-2 superfluous. Several commenters supported the elimination of Form S-2 and Form F-2.[550] We are, therefore, rescinding Form S-2 and Form F-2.[551]

VI. Prospectus Delivery Reforms

A. Current Prospectus Delivery Requirements

The Securities Act requires delivery of a prospectus meeting the requirements of Securities Act Section 10(a), known as a “final prospectus,” to each investor in a registered offering.[552] After the effective date of a registration statement, a written communication that offers a security for sale or confirms the sale of a security may be provided if a final prospectus is sent or given previously or at the same time. Otherwise, such a communication is a prospectus and may not be provided unless it meets the requirements of Securities Act Section 10(a).[553] A written confirmation is not designed to meet these requirements. Therefore, a final prospectus must accompany or precede a written confirmation. In addition, Securities Act Section 5(b)(2) makes it unlawful to deliver a security “unless accompanied or preceded” by a final prospectus.

Under these requirements, in the current system, if no preliminary prospectus or written selling materials are distributed, the final prospectus is the only prospectus received by investors. However, an investor's purchase commitment and the resulting contract of sale of securities to the investor in the offering generally occur before the final prospectus is required to be delivered under the Securities Act. Moreover, for sales occurring in the aftermarket, as a result of our rules, investors in securities of reporting issuers generally are not delivered a final prospectus.[554] Accordingly, the greatest utility of a final prospectus may be as a document that informs and memorializes the information for the aftermarket. Actual delivery to purchasers is not necessary to satisfy this purpose.[555]

We have previously adopted a number of other rules to address prospectus delivery in primary offerings and secondary market transactions. Securities Act Rule 153 addresses delivery of final prospectuses in transactions between brokers taking Start Printed Page 44783place over a national securities exchange. Securities Act Rule 434 was intended to ease the burden of prospectus delivery within the T+3 settlement cycle by permitting delivery of a final prospectus to be made in multiple documents at different intervals in the offering process.[556]

Many of our recent rulemakings to improve the content and timing of a reporting issuer's Exchange Act filings, together with the communications and procedural changes we are adopting today, are aimed at providing more information to investors at the time they commit to purchase a security. As we discussed in the Proposing Release, the increase in the flow of current information about a reporting issuer and the ability of offering participants to use free writing prospectuses in connection with offerings will give offering participants a greater ability to provide information to investors about the securities at that time. Further, rapid technological advances in the area of information delivery have resulted in greater access to information. For example, prospectuses and other filings now are available through EDGAR and other electronic sources, including the Internet, immediately upon filing.[557]

B. Prospectus Delivery Revisions

We are adopting revisions to the prospectus delivery requirements. Our new and amended rules are intended to facilitate effective access to information, while taking into account advancements in technology and the practicalities of the offering process. These changes are intended to alleviate timing difficulties that may arise under the current securities clearance and settlement system, and also to facilitate the successful delivery of, and payment for, securities in a registered offering.

As we discussed in the Proposing Release, given that the final prospectus delivery obligations generally affect investors only after they have made their purchase commitments and that investors and the market have access to the final prospectus upon its filing, we believe that delivery obligation should be able to be satisfied through a means other than physical delivery. Because the contract of sale has already occurred, we also believe that delivery of a written confirmation and the delivery of the final prospectus need not be linked.

Many commenters and market participants have encouraged us to adopt an “access equals delivery” model for final prospectus delivery.[558] Under such an “access equals delivery” model, investors are presumed to have access to the Internet, and issuers and intermediaries can satisfy their delivery requirements if the filings or documents are posted on a web site. The access concept is premised on the information or filings being readily available.

At this time, we believe that Internet usage has increased sufficiently to allow us to adopt a final prospectus delivery model for issuers and their intermediaries that relies on timely access to filed information and documents.[559] Issuers, brokers, and dealers can satisfy their final prospectus delivery obligations if a final prospectus is or will be on file with us within the time required by the new rules, including the cure period.

As adopted, the new and amended rules will:

  • Eliminate the existing link between delivery of the final prospectus and the delivery of a written confirmation of sale;
  • Provide that the obligation to have a final prospectus precede or accompany a security for sale can be satisfied by filing the final prospectus with us within the relevant timeframe provided by Rule 424(b);
  • Permit written notices of allocations; and
  • Permit the prospectus delivery obligations in dealer transactions during any prospectus delivery period and in broker or dealer transactions on exchanges, facilities of exchanges, and alternative trading systems to be satisfied if the final prospectus has been or will be filed with us.

1. Access Equals Delivery

a. Rule 172

(i) Scope of Rule

We are adopting new Rule 172 with some refinements from the proposals to implement our access equals delivery model.[560] Under Rule 172(b), as adopted, a final prospectus will be deemed to precede or accompany a security for sale for purposes of Securities Act Section 5(b)(2) as long as the final prospectus meeting the requirements of Securities Act Section 10(a) is filed or the issuer will make a good faith and reasonable effort to file it with us as part of the registration statement within the required Rule 424 prospectus filing timeframe.[561]

Our “access equals delivery” model will continue to satisfy the principal statutory purposes of final prospectus delivery while recognizing the need to modernize the obligations in view of technological and market structure developments.[562]

(ii) Comments on Rule 172

Most commenters supported the proposals that would deem the final prospectus delivery requirements satisfied through the filing of the final prospectus with the Commission.[563] Some commenters believed that the “access equals delivery” concept should extend to delivery obligations for preliminary prospectuses in initial public offerings as well as those applicable to proxy statements and other documents.[564] One commenter was concerned that an access equals delivery method for providing information would not provide older persons with the information they needed for their investment decisions.[565]

A number of commenters were concerned about the condition to the proposed rule that the final prospectus Start Printed Page 44784would have to be on file with the Commission within the time frame required under Securities Act Rule 424.[566] The commenters were concerned about retroactive violations of Section 5 if underwriters or dealers sent written confirmations and then the issuer failed to file the final prospectus within the required time frame. These commenters recommended including a cure provision in the Rule. Other commenters recommended eliminating this condition entirely and instead relying on Commission enforcement actions as the penalty for issuers failing to timely file final prospectuses.[567]

As we note above, we have adopted Rule 172 to continue to cover only delivery of final prospectuses. We do not currently believe that extension of access equals delivery is appropriate for preliminary prospectus delivery obligations in initial offerings because we believe that it is important for potential investors to be sent the preliminary prospectus.

We have, however, revised the Rule in response to commenters' concerns about the filing condition. As adopted, we have provided that the filing condition is satisfied if the issuer makes a good faith and reasonable effort to file the prospectus within the timeframe required by Rule 424. We have included a cure provision that allows the issuer an ability to cure an unintentional failure to file if it has made such a good faith and reasonable effort to comply with the filing condition and files the prospectus as soon as practicable after discovery of the failure to file. We believe that these revisions to the Rule will address commenters' concerns regarding retroactive violations of Section 5 due to an issuer's failure to timely file the final prospectus.[568] We also have provided new paragraph (b)(8) of Rule 424 under which the issuer will file a form of prospectus that is not timely filed. We also have provided that the filing condition does not apply to transactions by dealers requiring delivery of a final prospectus pursuant to Securities Act Section 4(3).

b. Exceptions to the Rule

We have excluded certain types of offerings from the Rule as adopted because either they do not raise the same issues as in corporate capital formation transactions or they are already subject to rules unique to their offerings. For example, in offerings made pursuant to Form S-8, the final prospectus is never filed with us and thus, these offerings do not raise the same types of issues as other capital formation transactions. Business combination transactions and exchange offers also differ from other types of offerings registered under the Securities Act because the proxy rules and tender offer rules in conjunction with state law impose informational and delivery requirements in those transactions. The information contained in the final prospectus, therefore, will be delivered regardless of the Securities Act's requirements. Moreover, it is important to retain consistency among the various rules and regulations applicable to these business combination transactions and exchange offers.[569]

Finally, registered investment companies and business development companies will not be able to rely on the Rule. These entities are subject to a separate framework governing communications with investors, and we believe that it would be more appropriate to consider any changes to our prospectus delivery requirements as they apply to registered investment companies and business development companies in the context of a broader reconsideration of this framework.[570]

c. Notification

(i) Rule 173

In addition to providing access to information, prospectus delivery can serve the function of informing investors that they purchased securities in a registered transaction. This notification will provide investors the ability to trace their purchases for purposes of asserting their rights under the liability provisions of the federal securities laws. To preserve this investor protection function, we are adopting Rule 173 substantially as proposed. Rule 173 addresses each transaction involving:

  • A sale by an issuer or an underwriter to a purchaser; and
  • A sale in which the final prospectus delivery requirements apply.

Rule 173 provides that, in these transactions, each underwriter or dealer participating in a registered offering (or, if the sale was effected by the issuer and not by or through an underwriter or dealer, then the issuer) must provide to each purchaser from it, not later than two business days after the completion of the sale, a copy of the final prospectus or, in lieu of the final prospectus, a notice providing that the sale was made pursuant to a registration statement or in a transactions in which a final prospectus would have been required to have been delivered in the absence of Rule 172.

The Rule also provides that an investor can request a final prospectus. Under the Rule, a requested final prospectus does not have to be provided before settlement.[571]

Rule 173, as adopted, provides that compliance with Rule 173 is not a condition to reliance on Rule 172 to satisfy final prospectus delivery. Accordingly non-compliance with Rule 173 will not result in a violation of Securities Act Section 5. Rule 173 is, however, an important component of the prospectus delivery modifications we are adopting today.

As adopted, the same offerings excluded pursuant to Rule 172, as discussed above, also are excluded from this notification provision.[572] We also have revised Rule 173 to exclude transactions solely between brokers or dealers in reliance on Rule 153.

(ii) Comments on Rule 173

Commenters suggested certain clarifications to proposed Rule 173 including providing a cure provision for failure to provide the required notification,[573] eliminating required compliance with Rule 173 for aftermarket sales covered by Rule 174,[574] and providing that compliance with Rule 153 would be deemed compliance with Rule 173.[575] One commenter also requested that we confirm that the Rule 173 notification may be included in Rule 10b-10 confirmations.[576]

Start Printed Page 44785

We have adopted Rule 173 substantially as proposed. We have made clear that Rule 173 does not apply to transactions between dealers or brokers in reliance on Rule 153, but it continues to apply to the transaction between the broker or dealer and the underlying purchaser on whose behalf or for whose account the transaction is effected. We believe that it is important that purchasers in registered offerings are notified that they have acquired their securities in the registered transaction and so we also have not taken commenters' suggestions to eliminate compliance with the Rule for aftermarket sales. The Rule 173 notification can be sent separately or can be included in a Rule 10b-10 confirmation.

2. Written Confirmations and Notices of Allocations

We are adopting Rule 172(a), substantially as proposed, to provide an exemption from Securities Act Section 5(b)(1) that allows written confirmations and notices of allocation to be sent after effectiveness of a registration statement without being accompanied or preceded by a final prospectus.[577] The exemption is conditioned on the registration statement being effective and the final prospectus meeting the requirements of Securities Act Section 10(a) being filed with us.[578] The exemption permits:

  • Written confirmations containing information limited to that called for in Exchange Act Rule 10b-10 and other information customarily included in confirmations, including any notice provided pursuant to Rule 173; and
  • Written communications from an offering participant to a customer or from an underwriter to dealers in the selling group notifying them of the transaction and their allocations of securities in a registered offering.

Under the exemption, for example, broker-dealers could send e-mail notices after effectiveness to inform investors in a public offering of their allocations. Under the Rule as adopted, the notices of allocations may include the name of the securities, the CUSIP number, the amount allocated to the customer, the price of the securities, and the date or expected date of settlement and incidental information. Similar information is permitted in notices to participating dealers. The exemption is not available for the same offerings excluded from the prospectus delivery provision of the Rule discussed above.

One commenter suggested that the notice of allocation be permitted to included CUSIP numbers and also suggested that, especially for asset-backed securities, the notice of allocation should be expanded to permit communication of demand for securities and “price talk” or a communication of information regarding expected or actual allocation of classes of securities in order to facilitate an investment decision.[579] We have included specific reference permitting inclusion of a CUSIP number. However, we believe that the other information identified in this comment, if communicated in writing, should be the subject of a free writing prospectus. It is not an appropriate subject for a notice of allocation. The notice of allocation is intended to be a notice of actual allocation of securities to the investor or participating dealer to which the notice is provided.

3. Transactions Taking Place on an Exchange or Through a Registered Trading Facility—Rule 153

Securities Act Rule 153 addresses delivery of final prospectuses in transactions taking place between brokers over a national securities exchange; it does not currently apply to transactions on an automated quotation system, such as the Nasdaq Stock Market. Rule 153 provides that where members of the exchange are on both sides of the transaction and the transaction is effected on that exchange, the Section 5 obligation to deliver a final prospectus before or with a security between the brokers will be satisfied if the issuer or underwriter delivers copies of the final prospectus to the exchange.[580] Rule 153 has limited utility today because it may be relied on only for transactions between brokers on an exchange. The difficulty in prospectus delivery that Rule 153 was designed to address—the difficulty or inability to identify the ultimate buyer—has expanded since 1936 with the rise in transactions effected on markets other than national securities exchanges, such as the Nasdaq Stock Market and alternative trading systems, the growth of the book-entry system, and street name holdings.[581] In addition, the paper-based system upon which Rule 153 is premised is outmoded and unnecessary due to electronic filings of final prospectuses on EDGAR and the technological resources of market members. There currently is no significance to the paper copies of prospectuses delivered to national securities exchanges.

As we stated in the Proposing Release, we believe it is important, therefore, to amend Rule 153. Under the amendments we are adopting today, brokers or dealers effecting transactions on a registered exchange, through a trading facility of a registered national securities association, or through a registered alternative trading system will be deemed to satisfy their prospectus delivery obligations under Securities Act Section 5(b)(2) with regard to transactions in securities if:

  • The issuer has filed or will file the final prospectus with us;
  • Securities of the same class as the securities that are the subject of the transaction are trading on that exchange or through that trading facility or alternative trading system;
  • The registration statement relating to the offering is effective and not the subject of a stop order issued under Securities Act Section 8; and
  • Neither the issuer nor any underwriter or participating dealer is the subject of a pending proceeding under Securities Act Section 8A in connection with the offering.

These changes will eliminate the difficulties for prospectus delivery among brokers and dealers in registered resales and other sales into existing trading markets where securities of the same class already are trading. We are not requiring as part of the Rule that physical copies of the prospectus be sent to the exchange or a market maker. Further, the exchange and the market maker no longer will need to keep track of any prospectuses.[582] As with the existing rule, the amended Rule does not affect delivery obligations to Start Printed Page 44786purchasers other than brokers or dealers.

We have revised our proposed amendments to Rule 153 in one respect. For purposes of Rule 153 as amended, the filing of the final prospectus, regardless of whether it occurs before or after reliance on the Rule, will satisfy the conditions of the Rule.[583]

4. Aftermarket Prospectus Delivery—Rule 174

Unless our rules provide otherwise, all dealers are required to deliver a final prospectus for a specified period after a registration statement becomes effective to persons who buy the securities in the aftermarket.[584] Securities Act Rule 174 exempts from this aftermarket dealer prospectus delivery obligation any transaction relating to securities of a reporting issuer. These exemptions in Rule 174 do not apply to underwriters or dealers with regard to any unsold allotment. Otherwise, if the transaction relates to securities of a non-reporting issuer that will be listed on a national securities exchange or quoted on an electronic inter-dealer quotation system, current Rule 174 sets an aftermarket delivery period of 25 days after effectiveness. For offerings of securities of non-reporting issuers that will not be so listed or quoted and offerings by blank check companies, Rule 174 sets an aftermarket prospectus delivery period of 90 days after effectiveness or after the funds are released from the escrow or trust account, as the case may be. Where a registration statement relates to offerings to be made from time to time, Rule 174 provides that there is no aftermarket delivery requirement once the initial period expires. The underlying purpose of aftermarket prospectus delivery is to assure wide dissemination of information about the issuer in the market. For reporting issuers, the Rule assumes that the information is already disseminated and eliminates the prospectus delivery requirement for these issuers.

We believe that, where information regarding all issuers is largely disseminated other than through physical delivery, including through EDGAR, physical delivery of a final prospectus in the aftermarket is of limited utility and necessity. We are, therefore, amending Rule 174 as proposed to provide that during the aftermarket period, dealers can rely on proposed Rule 172 to satisfy any aftermarket delivery obligations (other than for blank check companies).

Some commenters recommended that we eliminate the conditions to “access equals delivery” contained in Rule 172 for brokers or dealers involved in only aftermarket distributions.[585] Commenters also recommended elimination of all aftermarket prospectus delivery requirements for all transactions, with some suggesting that the obligation should be eliminated where the securities are listed on an exchange or quoted on the Nasdaq Stock Market.[586] While we are not eliminating the prospectus delivery obligations that currently arise under Securities Act Section 4(3) and Rule 174, we are providing for reliance on Rule 172 to satisfy those delivery obligations (other than for blank check companies).[587] Rule 173 applies in part where Securities Act Section 4(3) requires prospectus delivery and where there is no exemption from delivery under Rule 174.

VII. Additional Exchange Act Disclosure Provisions

A. Risk Factor Disclosure

1. Scope of Requirement

As we stated in the Proposing Release, many Securities Act registration statements require disclosure of the risks associated with an investment in an issuer's securities. Items 503(c) of Regulation S-K and Regulation S-B [588] describe that required disclosure as a “discussion of the most significant factors that make the offering speculative or risky.” The risk factor section is intended to provide investors with a clear and concise summary of the material risks to an investment in the issuer's securities.

We are adopting substantially as proposed a new item requiring risk factor disclosure in annual reports on Forms 10-K and Exchange Act registration statements on Form 10.[589] We are not extending this requirement to Forms 10-KSB or Form 10-SB. The new item applies the standard for risk factor disclosure in Securities Act registration statements to Exchange Act registration statements and annual reports.[590] As such, risk factor disclosure under the Exchange Act will be the same type of disclosure as required in a Securities Act registration statement by Item 503, other than information about a particular securities offering.[591] We are not requiring asset-backed issuers to include risk factor disclosure in their annual reports on Form 10-K. We agree with commenters who noted that disclosure requirements in a Form 10-K for asset-backed issuers varies considerably under Regulation AB from corporate issuers.[592] These requirements, along with the fundamental structure of most asset-backed securities offerings involving stand-alone trusts, make this requirement inappropriate for asset-backed issuers.

We also are adopting as proposed the requirement that the risk factor disclosure in Forms 10 and 10-K be written in accordance with the same “plain English” standards as apply to risk factor disclosure in Securities Act registration statements.[593] The amendments as adopted also provide for quarterly updates to reflect material changes from risk factors as previously disclosed in Exchange Act reports. The amendments do not otherwise require, and we discourage, unnecessary restatement or repetition of risk factors in quarterly reports.

As we stated in the Proposing Release, the requirement to include risk factor disclosure in Forms 10 and 10-K will, we believe, further enhance the contents of Exchange Act reports and their value in informing investors and the markets.[594] Further, requiring risk factor Start Printed Page 44787disclosure in Exchange Act registration statements and annual reports will enhance the ability of reporting issuers to incorporate risk factor disclosure from these Exchange Act reports into Securities Act registration statements to satisfy the risk factor disclosure requirements.[595] Because one of our goals is to further integrate disclosures under the Securities Act and the Exchange Act, we believe it is important to establish consistent disclosure standards for risk factor disclosure.

We are adopting the proposed requirements for updated risk factor disclosure in quarterly reports because we believe that issuers who are required to file quarterly reports already need to undertake a review of changes in their operations, financial results, financial condition, and other circumstances in order to prepare the other portions of the quarterly report, including the financial statements and MD&A.[596] Therefore, we believe that issuers should be able, on a quarterly basis, to update risk factors to reflect material changes from previously disclosed risk factors.

2. Comments on Risk Factor Disclosure Requirement

While some commenters supported the proposal generally, others suggested modifications to the risk factor requirement.[597] For example, several commenters suggested we should require risk factors only “where appropriate.” [598] Other commenters did not believe a separate risk factor section was necessary because reporting companies already included risk disclosures in various sections of their annual reports.[599] Commenters also noted that the proposed language was more extensive than Item 503(c).[600] A number of commenters thought we should extend the requirement for risk factor disclosure to small business issuers.[601] Further, at least one commenter was concerned about the proposal to require updated risk factor disclosures in quarterly reports.[602]

We have made modifications to the language in the proposals as we considered appropriate. While we are providing risk factor disclosure to be included “where appropriate,” and have eliminated duplicative language, we continue to believe that a risk factor section in Exchange Act annual reports and registration statements will, where appropriate, be beneficial to investors.

B. Disclosure of Unresolved Staff Comments

As we stated in the Proposing Release, because enhanced Exchange Act reporting provides a principal element of support for, and is at the core of, the rules we are adopting today, it is important that issuers timely resolve any staff comments on their Exchange Act reports. It is possible, however, that the procedural changes we are adopting today may eliminate some of the incentives issuers have to respond to and resolve comments on their Exchange Act reports in a timely manner. In particular, with immediate effectiveness, well-known seasoned issuers will not be subject to the possibility that effectiveness of a Securities Act registration statement could be delayed while comments are being resolved. In addition, all shelf eligible issuers will have to file new registration statements only every three years. Staff in the Division of Corporation Finance has begun to review more Exchange Act reports and will continue to do so in keeping with the requirements of the Sarbanes-Oxley Act [603] as well as our view of the importance of an issuer's Exchange Act reports. Under these circumstances, and with the greater flexibility given in the rules we are adopting today to communications outside the statutory prospectus and offering procedures, we think it is appropriate for accelerated filers and well-known seasoned issuers to disclose outstanding staff comments that remain unresolved for a substantial period of time.

1. Disclosure Requirement

We are adopting substantially as proposed the requirement that all entities defined as accelerated filers and well-known seasoned issuers disclose, in their annual reports on Form 10-K or Form 20-F, written comments our staff made in connection with a review of Exchange Act reports that:

  • The issuer believes are material;
  • Were issued more than 180 days before the end of the fiscal year covered by the annual report; [604] and
  • Remain unresolved as of the date of the filing of the Form 10-K or Form 20-F.[605]

The disclosure must be sufficient to disclose the substance of the comments. Staff comments that have been resolved, including those that the staff and issuer have agreed will be addressed in future Exchange Act reports, do not need to be disclosed. Issuers can provide other information, including their position regarding any such unresolved comments.

2. Comments on Disclosure of Outstanding Comments

Many commenters did not support the proposed disclosure of outstanding comments.[606] These commenters believed that issuers already have sufficient incentives to comply with staff comments and that the disclosure may not provide meaningful information to investors.[607] Some commenters suggested that well-known seasoned issuers should be able to choose to either comply with the disclosure requirement or abstain from conducting an offering until the Start Printed Page 44788comments have been resolved.[608] One commenter was concerned about potential liability that might arise from the disclosure of the unresolved comments.[609]

For the reasons noted above, we believe that disclosure of outstanding comments is an important component of the rules that we are adopting today. Because the disclosure requirement applies only to comments issued more than 180 days before the issuer's fiscal year end that remain unresolved at the filing date, we believe that, in most circumstances, this will provide issuers with more than enough time to address and resolve issues. Moreover, we are not modifying the language from the proposal to allow issuers the choice to either disclose or refrain from offering securities in registered offerings because we believe the disclosures are important to the entire market.

C. Disclosure of Status as Voluntary Filer Under the Exchange Act

As we noted in the Proposing Release, our filing system does not prohibit issuers that are not required to file Exchange Act reports us from filing those reports voluntarily. In most cases, voluntary filers are issuers who have, at some point, completed a registered offering under the Securities Act and have continued to file Exchange Act reports even after their reporting obligation under Exchange Act Section 15(d) has been suspended.[610]

We are adopting the proposal to include a box on the cover page of Forms 10-K, 10-KSB, and 20-F for an issuer to check if it is filing reports voluntarily. However, the box is for disclosure purposes only and an issuer's filing obligation will be unaffected by an incorrectly checked box.

We believe that it is important that investors and other market participants are aware that an issuer that is a voluntary filer is not required to continue to file Exchange Act reports and may cease to file its Exchange Act reports at any time and for any reason without notice. In addition, our communications and procedural rules we are adopting today do not treat voluntary filers as reporting issuers or seasoned issuers. As we indicated above, voluntary filers desiring treatment as reporting issuers should register a class of their securities under the Exchange Act.[611] Identification of voluntary filers will enable market participants and us to identify voluntary filers.

Commenters on voluntary filers generally thought that voluntary filers should be treated as seasoned issuers because many of them have contractual obligations to file reports.[612] Some commenters were concerned that it would be difficult for certain foreign private issuers to assess their voluntary filer status because of issues relating to calculating the number of U.S. holders of record.[613]

We are adopting as proposed the requirement for voluntary filers to disclose their status on the cover of Form 10-K, Form 10-KSB, and Form 20-F. To date, we have permitted voluntary filers to submit their reports to us through EDGAR. We believe it is important to be able to assess whether issuers are subject to our reporting and other requirements arising from their reporting status. We do not believe that calculation of the number of U.S. holders is a significant obstacle to unregistered foreign private issuers' determination of their voluntary filer status.

VIII. Paperwork Reduction Act

A. Background

The rules contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).[614] We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA.[615]

We did not receive any comments on the PRA analysis contained in the Proposing Release. As discussed above, we have made several changes to the proposed rules in response to comments on the proposals. These changes are designed to avoid potential unintended consequences and reduce possible additional costs or burdens pointed out by commenters. After evaluating the comments and our responsive revisions to address them, we are not changing the initial PRA estimates described in the Proposing Release and submitted to OMB, other than to reflect the decreased number of free writing prospectuses that will be filed as a result of the changes to the treatment of electronic road shows, as discussed below.

The titles for all the collections of information affected by these rules are: [616]

(1) “Form 10” (OMB Control No. 3235-0064);

(2) “Form 20-F” (OMB Control No. 3235-0288);

(3) “Form 10-K” (OMB Control No. 3235-0063);

(4) “Form 10-Q” (OMB Control No. 3235-0070);

(5) “Regulation S-K” (OMB Control No. 3235-0071);

(6) “Regulation S-B” (OMB Control No. 3235-0417);

(7) “Regulation C” (OMB Control No. 3235-0074);

(8) “Form S-1” (OMB Control No. 3235-0065);

(9) “Form F-1” (OMB Control No. 3235-0258);

(10) “Form S-2” (OMB Control Number 3235-0072);

(11) “Form F-2” (OMB Control Number 3235-0257);

(12) “Form S-3” (OMB Control Number 3235-0073);

(13) “Form F-3” (OMB Control Number 3235-0256);

(14) “Form S-4” (OMB Control Number 3235-0324);

(15) “Form F-4” (OMB Control Number 3235-0325);

(16) “Form N-2” (OMB Control Number 3235-0026);

(17) “Rule 173” (OMB Control Number 3235-0618);

(18) “Rule 163” (OMB Control Number 3235-0619); and

(19) “Rule 433” (OMB Control Number 3235-0617).

We adopted all of the existing regulations and forms pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. They set forth the disclosure requirements for annual and quarterly reports, registration statements, and prospectuses that are prepared by issuers to ensure that investors have the information they need to make informed investment decisions in registered offerings and in secondary market transactions. We also are adopting new Securities Act Rules 163, 173, and 433 Start Printed Page 44789and eliminating Securities Act Rule 434 and Forms S-2 and F-2.

The amendments to existing forms and regulations and new rules will modify and advance the Commission's regulatory system for offerings under the Securities Act, enhance communications between public issuers and investors, and promote investor protection. The rules involve three main areas:

  • Communications related to registered securities offerings;
  • Procedural restrictions in the offering and capital formation processes; and
  • Delivery of information to investors.

The hours and costs associated with preparing disclosure, filing forms, and retaining records constitute reporting and cost burdens imposed by the collections of information. The estimates of reporting and cost burdens provided in this PRA analysis address the time, effort, and financial resources necessary to provide the collections of information and are not intended to represent the full economic cost of complying with the rules. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

The information collection requirements related to registration statements and periodic reports will be mandatory. For registration statements and periodic reports, there will be no mandatory retention period for the information disclosed, and the information gathered will be made publicly available. The information collection requirements related to the communications and prospectus delivery rules will apply only to issuers and other offering participants choosing to rely on them. There will be a mandatory record retention period with respect to the communications and prospectus delivery provisions. Moreover, free writing prospectuses that are prepared by or on behalf of or used or referred to by an issuer, and free writing prospectuses that are broadly disseminated by another offering participant, will have to be filed and will be publicly available on the EDGAR filing system, whereas other free writing prospectuses prepared by or on behalf of or used or referred to by offering participants, other than the issuer, will not have to be filed.

B. Summary of Information Collections

The rules will add the following disclosure requirements to Exchange Act periodic reports and registration statements:

  • Risk factor disclosure;
  • Disclosure by accelerated filers and well-known seasoned issuers, in their annual reports on Forms 10-K or 20-F, of any written staff comments regarding their Exchange Act reports issued more than 180 days before the end of the fiscal year covered by the annual report that the issuer believes to be material and that remain unresolved as of the date of the filing of the annual report; and
  • “Check boxes” that will appear on the cover page of the report or registration statement to indicate whether the registrant is filing Exchange Act reports on a voluntary basis and whether the registration is a well-known seasoned issuer.[617]

The rules will impose the following new disclosure requirements and filing or notification conditions in connection with registered offerings under the Securities Act:

  • A brief notice to purchasers in a registered offering providing that the sale was made pursuant to a registration statement; [618]
  • A brief legend in “free writing prospectuses” [619] that refers investors to the statutory prospectus;
  • “Check boxes” on registration statement cover pages indicating whether the registration statement is being used for “automatic shelf registration” or post-effective registration of additional securities or classes of securities; [620]
  • Additional disclosure in the undertakings required to be included in a registration statement for securities to be offered pursuant to Rule 415; [621]
  • A filing condition in connection with the use of certain free writing prospectuses; [622] and
  • Making a version of an electronic road show that is a written communication used in initial public offerings of common equity or convertible equity securities by non-reporting issuers broadly disseminated on an unrestricted basis.

The rules will decrease existing disclosure requirements by:

  • Reducing the need to repeat previously disclosed information by permitting any reporting issuer that has filed at least one annual report and that is current in its reporting obligation to incorporate information by reference into its registration statement on Forms S-1 or F-1; and
  • Reducing the number of registration statements filed because the automatic shelf registration rules likely will eliminate the need to file multiple registration statements.

C. Summary of Comment Letters on the PRA Analysis

We received no comments in response to our request for comment on the PRA analysis in the Proposing Release. We have made several changes and clarifications in response to comments on the proposals that are designed to avoid or reduce possible additional costs or burdens pointed out by commenters. For example, we are not requiring that an electronic road show be filed for most offerings, except if an electronic road show that is a written communication is used in an initial public offering of common equity or convertible equity securities by a non-reporting issuer. In that case, the electronic road show does not have to be filed if a bona fide electronic road show is made readily available electronically on an unrestricted basis In addition, we have revised the definition of graphic communication so that live, in real-time presentations to a live audience will not be considered written communications and therefore not free writing prospectuses. As a result of these modifications, we believe that fewer free writing prospectuses, including those that are electronic road shows, will be filed or otherwise made available electronically on an unrestricted basis, and we have therefore revised the estimates for the total burden imposed by Rule 433.

D. Paperwork Reduction Act Burden Estimates

For purposes of the PRA, we estimated the total annual incremental reduction in the paperwork burden for registrants to comply with the collection of information requirements to be approximately 40,393 hours of in-house issuer personnel time and the reduction in cost to be approximately $70,797,000 for the services of outside Start Printed Page 44790professionals.[623] The changes in the PRA burden estimates for Rule 433 (OMB Control No. 3235-0617) have the effect of reducing the estimated paperwork burden for registrants by approximately 356 hours of in-house personnel time, for a new estimate of approximately 40,749 hours, and a reduction in cost of approximately $320,800, for a new estimate of approximately $71,117,800 for the services of outside professionals. For broker-dealers, we estimated the annual incremental paperwork burden to comply with the collection of information requirements to be approximately 3,874,133 hours of in-house issuer personnel time, and we are not changing this estimate.[624] Those estimates include the time and the cost of preparing and reviewing disclosure, filing documents or otherwise publicizing information, and retaining records.

As we noted in the Proposing Release, the estimates represent the average burden for all issuers, both large and small. We expect that the burdens and costs could be greater for larger issuers and lower for smaller issuers. For Exchange Act periodic reports, we estimated that 75% of the burden of preparation is carried by the issuer internally and that 25% of the burden is carried by outside professionals retained by the issuer at an average cost of $300 per hour.[625] For Securities Act registration statements, Exchange Act registration statements, all filings by foreign private issuers, and the free writing prospectus rules, we estimated that 25% of the burden of preparation is carried by the issuer internally and that 75% of the burden is carried by outside professionals retained by the issuer at an average cost of $300 per hour. The portion of the burden carried by outside professionals is reflected as a cost, while the portion of the burden carried by the issuer internally is reflected in hours.

1. Exchange Act Periodic Reports and Registration Statements

For purposes of the PRA, we estimated the annual incremental paperwork burden for all issuers to prepare the disclosure required in Exchange Act periodic reports and registration statements under the rules to be approximately 43,245 hours of issuer personnel time and the cost to be approximately $4,477,000 for the services of outside professionals, as we explained more fully in the Proposing Release. Those estimates include the time and the cost of preparing and reviewing the required new disclosure. The estimates reflect our belief that, because the current disclosure requirements for Exchange Act reports (such as Management's Discussion and Analysis of Financial Condition and Results of Operations) [626] already require issuers to obtain information necessary to evaluate their material risks, and because disclosure by accelerated filers describing unresolved written staff comments on previous filings that the issuer believes to be material will be simply a summary of comments provided to the issuer by the staff of the Commission, the disclosure that issuers would have to make in their Exchange Act periodic reports and registration statements should not impose significant new burdens.

2. Communications and Prospectus Delivery

For purposes of the PRA, we estimate that the annual paperwork burden for issuers that choose to comply with the communications rules will be approximately 1,176 hours of issuer personnel time and a cost of approximately $1,058,288 for the services of outside professionals. These estimates reflect the burden hours and costs associated with the disclosure, filing, and record retention conditions. As noted above, we are revising the annual burden for the information collection requirements of Rule 433 as a result of the changes to the treatment of electronic road shows and we have decreased the annual paperwork burden accordingly. For the prospectus delivery rules, we estimated that the annual burden would be 3,874,133 hours total for all respondents to comply with Rule 173.

3. Securities Act Registration Statements

For purposes of the PRA, we estimated that the rules affecting the collection of information requirements related to Securities Act registration statements would reduce incrementally the annual paperwork burden by approximately 85,170 hours of issuer personnel time and by a cost of approximately $76,653,000 for the services of outside professionals, as we explained more fully in the Proposing Release. That estimate reflected changes to the number of filings that could result from the rules as well as the decrease in disclosure preparation time resulting from the expansion of incorporation by reference.

IX. Cost Benefit Analysis

A. Background

We are revising the registration, communications, and offering processes under the Securities Act. The rules involve three main areas:

  • Communications related to registered securities offerings;
  • Registration and other procedures in the offering and capital formation processes; and
  • Delivery of information to investors.

The overall goal of the reforms is to make the registration system more workable for issuers and underwriters and more effective for investors in today's capital markets. We believe that the gun-jumping provisions of the Securities Act impose substantial and increasingly unworkable restrictions on useful communications that would be beneficial to investors and markets and consistent with investor protection. Today's rules reflect our view that revisions to the Securities Act registration and offering processes are appropriate in light of significant developments in the offering and capital formation processes and can provide enhanced protection of investors under the statute. This view is based on our belief that today's rules will:

  • Facilitate greater availability of information to investors and the market with regard to all issuers;
  • Eliminate barriers to open communications that have been made increasingly outmoded by technological advances;
  • Reflect the increased importance of electronic dissemination of information, including the use of the Internet;
  • Make the capital formation process more efficient; and
  • Define more clearly both the information and the timeliness of the availability of information against which a seller's statements are evaluated for liability purposes.

B. Summary of Rules

The amount of flexibility granted to issuers under the revisions to the registration, communications, and offering processes is contingent on the characteristics of the issuer. We believe that the most far-reaching revisions of the communications rules and registration processes should be Start Printed Page 44791considered for issuers that have a reporting history under the Exchange Act and are presumptively the most widely followed in the marketplace. We believe that these issuers have an Exchange Act record, a broad following of their Exchange Act filings, and the contemplated attention directed to their Exchange Act reports by analysts and institutional investors, and the staff of the Division of Corporation Finance that will produce the greatest likelihood of Exchange Act reports that not only are reliable but also are broadly scrutinized by investors and the markets.

For purposes of the rules we are adopting today, we categorize issuers into tiers, consisting of non-reporting issuers, unseasoned issuers, seasoned issuers, and well-known seasoned issuers. The first three tiers of issuers are identified by pre-existing criteria under the existing federal securities laws. A non-reporting issuer is an issuer that is not required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act.[627] An unseasoned issuer is an issuer that is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities. A seasoned issuer is an issuer that uses Form S-3 or Form F-3 to register primary offerings of securities. Our longstanding experience with these categories of issuers provides us with a basis for determining the amount of flexibility provided by the rules we are adopting today.

The characteristics of the last tier of issuer, called well-known seasoned issuers in the rules, will be easily measurable and readily available so that issuers and market participants can determine eligibility easily. In response to comments, we are modifying the definition of well-known seasoned issuer to provide that the eligibility determination will be made as of the later of the time of filing of the issuer's most recent registration statement on Form S-3 or Form F-3 for a primary offering, the time of filing its most recent amendment for purposes of complying with Section 10(a)(3) of the Securities Act, or an amendment to a shelf registration within 16 months. If the well-known seasoned issuer has not filed an automatic shelf registration statement, the eligibility is determined at the time of filing the issuer's most recent annual report on Form 10-K or Form 20-F (or if such report has not been filed by its due date, such due date). In addition, we will require issuers to check a box on the cover of their Form 10-K or Form 20-F if they are a well-known seasoned issuer so that market participants may reasonably rely on the issuer's determination. For issuers with publicly traded equity, we believe that market capitalization provides a sufficient proxy for determining whether or not an issuer is well followed. For issuers of fixed income securities, we believe that the amount of fixed income securities sold in registered offerings for cash in the past three years provides a sufficient proxy.[628]

Under the rules, a well-known seasoned issuer will have the greatest flexibility. The largest issuers are followed by sophisticated institutional and retail investors, members of the financial press, and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. Unlike smaller or less mature issuers, large, seasoned public issuers tend to have a more regular dialogue with investors and market participants through the press and other media. The communications of these well-known seasoned issuers are subject to scrutiny by investors, the financial press, analysts, and others who evaluate disclosure when it is made.

1. Communications

We are adopting communications rules that recognize the value of ongoing communications as well as the importance of avoiding unnecessary restrictions on offers during a registered offering. The rules are designed to improve investors' access to information, to promote communications between offering participants and investors, and to maintain adequate investor protection. The rules will operate in the following manner:

  • There will be two separate safe harbors from the gun-jumping provisions for ongoing communications at any time:

○ A safe harbor for a reporting issuer's continued publication or dissemination at any time of regularly released factual business and forward-looking information; and

○ A safe harbor for a non-reporting issuer's continued publication or dissemination at any time of factual business information that is regularly released to persons other than investors or potential investors.

  • There will be two separate exclusions from the gun-jumping provisions for communications not encompassed in the rules above that occur prior to the filing of a registration statement:

○ An exclusion from the definition of offer for purposes of Securities Act Section 5(c) for all issuers for all communications made by or on behalf of issuers 30 days prior to filing a registration statement; and

○ An exemption from the prohibition on offers for purposes of Securities Act Section 5(c) before the filing of a registration statement for offers made by or on behalf of eligible well-known seasoned issuers.

  • Certain written offering related communications, such as communications about the schedule for an offering or communications about account-opening procedures, will be permitted in connection with an offering and will be excluded from the definition of “prospectus.”
  • Issuers and other offering participants will be permitted to use free writing prospectuses after the filing of the registration statement, subject to enumerated conditions (including, in specified cases, filing with the Commission).
  • The safe harbors for research reports will be expanded.

2. Securities Act Registration Rules

As part of the rules to modernize the regulatory regime for registered securities offerings, we are streamlining the registration process for most types of reporting issuers. The rules recognize the role that technology and improved Exchange Act reporting procedures have in informing the marketplace. The rules address the registration procedures for seasoned and unseasoned issuers. These rules include:

  • Modifications that clarify and expand how and when information can be included in registration statements;
  • A clarification of the Securities Act liability treatment of information provided in a prospectus supplement and Exchange Act reports incorporated by reference;
  • A more flexible automatic registration process for well-known seasoned issuers, including immediate effectiveness and pay-as-you-go registration fee payment; and
  • Rules related to non-shelf offerings of securities.

3. Prospectus Delivery

We are adopting an “access equals delivery” prospectus delivery model, where final prospectus delivery obligations for purposes of Securities Start Printed Page 44792Act Section 5(b)(2) will be satisfied if the issuer filed the final prospectus with the Commission within the required time frame. The rules will:

  • Eliminate the existing link between delivery of the final prospectus and the delivery of a written confirmation of sale;
  • Provide that the obligation to have a final prospectus precede or accompany a security can be satisfied by filing a final prospectus with us within the relevant timeframe provided by Rule 424(b);
  • Permit written notices of allocations; and
  • Permit the prospectus delivery obligations in dealer transactions during any prospectus delivery period and broker or dealer transactions in registered resales of securities that are trading to be satisfied if the final prospectus has been or will be filed with us.

4. Exchange Act Reports

A public issuer's Exchange Act record often provides the most detailed source of information to the market and to potential purchasers regarding the issuer, its business, its financial condition, and its prospects. We are adopting, substantially as proposed, several reforms to Exchange Act reporting requirements related to the reforms to the Securities Act offering process. As a result of the rules, we will:

  • Extend risk factor disclosure requirements to annual reports on Exchange Act Form 10-K and registration statements on Exchange Act Form 10;
  • Require updates for previously disclosed risk factors in quarterly reports on Exchange Act Form 10-Q;
  • Require accelerated filers and well-known seasoned issuers to disclose in their annual reports on Exchange Act Forms 10-K and 20-F any written staff comments on Exchange Act reports issued more than 180 days before the end of the fiscal year covered by the report that the issuer believes to be material and that remain unresolved as of the filing date of the report;
  • Include a box on the cover page of the Exchange Act Forms 10-K and 20-F for an issuer to check if it is a well-known seasoned issuer; and
  • Include a box on the cover page of Exchange Act Forms 10-K, 10-KSB, and 20-F for an issuer to check if it is filing reports voluntarily.

C. Comments on the Proposals

Commenters supported the proposals, with many commenters noting that the proposals struck the appropriate balance between improving the capital formation process and modernizing offering communications, while preserving investor protection and avoiding unnecessary impediments to the capital formation process. We did not receive any comments on the cost-benefit analysis, other than asking generally about cost savings by underwriters and broker-dealers. Some commenters noted potential costs that certain of the proposals might impose. We considered these comments carefully and believe that we have made responsive changes in order to minimize these potential costs.

For example, a number of commenters were concerned about the final prospectus filing condition in Rule 172, due to the potential liability if written confirmations were sent and the issuer failed to file the final prospectus within the required time frame. We have included a cure provision allowing an issuer that has made a good faith and reasonable effort to file within the required time frame to file the final prospectus as soon as practicable after discovery of the failure to file. Commenters also expressed concern about the distinctions between oral and written communications and the effects on offering participants to provide information. We have revised the definition of graphic and written communications to make clearer when a communication is written and when it is oral.

D. Benefits

As discussed, the overall goal of the reforms is to make the registration system more workable for issuers and underwriters and more effective for investors in today's capital markets. We believe that the reforms will achieve this goal and consequently result in significant benefits in a number of areas, including by increasing the flow of information available to investors during a registered offering while maintaining investor protection against misleading or inaccurate disclosures. We also anticipate that the rules will improve access to the public capital markets and possibly lower the cost of capital by, among other things, modifying, and in some cases clarifying, the federal securities laws related to communications, liability, shelf registration, and the use of electronic media during a registered offering. Finally, we believe that the rules will provide cost-saving options to issuers and underwriters.

1. Increased Information Flow

The primary benefit that the rules seek to achieve is an increased flow of information to investors during a registered offering. While much of the Commission's recent rulemaking is intended to encourage reporting issuers to provide materially accurate and complete information to the market on a more current basis, the Securities Act's constraints on communications during an offering cause issuers to be concerned about the treatment of their ongoing communications and whether their customary disclosures will be considered an impermissible offer of securities. As a result of the multiplicity of means of communication, restricting written offers to a statutory prospectus inhibits desirable methods of timely communication of information. The rules regarding communications, registration, and liability will operate to increase the amount of valuable information that could be provided to investors before they make investment decisions. We believe that more information will be provided on a more timely basis because the rules will eliminate regulatory barriers to the dissemination of that information, and the markets may provide incentives for issuers, underwriters, and broker dealers to produce additional information.

Increased information flow will promote efficient capital markets because the market may be able to value securities more accurately. Under the rules, underwriters can communicate with potential investors during an offering to better gauge investor interest, thus facilitating greater discourse among investors and underwriters.

Another benefit of increasing the information flow is that investors may become better informed in making portfolio allocation decisions in accordance with their particular risk-return profiles. Moreover, the ability of offering participants to use free writing prospectuses in connection with offerings will impart a greater ability to provide information to investors about securities before they make investment decisions. For example, issuers and underwriters will be able to provide proprietary analytical material that is specifically tailored to address the particular asset allocation considerations of different investors. Today's markets include a growing number of increasingly complex securities where written communications, such as detailed term sheets, will enhance significantly the offering process for the benefit of investors. In addition, we are adopting rules to permit research to be distributed about more issuers that are making registered offerings. Having access to these reports may facilitate Start Printed Page 44793additional security analysis among investors.

By reducing the restrictions on the contents of written communications, we anticipate that investors will demand more information and issuers, underwriters, and other offering participants will be more willing to provide it. Significant technological advances have increased both the market's demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate information. The rules will enable issuers and market participants to take greater advantage of the Internet and other electronic media to communicate and deliver information to investors. As discussed in greater detail below, reducing regulatory and liability uncertainty with respect to the treatment of written communications may make issuers more comfortable in supplying information without worrying about violating the gun-jumping provisions. Accordingly, investor demand for information can be satisfied through relatively inexpensive mass dissemination of the information through electronic means.

Finally, the rules we are adopting today that provide that an electronic road show presentation must either be filed or a bona fide version must be made readily available to an unrestricted audience for initial public offerings of a non-reporting issuer's common equity or convertible equity securities provide for the availability of information in these offerings to all investors. We believe these changes will encourage more road shows and other information in these offerings to be provided to more investors.

2. Investor Protection

Another benefit of the rules is that they will maintain investor protection against misleading or inaccurate disclosures. Investor protection is of paramount importance in maintaining fair, orderly, and efficient capital markets. The rules regarding liability and disclosure in Exchange Act periodic reports, as well as the filing conditions and record retention conditions for unfiled free writing prospectuses, will maintain and enhance investor protection in connection with registered securities offerings.

A central premise underlying the liability rules is that communications to investors at the time of sale (including the time of the contract of sale) should not include material misstatements or fail to include material information that is necessary to make the communication not misleading in light of the circumstances in which the communication is made. We believe that the rules will provide issuers and underwriters with greater flexibility to communicate information in a manner that does not slow the offering process unduly. At the same time, investors should be in a better position to have accurate information at the time of the sale of the securities to them (including the time of the contract of sale). These measures should encourage the disclosure of accurate information about transactions.[629]

The free writing prospectus rules will promote investor protection by requiring issuers to file issuer prepared or used free writing prospectuses and issuer information in free writing prospectuses. We believe that conditioning the use of written issuer provided or used information on filing will improve investor protection. On the one hand, the filing requirement is designed to assure that written issuer provided or used information is publicly available. On the other hand, requiring underwriters to file their proprietary analysis may cause them competitive harm. Additionally, the free writing prospectus will be a Section 10(b) prospectus under the Securities Act and, as such, will be subject to liability under Section 12(a)(2) as well as the anti-fraud provisions of the federal securities laws. As a Section 10(b) prospectus, there will be continuing Commission oversight and enforcement authority over the contents and use of the free writing prospectus, including the ability to halt the use of any materially false or misleading free writing prospectus in accordance with Section 10(b).

The rules allowing automatic shelf registration statements to become effective immediately will allow the Commission to shift its resources more toward the review of issuers' Exchange Act reports. Because we believe that an issuer's Exchange Act record often provides the most detailed source of information to the market and to potential purchasers regarding the issuer, its business, its financial condition, and its prospects, we believe that investors will benefit from the staff's ability to review Exchange Act reports more frequently.

The inclusion of additional disclosures in Exchange Act periodic reports also will promote investor protection. We believe that the disclosure by issuers meeting the definition of accelerated filers and well-known seasoned issuers of unresolved written staff comments that the issuer believes to be material will benefit investors because they will be able to ascertain the nature of the staff comments and take them into account in their investment decisions. We believe that the disclosure of risk factors in plain English will help investors in assessing the risks that an issuer currently faces or may face in the future. Many issuers currently provide this risk factor disclosure in their Exchange Act reports voluntarily. However, for other issuers, investors have access to this information only if the issuer has recently conducted a registered offering under the Securities Act, in which case the issuer will be subject to risk factor disclosure requirements in its Securities Act registration statement. The rules also require disclosure of voluntary filer status. We believe it is important that the staff and the market understand when issuers are filing Exchange Act reports voluntarily, since such issuers may cease filing these reports at any time.

3. Facilitating Capital Formation

We anticipate that the rules will facilitate capital formation, and possibly lower the cost of capital, by improving access to the public capital markets. The rules are designed to eliminate unnecessary regulatory impediments to capital formation and provide more flexibility to issuers to conduct registered securities offerings. The amount of flexibility accorded by the rules will depend on the characteristics of the issuer. The rules provide the most flexibility under the communications rules and the automatic shelf registration system to eligible well-known seasoned issuers. Other issuers also will benefit, albeit to a lesser degree, from the other revisions to the communications and registration process.

The rules may lower the cost of capital because they will provide significant flexibility to issuers and underwriters in marketing their securities. The communications rules will allow well-known seasoned issuers to communicate at any time regarding an offering and will allow other issuers more freedom in communicating after a registration statement is filed. For well-known seasoned issuers, automatic shelf registration will facilitate immediate market access and promote efficient capital formation, without diminishing investor protection. The automatic shelf registration process will allow eligible Start Printed Page 44794issuers to add additional classes of securities and eligible majority-owned subsidiaries as additional registrants after an automatic shelf registration statement is effective. The “pay-as-you-go” system will allow well-known seasoned issuers to pay at the time of each takedown off the shelf registration statement or in advance. The automatic shelf registration rules will provide these issuers with significant latitude in determining the types and amounts of their securities or those of their eligible subsidiaries that could be offered without any potential time delay or other obstacles imposed by the registration process. The rules will provide the flexibility to take advantage of market windows, to structure securities on a real-time basis to accommodate issuer needs or investor demand, and to determine or change the plan of distribution of securities as issuers elect in response to changing market conditions.

The other rules to the shelf registration procedures and expansion of incorporation by reference also will provide flexibility to issuers to enable them to access the capital markets at a lower cost. For example, removing the current restrictions on at-the-market offerings of equity securities will allow issuers eligible to use Form S-3 or Form F-3 for primary equity offerings to offer securities directly to the marketplace, without using the underwriting or syndication process. Under the rules to expand Form S-3 eligibility to cover additional majority-owned subsidiaries, issuers will have greater flexibility to structure offerings of guaranteed securities without losing the benefits of shelf registration. In addition, the rules to expand incorporation by reference to Form S-1 and Form F-1 will enable eligible issuers to use their Exchange Act filings to satisfy their disclosure requirements without having to incur costs to replicate information in the prospectus.

Providing flexibility for registered offerings may encourage issuers to raise capital through the registration process instead of through private placements. Typically, registered securities enjoy more liquid markets than unregistered securities. Therefore, registered securities are less likely to be subject to a liquidity discount. In addition, registered securities offerings provide a potentially larger investor base than that available to those who participate in private placements. Accordingly, issuers may incur lower transaction costs when raising capital because they will have access to a much deeper market for their securities and may have to expend fewer resources to locate investors.

The prospectus delivery rules are designed to facilitate effective access to information, while taking into account advancements in technology and the practicalities of the offering process. These changes are intended to alleviate timing difficulties that may arise under the current securities clearance and settlement system, and also to facilitate the successful delivery of, and payment for, securities in a registered offering. Given that the final prospectus delivery obligations generally affect investors only after they have made their investment decisions and that investors and the market have access to the final prospectus upon its filing, we believe that the obligation can be satisfied through a means other than physical delivery. Because the contract of sale will have already occurred by the time the final prospectus is filed, we also believe that delivery of a confirmation and the delivery of the final prospectus need not be linked. Receiving confirmations earlier in the settlement process will enable investors to review the confirmation and verify trade data closer to the time of the investment decision.

4. Reduced Regulatory Uncertainty

The rules modify the federal securities laws related to communications, liability, shelf registration, and the use of electronic media during a registered offering. The rules, by enhancing issuers' certainty about the regulatory treatment of and liability provisions attached to the communication of information to the marketplace, could encourage issuers to increase the dissemination of readily available information useful to investors, such as management's plans and objectives for future operations. The 30-day bright-line exclusion and the exemption from the prohibition on offers prior to filing for well-known seasoned issuers will provide these issuers with the ability to communicate information prior to filing a registration statement without risk of violating the gun-jumping provisions.

The safe harbors for regularly released factual business information and forward-looking information will allow issuers to continue ordinary communications without fear of violating the gun-jumping provisions. At the same time, these communications could benefit all investors because there will be more current information and analysis available upon which to make investment decisions. We also are clarifying the treatment of information located on or hyperlinked to an issuer's website around the time of a registered offering, to allow for the continued availability of historical information that may be useful to investors.

The rules affecting the shelf registration procedures will codify in a single location permissible omissions from shelf registration statements and the permissible methods to include the omitted information. This will promote efficiency by providing certainty about the content of base prospectuses in shelf registration statements and the methods by which required information may be included, thereby reducing divergent practices and eliminating possible inadvertent mistakes. In addition, we believe the rules will address the disparate treatment of underwriters from a liability standpoint by establishing a new effective date for liability purposes for issuers and persons who are underwriters at that time in connection with takedowns off shelf registration statements, as reflected in prospectus supplements filed for such takedowns. On the other hand, the new rules regarding prospectus supplement filings will not trigger a new effective date for officers or directors of the issuer or for experts, including accountants.

5. Lower Costs

The prospectus delivery rules and the rules related to the registered securities offering process will provide cost-saving options to issuers, underwriters, and dealers. We believe that allowing reporting issuers to incorporate by reference their previously filed Exchange Act reports and other materials into a Form S-1 or Form F-1 provides them a more cost-effective way to raise capital without the cost of duplicating the information contained in their filed reports and other materials. The rules affecting final prospectus delivery should also result in lower costs to issuers because of reduced printing costs for a smaller number of final prospectuses.

For purposes of the PRA analysis, we have estimated that the rules to the registered securities offering processes will reduce the total current annual compliance costs by approximately $87,664,000.[630] In addition, we believe that issuers and underwriters will benefit from not having to print and deliver final prospectuses. We estimate that the cost savings per prospectus will be approximately $0.75 per prospectus. For purposes of the PRA, we have estimated 232.45 million instances in which broker dealers will be able to rely on the “access equals delivery” Start Printed Page 44795provisions. Investors may request the final prospectus, and we estimate that they will do so 25% of the time. Therefore, we estimate the total annual cost savings will be approximately $130,753,000.

E. Costs

While the overall goal of the reforms is to make the registration system more workable for issuers and underwriters and more effective for investors in today's capital markets, we do believe that there will be costs to the rules. These include costs for compliance with the rules, potential behavioral changes resulting from the liability rules, and certain other costs.

1. Compliance Costs

One potential cost of the rules is that issuers may incur increased filing costs associated with issuer free writing prospectuses or making a version of an electronic road show publicly available.[631] These costs should be mitigated somewhat by the fact that free writing prospectuses are not required to be filed as part of the registration statement and therefore will not have to be conformed to meet all the requirements for an amendment to the registration statement. In addition, because oral communications are not written and, therefore, not free writing prospectuses, the rules should not result in significant incremental costs from existing regulations. We also are conditioning the use of free writing prospectuses on the inclusion of a legend that notifies investors that they can receive a copy of the prospectus by calling a toll-free number. Accordingly, there may be some costs for issuers and offering participants associated with establishing a toll-free number for investors, although the toll-free number does not have to be issuer specific.

Another potential compliance cost is the additional expenditures that issuers and offering participants may incur in storing and archiving information to satisfy the record retention conditions.[632] Parties will need to implement appropriate mechanisms to ensure that they retain for three years adequate records of any free writing prospectuses used and not filed. We have revised the proposed record retention condition so that it encompasses only free writing prospectuses that have not been filed on EDGAR, so this should ease the burden for issuers and offering participants.

The disclosures may increase the cost to issuers of preparing their Exchange Act reports. We do not expect the costs to accelerated filers and well-known seasoned issuers of including disclosure of certain unresolved staff comments to be significant because the information will be readily available to the issuer.[633]

Including risk factor disclosure may impact issuers who do not already include this disclosure in their Exchange Act reports for other reasons.[634] Because issuers already are required to prepare financial statements and other information about their business, financial condition, and prospects in their annual and quarterly reports, some of which will include these risk factors, we believe that issuers will have already analyzed the issues that might be addressed in the risk factor disclosure. In addition, issuers may already include risk factor disclosure in their Exchange Act reports for varying reasons, including to take advantage of the safe harbor for forward-looking statements in Securities Act Section 27A of the Securities Act[635] and the “bespeaks caution” defense developed through case law. We recognize, however, that issuers will incur costs in preparing, reviewing, filing, printing, and disseminating this information. In particular, in addition to involving in-house preparers, in-house legal and accounting staff, and senior management, issuers may consult with outside legal counsel in preparing this disclosure. We believe, however, that the potential compliance costs for the risk factor disclosure should be considered in light of the fact that requiring risk factor disclosure in Exchange Act registration statements and annual reports will enhance the ability of reporting issuers to incorporate risk factor disclosure from Exchange Act reports into Securities Act registration statements to satisfy the risk factor disclosure requirements.

Parties also may incur additional costs due to the requirement to notify investors that they have purchased in a registered offering. In addition, these same parties will incur costs to establish procedures for receiving and complying with requests for final prospectuses. We believe that providing the notice to investors will not impose a significant incremental cost because the notice can consist of a pre-printed message that is automatically delivered with or as part of the confirmation required by Exchange Act Rule 10b-10. Accordingly, we estimate that the cost for complying with Rule 173 will be approximately $0.05 per notice. We estimate the annual cost of providing the notifications will be approximately $11,622,500.[636] The cost savings resulting from the elimination of the requirement to supply a final prospectus to each investor will offset the costs incurred, however.

2. Potential for Increased Liability

The rules to deem prospectus supplements to be part of and included in effective registration statements, and to modify, for liability purposes for the issuer and underwriters only, the effective date of shelf registration statements to link them to individual offerings or takedowns off the shelf registration statement may cause issuers to evaluate more carefully the information contained in prospectuses and the information conveyed to investors. We have sought to minimize the potential costs by limiting the rule so that it affects the issuer and underwriters only, and therefore have not changed the effective date for liability purposes for officers, directors, and experts, other than when new expertized information is included in the prospectus.

In response to commenters' concerns about cross-liability for free writing prospectuses, the rules provide greater clarity for when an offering participant would be liable for a free writing prospectus.

With respect to the risk factor disclosure, a potential cost might be that issuers may be concerned about increased liability for a material misstatement or omission in their disclosure. In view of existing liability for information in registration statements and Exchange Act reports, as well as existing safe-harbors for forward-looking information, in drafting the current rules, however, we were Start Printed Page 44796sensitive to potential additional costs that the disclosure requirement might impose. For example, for liability purposes, we are not treating risk factor disclosure any differently than other disclosures in Exchange Act reports that may be incorporated by reference into Securities Act registration statements. We also note that the safe harbor for forward-looking statements contained in Securities Act Section 27A and Exchange Act Section 21E may apply to this disclosure for eligible issuers. In addition, the risk factor disclosure is based on an evaluation of the material risks facing an issuer. Issuers currently disclose significant information about themselves in their Exchange Act reports, including in management's discussion and analysis of financial condition and results of operations and, as a result, already analyze their business and operations. Moreover, we note that issuers already are subject to disclosure requirements regarding this information in Securities Act registration statements.

3. Other Potential Costs

We are allowing registration statements by well-known seasoned issuers to become effective automatically, rather than being subject to review by the staff of the Division of Corporation Finance. As a result, registrants may not have the same incentive to remedy deficient disclosure in Exchange Act reports or in the registration statement itself than they would if their registration statements were subject to pre-effective staff review. We have sought to minimize this possibility by requiring accelerated filers and well-known seasoned issuers to disclose, on an annual basis, written staff comments on their periodic report disclosures, that were issued more than 180 days prior to the fiscal year end covered by the report, that the issuer believes to be material, and that remain unresolved at the time of the filing of the annual report.

The rules also may impose certain costs on underwriters. For example, removing the restrictions on at-the-market equity offerings by unseasoned issuers on Form S-3 or Form F-3 may affect underwriters adversely because issuers may decide not to hire an underwriter to conduct an at-the-market equity offering.

The rules permit reporting issuers with the ability to incorporate by reference historical filings into Form S-1 or Form F-1, provided that the issuer post its Exchange Act reports on a web site maintained by or for the issuer and containing issuer information. Issuers wishing to take advantage of this ability to incorporate by reference will have to make these reports readily available on a web site maintained by or for the issuer in addition to availability on EDGAR. Because most companies today maintain web sites for their businesses and other entities maintain web sites for companies, we do not believe that this cost will be significant.

We also recognize that relaxing restrictions on communications may impose a burden on investors. For example, today, for some offerings, such as those on Form S-1, much of the relevant information regarding an offering is required to be contained in one document comprising the registration statement. Under the rules, some offerings will require an investor to assemble and assimilate information from various free writing prospectuses, Exchange Act reports, and the Securities Act registration statement in order to get the relevant information regarding an offering. Investors will have to compile the information integrated into the registration statement or delivered by means outside of the prospectus. We note, however, that Securities Act Forms S-3 and F-3 have long permitted incorporation by reference from the issuer's Exchange Act reports and investors have not complained they are unduly burdened when investing in offerings registered on these Forms.

X. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

Exchange Act Section 23(a)(2) [637] requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. In addition, Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Furthermore, Securities Act Section 2(b),[638] Exchange Act Section 3(f),[639] and Investment Company Act Section 2(c) [640] require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

The rules are intended to modify and advance the Commission's regulatory system for offerings under the Securities Act, enhance communications between public issuers and investors, and promote investor protection. We anticipate these rules will improve investors' ability to make informed investment decisions and, therefore, lead to increased efficiency and competitiveness of the U.S. capital markets. We anticipate that this increased market efficiency and investor confidence also may encourage more efficient capital formation. Specifically, we believe that the rules will:

  • Facilitate greater availability of information to investors and the market with regard to all issuers;
  • Eliminate barriers to open communications that have been made increasingly outmoded by technological advances;
  • Reflect the increased importance of electronic dissemination of information, including the use of the Internet;
  • Make the capital formation process more efficient; and
  • Define more clearly both the information and the timeliness of the availability of information against which a seller's statements are evaluated for liability purposes.

To the extent that some of these reforms will be available to well-known seasoned issuers, smaller issuers may not be able to use all of the reforms. In addition, it is possible that investors will favor issuers that are able to take advantage of the reforms. We believe, however, that these potential unequal effects are justified in order to ensure that investors have appropriate access to required information about all issuers.

We requested comment on whether the rules would promote efficiency, competition, and capital formation or have an impact or burden on competition. We received no comments on this subject directly, but some comments touched on these issues. Commenters expressed strong support for the proposals to streamline the registration process by providing well-known seasoned issuers the ability to use automatic shelf registration statements.[641] They generally believed that the streamlined registration process will aid issuers in capital formation by providing them with quick access to the capital markets. In addition, one commenter believed the proposals have the potential to draw more offerings from 144A and other unregistered markets into public market, improve efficiency of U.S. public market, and possibly enhance global competitiveness of U.S. public capital markets.[642]

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Two commenters believed that the proposed rules, which created an exception to the conditions to the free writing prospectus rules for publications by unaffiliated media would create a competitive disadvantage for issuers who are in the media business.[643] We have addressed these concerns by providing an exclusion for media companies and their affiliates if certain conditions are met, including that the company or its affiliate is a bona fide media publisher or broadcaster.[644]

XI. Final Regulatory Flexibility Act Analysis

This Final Regulatory Flexibility Act Analysis has been prepared in accordance with 5 U.S.C. 603. It relates to revisions to the rules and forms under the Securities Act and the Exchange Act that will (1) alter shelf registration procedures; (2) allow more communications between offering participants than currently permitted; and (3) enable offering participants to satisfy their prospectus delivery obligations through means other than actual physical delivery. These rules are intended to modify and advance the Commission's regulatory system for offerings under the Securities Act, enhance communications between public issuers and investors, and promote investor protection.

A. Reasons for and Objectives of the Rules and Amendments

On November 3, 2004, we issued proposed rule and form changes under the Securities Act and the Exchange Act that would modernize the securities offering and communication processes while maintaining protection of investors under the Securities Act.[645] We are revising the registration, communications, and offering processes under the Securities Act that we believe, while limited in scope, properly address the areas that are in need of modernization. The rules involve three main areas:

  • Communications related to registered securities offerings;
  • Procedural restrictions in the offering and capital formation processes; and
  • Delivery of information to investors.

The overall objective of the reforms is to make the registration system more workable for issuers and underwriters and more effective for investors in today's capital markets. The rules reflect our view that revisions to the Securities Act registration and offering processes are not only appropriate in light of significant developments in the offering and capital formation processes, but also are necessary for the proper protection of investors under the statute. This view is based on our belief that today's rules will:

  • Facilitate greater availability of information to investors and the market with regard to all issuers;
  • Eliminate barriers to open communications that have been made increasingly outmoded by technological advances;
  • Reflect the increased importance of electronic dissemination of information, including the use of the Internet;
  • Make the capital formation process more efficient; and
  • Define more clearly both the information and the timeliness of the availability of information against which a seller's statements are evaluated for liability purposes.

B. Significant Issues Raised by Public Comment

The Initial Regulatory Flexibility Analysis, or IRFA, appeared in the Proposing Release.[646] We requested comment on any aspect of the IRFA, including the number of small entities that would be affected by the rules, the nature of the impact, how to quantify the number of small entities that would be affected and how to quantify the impact of the proposals. We received no comment letters responding to that request.

C. Small Entities Subject to the Rules

The rules will affect issuers that are small entities. Securities Act Rule 157 [647] and Exchange Act Rule 0-10(a) [648] define an issuer, other than an investment company, to be a “small business” or “small organization” for purposes of the Regulatory Flexibility Act if it had total assets of $5 million or less on the last day of its most recent fiscal year.[649] We estimate that there were approximately 2,500 public issuers, other than investment companies, that may be considered small entities as of the end of fiscal year 2004.[650]

In addition to small issuers, small broker-dealers may be affected by the rules. Paragraph (c)(1) of Rule 0-10 [651] states that the term “small business” or “small organization,” when referring to a broker-dealer, means a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to § 240.17a-5(d); and is not affiliated with any person (other than a natural person) that is not a small business or small organization. As of 2003, we estimated that there were approximately 900 broker-dealers that qualified as small entities as defined above. To the extent a small broker-dealer participates in a securities offering or prepares research reports, it may be affected by the rules. Generally, we believe larger broker-dealers engage in these activities. We requested comment on whether and how these rules will affect small broker-dealers and did not receive any responses.

For purposes of the rules, we categorize issuers into tiers, consisting of non-reporting issuers, unseasoned issuers, seasoned issuers, and well-known seasoned issuers. The first three tiers of issuers are identified by pre-existing criteria under the existing federal securities laws. A non-reporting issuer is an issuer that is not required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act.[652] An unseasoned issuer is an issuer that is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities. A seasoned issuer is an issuer that uses Form S-3 or Form F-3 to register offerings of securities.

Under the rules, a well-known seasoned issuer will have the greatest flexibility. The largest issuers are followed by sophisticated institutional and retail investors, members of the financial press, and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. Unlike smaller or less mature issuers, large, seasoned public issuers tend to have a more regular dialogue with investors and market participants through the press and other media. The Start Printed Page 44798communications of these well-known seasoned issuers are subject to scrutiny by investors, the financial press, analysts, and others who evaluate disclosure when it is made.

To the extent that some of these reforms are designed for well-known seasoned issuers, smaller issuers may not benefit from all of the reforms to the registration process. We believe, however, that these potential unequal effects are justified in order to ensure that investors have access to required information about all issuers. Therefore, allowing smaller entities to take advantage of all of the reforms to the registration process may not address issues of investor protection. The reforms are not available to offerings by a blank check company, offerings by a shell company, and offerings of penny stock by an issuer. These offerings are more likely to be made by issuers that are small issuers. We have excluded these offerings from the reforms because they pose the greatest risk of abuse of the reforms.

To the extent the rules are not available to smaller issuers, the establishment of any differing compliance or reporting requirements or timetables or any exemptions for small business issuers may not be in keeping with the objectives of the rules. We believe that the rules are a cost-effective initial approach to address specific concerns related to small entities.

D. Reporting, Recordkeeping, and Other Compliance Requirements

The rules are expected to impact all issuers raising capital and selling security holder transactions that are registered under the Securities Act, as well as all issuers that file annual reports on Exchange Act Form 10-K or Form 20-F.

For smaller issuers, we are not imposing any new restrictions on communications. In fact, small issuers will be able to take advantage of the new bright-line rule permitting communications more than 30 days before filing a registration statement and the clarification that they can continue to make factual business communications and, if they are reporting companies, communications of forward-looking information. Small issuers, like larger issuers, will have to file any free writing prospectus they use. We requested comment on whether issuers that file on Form 10-KSB, who tend to be smaller issuers, should be required to disclose risk factors in their annual reports, and have decided not to extend this requirement to these issuers. Unlike larger companies that are “accelerated filers,” smaller issuers will not be required to disclose outstanding staff comments in their annual reports.

The rules also will affect broker-dealers participating in a registered offering, as they will no longer be required to deliver a final prospectus, but will be able to send a notice of allocation and notice of prospectus availability. They also will be permitted to prepare and use free writing prospectuses. If a free writing is not required to be filed publicly, the broker-dealer will have to retain copies of the free writing prospectus for three years. (Such retention requirements may already exist in most cases). Finally, the broker-dealer will be permitted to issue research reports with respect to a broader class of issuers and securities than currently permitted.

E. Agency Action To Minimize Effect on Small Entities

The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objectives, while minimizing any significant adverse impact on small entities. In connection with the rules, we considered the following alternatives:

1. Establishing different compliance or reporting requirements that take into account the resources available to small entities;

2. Clarifying, consolidating, or simplifying compliance and reporting obligations for small entities;

3. Using performance standards rather than design standards; and

4. Including smaller entities in some of the reforms.

We have considered a variety of reforms to achieve our regulatory objectives and, where possible, have taken steps to minimize the effects of the rules and amendments on small entities. For example, we are not requiring small business issuers to include disclosure of risk factors or unresolved staff comments in their Exchange Act periodic reports. We are liberalizing generally the restrictions regarding communications around the time of a Securities Act registered offering of securities. As discussed above, the flexibility will be greatest for larger, more seasoned issuers; however, the rules will provide greater flexibility for all issuers, including small entities. As we implement these changes, we will consider the available information to determine whether greater flexibility is warranted, consistent with investor protections. In this regard, we have established an Advisory Committee on Smaller Public Companies to examine these and other related issues.

XII. Statutory Authority—Text of the Rules and Amendments

We are adopting the new rules and amendments pursuant to Sections 7, 10, 19, 27A and 28 of the Securities Act, as amended, Sections 3, 10, 12, 13, 15, 17, 21E, 23 and 36 of the Securities Exchange Act, as amended, and Sections 8, 24(a), 30, and 38 of the Investment Company Act of 1940, as amended.

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List of Subjects

, 230, 239, 240, 243, and 249

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For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows:

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PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS

Subpart A—Organization and Program Management

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1. The authority citation for Part 200, subpart A, continues to read, in part, as follows:

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Authority: 15 U.S.C. 77s, 77o, 77sss, 78d, 78d-1, 78d-2, 78w, 78 ll (d), 78mm, 79t, 80a-37, 80b-11, and 7202, unless otherwise noted.

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* * * * *
Start Amendment Part

2. Amend § 200.30-1 to add paragraphs (a)(9) and (a)(10) to read as follows:

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Delegation of authority to Director of Division of Corporation Finance.
* * * * *

(a) * * *

(9) To determine whether to object, pursuant to Rule 401(g)(1) (§ 230.401(g)(1) of this chapter), and to notify issuers, pursuant to Rule 401(g)(2) (§ 230.401(g)(2) of this chapter), of an objection to the use of an automatic shelf registration as defined in Rule 405 (§ 230.405 of this chapter) or any post-effective amendment thereto that becomes effective immediately Start Printed Page 44799pursuant to Rule 462 (§ 230.462 of this chapter).

(10) To authorize the granting or denial of applications, upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer as defined in Rule 405.

* * * * *
Start Part

PART 228—INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

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3. The authority citation for part 228 continues to read in part as follows:

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Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78 l, 78m, 78n, 78o, 78u-5, 78w, 78 ll, 78mm, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350.

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* * * * *
Start Amendment Part

4. Amend § 228.512 as follows:

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a. Revise the Note after paragraph (a)(1)(iii);

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b. Add paragraph (a)(4); and

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c. Add paragraph (g).

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The additions read as follows:

Undertakings.
* * * * *

(a) * * *

Notes to paragraph (a)(1):

1. Small business issuers do not need to give the statements in paragraphs (a)(1)(i) and (a)(1)(ii) of this Item if the registration statement is on Form S-8 (§ 239.16b of this chapter), and the information required in a post-effective amendment is incorporated by reference from periodic reports filed by the small business issuer under the Exchange Act; and

2. Small business issuers do not need to give the statements in paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) of this Item if the registration statement is on Form S-3 (§ 239.13 of this chapter) and the information required in a post-effective amendment is incorporated by reference from periodic reports filed by the small business issuer under the Exchange Act, or is contained in a form of prospectus filed pursuant to Rule 424(b) (§ 230.424(b) of this chapter) that is deemed part of and included in the registration statement.

* * * * *

(4) For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter);

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and

(iv) Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.

* * * * *

(g) That, for the purpose of determining liability under the Securities Act to any purchaser:

(1) If the small business issuer is relying on Rule 430B (§ 230.430B of this chapter):

(i) Each prospectus filed by the undersigned small business issuer pursuant to Rule 424(b)(3) (§ 230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) (§ 230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

(2) If the small business issuer is subject to Rule 430C (§ 230.430C of this chapter), include the following:

Each prospectus filed pursuant to Rule 424(b)(§ 230.424(b) of this chapter) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§ 230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

Start Part

PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K

End Part Start Amendment Part

5. The authority citation for part 229 continues to read in part as follows:

End Amendment Part Start Authority

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78 l, 78m, 78n, 78o, 78u-5, 78w, 78 ll, 78mm, 79e, 79j, 79n, 79t, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.

End Authority
* * * * *
Start Amendment Part

6. Amend § 229.512 as follows:

End Amendment Part Start Amendment Part

a. Revise the first proviso immediately following paragraph (a)(1)(iii);

End Amendment Part Start Amendment Part

b. Redesignate the second proviso immediately following paragraph (a)(1)(iii) as paragraph (a)(1)(iii)(C);

End Amendment Part Start Amendment Part

c. Add paragraph (a)(5); and

End Amendment Part Start Amendment Part

d. Add paragraph (a)(6).

End Amendment Part

The revision and additions read as follows:

(Item 512) Undertakings.

(a) * * *

(1) * * *

(iii) * * *

Provided, however, That:

(A) Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-8 (§ 239.16b of this chapter), and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) that are incorporated by reference in the registration statement; and

(B) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 (§ 239.13 of this chapter) or Form F-3 (§ 239.33 of this chapter) and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) (§ 230.424(b) of this chapter) that is part of the registration statement.

* * * * *

(5) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

(i) If the registrant is relying on Rule 430B (§ 230.430B of this chapter):

(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) (§ 230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) (§ 230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

(ii) If the registrant is subject to Rule 430C (§ 230.430C of this chapter), each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§ 230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter);

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

* * * * *
Start Part

PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

End Part Start Amendment Part

7. The authority citation for part 230 continues to read in part as follows:

End Amendment Part Start Authority

Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78 l, 78m, 78n, 78o, 78t, 78w, 78 ll (d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

End Authority
* * * * *
Start Amendment Part

8. Revise § 230.134 to read as follows:

End Amendment Part
Communications not deemed a prospectus.

Except as provided in paragraphs (e) and (g) of this section, the terms “prospectus” as defined in section 2(a)(10) of the Act or “free writing prospectus” as defined in Rule 405 (§ 230.405) shall not include a communication limited to the statements required or permitted by this section, provided that the communication is published or transmitted to any person only after a registration statement relating to the offering that includes a prospectus satisfying the requirements of section 10 of the Act (except as otherwise permitted in paragraph (a) of this section) has been filed.

(a) Such communication may include any one or more of the following items of information, which need not follow the numerical sequence of this paragraph, provided that, except as to paragraphs (a)(4), (a)(5), (a)(6), and (a)(17) of this section, the prospectus included in the filed registration statement does not have to include a price range otherwise required by rule:

(1) Factual information about the legal identity and business location of the Start Printed Page 44801issuer limited to the following: the name of the issuer of the security, the address, phone number, and e-mail address of the issuer's principal offices and contact for investors, the issuer's country of organization, and the geographic areas in which it conducts business;

(2) The title of the security or securities and the amount or amounts being offered, which title may include a designation as to whether the securities are convertible, exercisable, or exchangeable, and as to the ranking of the securities;

(3) A brief indication of the general type of business of the issuer, limited to the following:

(i) In the case of a manufacturing company, the general type of manufacturing, the principal products or classes of products manufactured, and the segments in which the company conducts business;

(ii) In the case of a public utility company, the general type of services rendered, a brief indication of the area served, and the segments in which the company conducts business;

(iii) In the case of an asset-backed issuer, the identity of key parties, such as sponsor, depositor, issuing entity, servicer or servicers, and trustee, the asset class of the transaction, and the identity of any credit enhancement or other support; and

(iv) In the case of any other type of company, a corresponding statement;

(4) The price of the security, or if the price is not known, the method of its determination or the bona fide estimate of the price range as specified by the issuer or the managing underwriter or underwriters;

(5) In the case of a fixed income security, the final maturity and interest rate provisions or, if the final maturity or interest rate provisions are not known, the probable final maturity or interest rate provisions, as specified by the issuer or the managing underwriter or underwriters;

(6) In the case of a fixed income security with a fixed (non-contingent) interest rate provision, the yield or, if the yield is not known, the probable yield range, as specified by the issuer or the managing underwriter or underwriters and the yield of fixed income securities with comparable maturity and security rating as referred to in paragraph (a)(17) of this section;

(7) A brief description of the intended use of proceeds of the offering, if then disclosed in the prospectus that is part of the filed registration statement;

(8) The name, address, phone number, and e-mail address of the sender of the communication and the fact that it is participating, or expects to participate, in the distribution of the security;

(9) The type of underwriting, if then included in the disclosure in the prospectus that is part of the filed registration statement;

(10) The names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;

(11) The anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them);

(12) A description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with the issuer or an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy), and procedures regarding directed share plans and other participation in offerings by officers, directors, and employees of the issuer;

(13) Whether, in the opinion of counsel, the security is a legal investment for savings banks, fiduciaries, insurance companies, or similar investors under the laws of any State or Territory or the District of Columbia, and the permissibility or status of the investment under the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1001 et seq.];

(14) Whether, in the opinion of counsel, the security is exempt from specified taxes, or the extent to which the issuer has agreed to pay any tax with respect to the security or measured by the income therefrom;

(15) Whether the security is being offered through rights issued to security holders, and, if so, the class of securities the holders of which will be entitled to subscribe, the subscription ratio, the actual or proposed record date, the date upon which the rights were issued or are expected to be issued, the actual or anticipated date upon which they will expire, and the approximate subscription price, or any of the foregoing;

(16) Any statement or legend required by any state law or administrative authority;

(17) With respect to the securities being offered:

(i) Any security rating assigned, or reasonably expected to be assigned, by a nationally recognized statistical rating organization as defined in Rule 15c3-1(c)(2)(vi)(F) of the Securities Exchange Act of 1934 (§ 240.15c3-1(c)(2)(vi)(F) of this chapter) and the name or names of the nationally recognized statistical rating organization(s) that assigned or is or are reasonably expected to assign the rating(s); and

(ii) If registered on Form F-9 (§ 239.39 of this chapter), any security rating assigned, or reasonably expected to be assigned, by any other rating organization specified in the Instruction to paragraph A.(2) of General Instruction I of Form F-9;

(18) The names of selling security holders, if then disclosed in the prospectus that is part of the filed registration statement;

(19) The names of securities exchanges or other securities markets where any class of the issuer's securities are, or will be, listed;

(20) The ticker symbols, or proposed ticker symbols, of the issuer's securities;

(21) The CUSIP number as defined in Rule 17Ad-19(a)(5) of the Securities Exchange Act of 1934 (§ 240.17Ad-19(a)(5) of this chapter) assigned to the securities being offered; and

(22) Information disclosed in order to correct inaccuracies previously contained in a communication permissibly made pursuant to this section.

(b) Except as provided in paragraph (c) of this section, every communication used pursuant to this section shall contain the following:

(1) If the registration statement has not yet become effective, the following statement:

A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective; and

(2) The name and address of a person or persons from whom a written prospectus for the offering meeting the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405) including as to the identified paragraphs above a price range where required by rule, may be obtained.

(c) Any of the statements or information specified in paragraph (b) of this section may, but need not, be contained in a communication which:

(1) Does no more than state from whom and include the uniform resource locator (URL) where a written prospectus meeting the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405) may be obtained, identify the security, state the price thereof and state by whom orders will be executed; or Start Printed Page 44802

(2) Is accompanied or preceded by a prospectus or a summary prospectus, other than a free writing prospectus as defined in Rule 405, which meets the requirements of section 10 of the Act, including a price range where required by rule, at the date of such preliminary communication.

(d) A communication sent or delivered to any person pursuant to this section which is accompanied or preceded by a prospectus which meets the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405), including a price range where required by rule, at the date of such communication, may solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate whether he or she might be interested in the security, if the communication contains substantially the following statement:

No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.

Provided, that such statement need not be included in such a communication to a dealer.

(e) A section 10 prospectus included in any communication pursuant to this section shall remain a prospectus for all purposes under the Act.

(f) The provision in paragraphs (c)(2) and (d) of this section that a prospectus that meets the requirements of section 10 of the Act precede or accompany a communication will be satisfied if such communication is an electronic communication containing an active hyperlink to such prospectus.

(g) This section does not apply to a communication relating to an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48))

Start Amendment Part

9. Revise § 230.137 to read as follows:

End Amendment Part
Publications or distributions of research reports by brokers or dealers that are not participating in an issuer's registered distribution of securities.

Under the following conditions, the terms “offers,” “participates,” or “participation” in section 2(a)(11) of the Act shall not be deemed to apply to the publication or distribution of research reports with respect to the securities of an issuer which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective:

(a) The broker or dealer (and any affiliate) that has distributed the report and, if different, the person (and any affiliate) that has published the report have not participated, are not participating, and do not propose to participate in the distribution of the securities that are or will be the subject of the registered offering.

(b) In connection with the publication or distribution of the research report, the broker or dealer (and any affiliate) that has distributed the report and, if different, the person (and any affiliate) that has published the report are not receiving and have not received consideration directly or indirectly from, and are not acting under any direct or indirect arrangement or understanding with:

(1) The issuer of the securities;

(2) A selling security holder;

(3) Any participant in the distribution of the securities that are or will be the subject of the registration statement; or

(4) Any other person interested in the securities that are or will be the subject of the registration statement.

Instruction to § 230.137(b). This paragraph (b) does not preclude payment of:

1. The regular price being paid by the broker or dealer for independent research, so long as the conditions of this paragraph (b) are satisfied; or

2. The regular subscription or purchase price for the research report.

(c) The broker or dealer publishes or distributes the research report in the regular course of its business.

(d) The issuer is not and during the past three years neither the issuer nor any of its predecessors was:

(1) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(2) A shell company, other than a business combination related shell company, each as defined in Rule 405 (§ 230.405); or

(3) An issuer for an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter).

(e) Definition of research report. For purposes of this section, research report means a written communication, as defined in Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.

Start Amendment Part

10. Revise § 230.138 to read as follows:

End Amendment Part
Publications or distributions of research reports by brokers or dealers about securities other than those they are distributing.

(a) Registered offerings. Under the following conditions, a broker's or dealer's publication or distribution of research reports about securities of an issuer shall be deemed for purposes of sections 2(a)(10) and 5(c) of the Act not to constitute an offer for sale or offer to sell a security which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective, even if the broker or dealer is participating or will participate in the registered offering of the issuer's securities:

(1)(i) The research report relates solely to the issuer's common stock, or debt securities or preferred stock convertible into its common stock, and the offering involves solely the issuer's non-convertible debt securities or non-convertible, non-participating preferred stock; or

(ii) The research report relates solely to the issuer's non-convertible debt securities or non-convertible, non-participating preferred stock, and the offering involves solely the issuer's common stock, or debt securities or preferred stock convertible into its common stock.

Instruction to paragraph (a)(1): If the issuer has filed a shelf registration statement under Rule 415(a)(1)(x) (§ 230.415(a)(1)(x)) or pursuant to General Instruction I.D. of Form S-3 or General Instruction I.C. of Form F-3 (§ 239.13 or § 239.33 of this chapter) with respect to multiple classes of securities, the conditions of paragraph (a)(1) of this section must be satisfied for the offering in which the broker or dealer is participating or will participate.

(2) The issuer as of the date of reliance on this section:

(i) Is required to file reports, and has filed all periodic reports required during the preceding 12 months (or such shorter time that the issuer was required to file such reports) on Forms 10-K (§ 249.310 of this chapter), 10-KSB (§ 249.310b of this chapter), 10-Q (§ 249.308a of this chapter), 10-QSB (§ 249.308b of this chapter), and 20-F (§ 249.220f of this chapter) pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); or

(ii) Is a foreign private issuer that:

(A) Meets all of the registrant requirements of Form F-3 other than the reporting history provisions of General Instructions I.A.1. and I.A.2(a) of Form F-3;

(B) Either: Start Printed Page 44803

(1) Satisfies the public float threshold in General Instruction I.B.1. of Form F-3; or

(2) Is issuing non-convertible investment grade securities meeting the provisions of General Instruction I.B.2. of Form F-3; and

(C) Either:

(1) Has its equity securities trading on a designated offshore securities market as defined in Rule 902(b) (§ 230.902(b)) and has had them so traded for at least 12 months; or

(2) Has a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more.

(3) The broker or dealer publishes or distributes research reports on the types of securities in question in the regular course of its business; and

(4) The issuer is not, and during the past three years neither the issuer nor any of its predecessors was:

(i) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(ii) A shell company, other than a business combination related shell company, each as defined in Rule 405 (§ 230.405); or

(iii) An issuer for an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter).

(b) Rule 144A offerings. If the conditions in paragraph (a) of this section are satisfied, a broker's or dealer's publication or distribution of a research report shall not be considered an offer for sale or an offer to sell a security or general solicitation or general advertising, in connection with an offering relying on Rule 144A (§ 230.144A).

(c) Regulation S offerings. If the conditions in paragraph (a) of this section are satisfied, a broker's or dealer's publication or distribution of a research report shall not:

(1) Constitute directed selling efforts as defined in Rule 902(c) (§ 230.902(c)) for offerings under Regulation S (§ 230.901 through § 230.905); or

(2) Be inconsistent with the offshore transaction requirement in Rule 902(h) (§ 230.902(h)) for offerings under Regulation S.

(d) Definition of research report. For purposes of this section, research report means a written communication, as defined in Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.

Start Amendment Part

11. Revise § 230.139 to read as follows:

End Amendment Part
Publications or distributions of research reports by brokers or dealers distributing securities.

(a) Registered offerings. Under the conditions of paragraph (a)(1) or (a)(2) of this section, a broker's or dealer's publication or distribution of a research report about an issuer or any of its securities shall be deemed for purposes of sections 2(a)(10) and 5(c) of the Act not to constitute an offer for sale or offer to sell a security that is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective, even if the broker or dealer is participating or will participate in the registered offering of the issuer's securities:

(1) Issuer-specific research reports.

(i) The issuer either:

(A)(1) At the later of the time of filing its most recent Form S-3 (§ 239.13 of this chapter) or Form F-3 (§ 239.33 of this chapter) or the time of its most recent amendment to such registration statement for purposes of complying with section 10(a)(3) of the Act, meets the registrant requirements of such Form S-3 or Form F-3 and either at such date meets the minimum float provisions of General Instruction I.B.1 of such Forms or, at the date of reliance on this section, is offering securities meeting the requirements for the offering of investment grade securities pursuant to General Instruction I.B.2 of Form S-3 or Form F-3; and

(2) As of the date of reliance on this section, has filed all periodic reports required during the preceding 12 months on Forms 10-K (§ 249.310 of this chapter), 10-KSB (§ 249.310b of this chapter), 10-Q (§ 249.308a of this chapter), 10-QSB (§ 249.308b of this chapter), and 20-F (§ 249.220f of this chapter) pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); or

(B) Is a foreign private issuer that as of the date of reliance on this section:

(1) Meets all of the registrant requirements of Form F-3 other than the reporting history provisions of General Instructions I.A.1. and I.A.2(a) of Form F-3;

(2) Either:

(i) Satisfies the public float threshold in General Instruction I.B.1. of Form F-3; or

(ii) Is issuing non-convertible investment grade securities meeting the provisions of General Instruction I.B.2. of Form F-3; and

(3) Either:

(i) Has its equity securities trading on a designated offshore securities market as defined in Rule 902(b) (§ 230.902(b)) and has had them so traded for at least 12 months; or

(ii) Has a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more;

(ii) The issuer is not and during the past three years neither the issuer nor any of its predecessors was:

(A) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(B) A shell company, other than a business combination related shell company, each as defined in Rule 405 (§ 230.405); or

(C) An issuer for an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter); and

(iii) The broker or dealer publishes or distributes research reports in the regular course of its business and such publication or distribution does not represent the initiation of publication of research reports about such issuer or its securities or reinitiation of such publication following discontinuation of publication of such research reports.

(2) Industry reports.

(i) The issuer is required to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 or satisfies the conditions in paragraph (a)(1)(i)(B) of this section;

(ii) The condition in paragraph (a)(1)(ii) of this section is satisfied;

(iii) The research report includes similar information with respect to a substantial number of issuers in the issuer's industry or sub-industry, or contains a comprehensive list of securities currently recommended by the broker or dealer;

(iv) The analysis regarding the issuer or its securities is given no materially greater space or prominence in the publication than that given to other securities or issuers; and

(v) The broker or dealer publishes or distributes research reports in the regular course of its business and, at the time of the publication or distribution of the research report, is including similar information about the issuer or its securities in similar reports.

(b) Rule 144A offerings. If the conditions in paragraph (a)(1) or (a)(2) of this section are satisfied, a broker's or dealer's publication or distribution of a research report shall not be considered an offer for sale or an offer to sell a security or general solicitation or general advertising, in connection with an offering relying on Rule 144A (§ 230.144A).

(c) Regulation S offerings. If the conditions in paragraph (a)(1) or (a)(2) of this section are satisfied, a broker's or Start Printed Page 44804dealer's publication or distribution of a research report shall not:

(1) Constitute directed selling efforts as defined in Rule 902(c) (§ 230.902(c)) for offerings under Regulation S (§§ 230.901 through 230.905); or

(2) Be inconsistent with the offshore transaction requirement in Rule 902(h) (§ 230.902(h)) for offerings under Regulation S.

(d) Definition of research report. For purposes of this section, research report means a written communication, as defined in Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.

Instruction to § 230.139.

Projections. A projection constitutes an analysis or information falling within the definition of research report. When a broker or dealer publishes or distributes projections of an issuer's sales or earnings in reliance on paragraph (a)(2) of this section, it must:

1. Have previously published or distributed projections on a regular basis in order to satisfy the “regular course of its business” condition;

2. At the time of publishing or disseminating a research report, be publishing or distributing projections with respect to that issuer; and

3. For purposes of paragraph (a)(2)(iii) of this section, include projections covering the same or similar periods with respect to either a substantial number of issuers in the issuer's industry or sub-industry or substantially all issuers represented in the comprehensive list of securities contained in the research report.

[Amended]
Start Amendment Part

12. Amend § 230.139a as follows:

End Amendment Part Start Amendment Part

a. Remove paragraph (c); and

End Amendment Part Start Amendment Part

b. Redesignate paragraphs (d) and (e) as paragraphs (c) and (d).

End Amendment Part Start Amendment Part

13. Revise § 230.153 to read as follows:

End Amendment Part
Definition of “preceded by a prospectus” as used in section 5(b)(2) of the Act, in relation to certain transactions.

(a) Definition of preceded by a prospectus. The term preceded by a prospectus as used in section 5(b)(2) of the Act, regarding any requirement of a broker or dealer to deliver a prospectus to a broker or dealer as a result of a transaction effected between such parties on or through a national securities exchange or facility thereof, trading facility of a national securities association, or an alternative trading system, shall mean the satisfaction of the conditions in paragraph (b) of this section.

(b) Conditions. Any requirement of a broker or dealer to deliver a prospectus for transactions covered by paragraph (a) of this section will be satisfied if:

(1) Securities of the same class as the securities that are the subject of the transaction are trading on that national securities exchange or facility thereof, trading facility of a national securities association, or alternative trading system;

(2) The registration statement relating to the offering is effective and is not the subject of any pending proceeding or examination under section 8(d) or 8(e) of the Act;

(3) Neither the issuer, nor any underwriter or participating dealer is the subject of a pending proceeding under section 8A of the Act in connection with the offering; and

(4) The issuer has filed or will file with the Commission a prospectus that satisfies the requirements of section 10(a) of the Act.

(c) Definitions.

(1) The term national securities exchange, as used in this section, shall mean a securities exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f).

(2) The term trading facility, as used in this section, shall mean a trading facility sponsored and governed by the rules of a registered securities association or a national securities exchange.

(3) The term alternative trading system, as used in this section, shall mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934 (§ 242.300(a) of this chapter) registered with the Commission pursuant to Rule 301 of Regulation ATS under the Securities Exchange Act of 1934 (§ 242.301(a) of this chapter).

Start Amendment Part

14. Amend § 230.158 to revise paragraph (c) to read as follows:

End Amendment Part
Definitions of certain terms in the last paragraph of section 11(a).
* * * * *

(c) For purposes of the last paragraph of section 11(a) of the Act only, the effective date of the registration statement is deemed to be the date of the latest to occur of:

(1) The effective date of the registration statement;

(2) The effective date of the last post-effective amendment to the registration statement next preceding a particular sale of the issuer's registered securities to the public filed for the purposes of:

(i) Including any prospectus required by section 10(a)(3) of the Act; or

(ii) Reflecting in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;

(3) The date of filing of the last report of the issuer incorporated by reference into the prospectus that is part of the registration statement or the date that a form of prospectus filed pursuant to Rule 424(b) or Rule 497(b), (c), (d), or (e) (§ 230.424(b) or § 230.497(b), (c), (d), or (e)) is deemed part of and included in the registration statement, and relied upon in either case in lieu of filing a post-effective amendment for purposes of paragraphs (c)(2)(i) and (ii) of this section next preceding a particular sale of the issuer's registered securities to the public; or

(4) As to the issuer and any underwriter at that time only, the most recent effective date of the registration statement for purposes of liability under section 11 of the Act of the issuer and any such underwriter only at the time of or next preceding a particular sale of the issuer's registered securities to the public determined pursuant to Rule 430B (§ 230.430B).

* * * * *
Start Amendment Part

15. Add § 230.159 to read as follows:

End Amendment Part
Information available to purchaser at time of contract of sale.

(a) For purposes of section 12(a)(2) of the Act only, and without affecting any other rights a purchaser may have, for purposes of determining whether a prospectus or oral statement included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading at the time of sale (including, without limitation, a contract of sale), any information conveyed to the purchaser only after such time of sale (including such contract of sale) will not be taken into account.

(b) For purposes of section 17(a)(2) of the Act only, and without affecting any other rights the Commission may have to enforce that section, for purposes of determining whether a statement includes or represents any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading at the time of sale (including, without limitation, a contract of sale), any information conveyed to the purchaser only after such time of sale (including such contract of sale) will not be taken into account.

(c) For purposes of section 12(a)(2) of the Act only, knowing of such untruth Start Printed Page 44805or omission in respect of a sale (including, without limitation, a contract of sale), means knowing at the time of such sale (including such contract of sale).

16. Add § 230.159A to read as follows:

Certain definitions for purposes of section 12(a)(2) of the Act.

(a) Definition of seller for purposes of section 12(a)(2) of the Act. For purposes of section 12(a)(2) of the Act only, in a primary offering of securities of the issuer, regardless of the underwriting method used to sell the issuer's securities, seller shall include the issuer of the securities sold to a person as part of the initial distribution of such securities, and the issuer shall be considered to offer or sell the securities to such person, if the securities are offered or sold to such person by means of any of the following communications:

(1) Any preliminary prospectus or prospectus of the issuer relating to the offering required to be filed pursuant to Rule 424 (§ 230.424) or Rule 497 (§ 230.497);

(2) Any free writing prospectus as defined in Rule 405 (§ 230.405) relating to the offering prepared by or on behalf of the issuer or used or referred to by the issuer and, in the case of an issuer that is an open-end management company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), any profile relating to the offering provided pursuant to Rule 498 (§ 230.498);

(3) The portion of any other free writing prospectus (or, in the case of an issuer that is an investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), any advertisement pursuant to Rule 482 (§ 230.482)) relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and

(4) Any other communication that is an offer in the offering made by the issuer to such person.

Notes to paragraph (a) of Rule 159A.

1. For purposes of paragraph (a) of this section, information is provided or a communication is made by or on behalf of an issuer if an issuer or an agent or representative of the issuer authorizes or approves the information or communication before its provision or use. An offering participant other than the issuer shall not be an agent or representative of the issuer solely by virtue of its acting as an offering participant.

2. Paragraph (a) of this section shall not affect in any respect the determination of whether any person other than an issuer is a “seller” for purposes of section 12(a)(2) of the Act.

(b) Definition of by means of for purposes of section 12(a)(2) of the Act.

(1) For purposes of section 12(a)(2) of the Act only, an offering participant other than the issuer shall not be considered to offer or sell securities that are the subject of a registration statement by means of a free writing prospectus as to a purchaser unless one or more of the following circumstances shall exist:

(i) The offering participant used or referred to the free writing prospectus in offering or selling the securities to the purchaser;

(ii) The offering participant offered or sold securities to the purchaser and participated in planning for the use of the free writing prospectus by one or more other offering participants and such free writing prospectus was used or referred to in offering or selling securities to the purchaser by one or more of such other offering participants; or

(iii) The offering participant was required to file the free writing prospectus pursuant to the conditions to use in Rule 433 (§ 230.433).

(2) For purposes of section 12(a)(2) of the Act only, a person will not be considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed the free writing prospectus with the Commission pursuant to Rule 433.

Start Amendment Part

17. Add § 230.163 to read as follows:

End Amendment Part
Exemption from section 5(c) of the Act for certain communications by or on behalf of well-known seasoned issuers.

Preliminary Note to § 230.163.

Attempted compliance with this section does not act as an exclusive election and the issuer also may claim the availability of any other applicable exemption or exclusion. Reliance on this section does not affect the availability of any other exemption or exclusion from the requirements of section 5 of the Act.

(a) In an offering by or on behalf of a well-known seasoned issuer, as defined in Rule 405 (§ 230.405), that will be or is at the time intended to be registered under the Act, an offer by or on behalf of such issuer is exempt from the prohibitions in section 5(c) of the Act on offers to sell, offers for sale, or offers to buy its securities before a registration statement has been filed, provided that:

(1) Any written communication that is an offer made in reliance on this exemption will be a free writing prospectus as defined in Rule 405 and a prospectus under section 2(a)(10) of the Act relating to a public offering of securities to be covered by the registration statement to be filed; and

(2) The exemption from section 5(c) of the Act provided in this section for such written communication that is an offer shall be conditioned on satisfying the conditions in paragraph (b) of this section.

(b) Conditions. (1) Legend. (i) Every written communication that is an offer made in reliance on this exemption shall contain substantially the following legend:

The issuer may file a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the company will arrange to send you the prospectus after filing if you request it by calling toll-free 1-8[xx-xxx-xxxx].

(ii) The legend also may provide an e-mail address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer's Web site, and provide the Internet address and the particular location of the documents on the Web site.

(iii) An immaterial or unintentional failure to include the specified legend in a free writing prospectus required by this section will not result in a violation of section 5(c) of the Act or the loss of the ability to rely on this section so long as:

(A) A good faith and reasonable effort was made to comply with the specified legend condition;

(B) The free writing prospectus is amended to include the specified legend as soon as practicable after discovery of the omitted or incorrect legend; and

(C) If the free writing prospectus has been transmitted without the specified legend, the free writing prospectus is retransmitted with the legend by substantially the same means as, and directed to substantially the same prospective purchasers to whom, the free writing prospectus was originally transmitted.

(2) Filing condition. (i) Subject to paragraph (b)(2)(ii) of this section, every written communication that is an offer made in reliance on this exemption shall be filed by the issuer with the Commission promptly upon the filing of the registration statement, if one is filed, or an amendment, if one is filed, covering the securities that have been offered in reliance on this exemption.

(ii) The condition that an issuer shall file a free writing prospectus with the Start Printed Page 44806Commission under this section shall not apply in respect of any communication that has previously been filed with, or furnished to, the Commission or that the issuer would not be required to file with the Commission pursuant to the conditions of Rule 433 (§ 230.433) if the communication was a free writing prospectus used after the filing of the registration statement. The condition that the issuer shall file a free writing prospectus with the Commission under this section shall be satisfied if the issuer satisfies the filing conditions (other than timing of filing which is provided in this section) that would apply under Rule 433 if the communication was a free writing prospectus used after the filing of the registration statement.

(iii) An immaterial or unintentional failure to file or delay in filing a free writing prospectus to the extent provided in this section will not result in a violation of section 5(c) of the Act or the loss of the ability to rely on this section so long as:

(A) A good faith and reasonable effort was made to comply with the filing condition; and

(B) The free writing prospectus is filed as soon as practicable after discovery of the failure to file.

(3) Ineligible offerings. The exemption in paragraph (a) of this section shall not be available to:

(i) Communications relating to business combination transactions that are subject to Rule 165 (§ 230.165) or Rule 166 (§ 230.166);

(ii) Communications by an issuer that is an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or

(iii) Communications by an issuer that is a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

(c) For purposes of this section, a communication is made by or on behalf of an issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it is made.

(d) For purposes of this section, a communication for which disclosure would be required under section 17(b) of the Act as a result of consideration given or to be given, directly or indirectly, by or on behalf of an issuer is deemed to be an offer by the issuer and, if a written communication, is deemed to be a free writing prospectus of the issuer.

(e) A communication exempt from section 5(c) of the Act pursuant to this section will not be considered to be in connection with a securities offering registered under the Securities Act for purposes of Rule 100(b)(2)(iv) of Regulation FD under the Securities Exchange Act of 1934 (§ 243.100(b)(2)(iv) of this chapter).

Start Amendment Part

18. Add § 230.163A to read as follows:

End Amendment Part
Exemption from section 5(c) of the Act for certain communications made by or on behalf of issuers more than 30 days before a registration statement is filed.

Preliminary Note to § 230.163A.

Attempted compliance with this section does not act as an exclusive election and the issuer also may claim the availability of any other applicable exemption or exclusion. Reliance on this section does not affect the availability of any other exemption or exclusion from the requirements of section 5 of the Act.

(a) Except as excluded pursuant to paragraph (b) of this section, in all registered offerings by issuers, any communication made by or on behalf of an issuer more than 30 days before the date of the filing of the registration statement that does not reference a securities offering that is or will be the subject of a registration statement shall not constitute an offer to sell, offer for sale, or offer to buy the securities being offered under the registration statement for purposes of section 5(c) of the Act, provided that the issuer takes reasonable steps within its control to prevent further distribution or publication of such communication during the 30 days immediately preceding the date of filing the registration statement.

(b) The exemption in paragraph (a) of this section shall not be available with respect to the following communications:

(1) Communications relating to business combination transactions that are subject to Rule 165 (§ 230.165) or Rule 166 (§ 230.166);

(2) Communications made in connection with offerings registered on Form S-8 (§ 239.16b of this chapter), other than by well-known seasoned issuers;

(3) Communications in offerings of securities of an issuer that is, or during the past three years was (or any of whose predecessors during the last three years was):

(i) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(ii) A shell company, other than a business combination related shell company, each as defined in Rule 405 (§ 230.405); or

(iii) An issuer for an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter); or

(4) Communications made by an issuer that is:

(i) An investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or

(ii) A business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

(c) For purposes of this section, a communication is made by or on behalf of an issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it is made.

(d) A communication exempt from section 5(c) of the Act pursuant to this section will not be considered to be in connection with a securities offering registered under the Securities Act for purposes of Rule 100(b)(2)(iv) of Regulation FD under the Securities Exchange Act of 1934 (§ 243.100(b)(2)(iv) of this chapter).

Start Amendment Part

19. Add § 230.164 to read as follows:

End Amendment Part
Post-filing free writing prospectuses in connection with certain registered offerings.

Preliminary Notes to § 230.164.

1. This section is not available for any communication that, although in technical compliance with this section, is part of a plan or scheme to evade the requirements of section 5 of the Act.

2. Attempted compliance with this section does not act as an exclusive election and the person relying on this section also may claim the availability of any other applicable exemption or exclusion. Reliance on this section does not affect the availability of any other exemption or exclusion from the requirements of section 5 of the Act.

(a) In connection with a registered offering of an issuer meeting the requirements of this section, a free writing prospectus, as defined in Rule 405 (§ 230.405), of the issuer or any other offering participant, including any underwriter or dealer, after the filing of the registration statement will be a section 10(b) prospectus for purposes of section 5(b)(1) of the Act provided that the conditions set forth in Rule 433 (§ 230.433) are satisfied.

(b) An immaterial or unintentional failure to file or delay in filing a free writing prospectus as necessary to satisfy the filing conditions contained in Rule 433 will not result in a violation of section 5(b)(1) of the Act or the loss of the ability to rely on this section so long as:

(1) A good faith and reasonable effort was made to comply with the filing condition; and Start Printed Page 44807

(2) The free writing prospectus is filed as soon as practicable after discovery of the failure to file.

(c) An immaterial or unintentional failure to include the specified legend in a free writing prospectus as necessary to satisfy the legend condition contained in Rule 433 will not result in a violation of section 5(b)(1) of the Act or the loss of the ability to rely on this section so long as:

(1) A good faith and reasonable effort was made to comply with the legend condition;

(2) The free writing prospectus is amended to include the specified legend as soon as practicable after discovery of the omitted or incorrect legend; and

(3) If the free writing prospectus has been transmitted without the specified legend, the free writing prospectus must be retransmitted with the legend by substantially the same means as, and directed to substantially the same prospective purchasers to whom, the free writing prospectus was originally transmitted.

(d) Solely for purposes of this section, an immaterial or unintentional failure to retain a free writing prospectus as necessary to satisfy the record retention condition contained in Rule 433 will not result in a violation of section 5(b)(1) of the Act or the loss of the ability to rely on this section so long as a good faith and reasonable effort was made to comply with the record retention condition. Nothing in this paragraph will affect, however, any other record retention provisions applicable to the issuer or any offering participant.

(e) Ineligible issuers. (1) This section and Rule 433 are available only if at the eligibility determination date for the offering in question, determined pursuant to paragraph (h) of this section, the issuer is not an ineligible issuer as defined in Rule 405 (or in the case of any offering participant, other than the issuer, the participant has a reasonable belief that the issuer is not an ineligible issuer);

(2) Notwithstanding paragraph (e)(1) of this section, this section and Rule 433 are available to an ineligible issuer with respect to a free writing prospectus that contains only descriptions of the terms of the securities in the offering or the offering (or in the case of an offering of asset-backed securities, contains only information specified in paragraphs (a)(1), (2), (3), (4), (6), (7), and (8) of the definition of ABS informational and computational materials in Item 1101 of Regulation AB (§ 229.1101 of this chapter), unless the issuer is or during the last three years the issuer or any of its predecessors was:

(i) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(ii) A shell company, other than a business combination related shell company, as defined in Rule 405; or

(iii) An issuer for an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter).

(f) Excluded issuers. This section and Rule 433 are not available if the issuer is an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

(g) Excluded offerings. This section and Rule 433 are not available if the issuer is registering a business combination transaction as defined in Rule 165(f)(1) (§ 230.165(f)(1)) or the issuer, other than a well-known seasoned issuer, is registering an offering on Form S-8 (§ 239.16b of this chapter).

(h) For purposes of this section and Rule 433, the determination date as to whether an issuer is an ineligible issuer in respect of an offering shall be:

(1) Except as provided in paragraph (h)(2) of this section, the time of filing of the registration statement covering the offering; or

(2) If the offering is being registered pursuant to Rule 415 (§ 230.415), the earliest time after the filing of the registration statement covering the offering at which the issuer, or in the case of an underwritten offering the issuer or another offering participant, makes a bona fide offer, including without limitation through the use of a free writing prospectus, in the offering.

Start Amendment Part

20. Add § 230.168 to read as follows:

End Amendment Part
Exemption from sections 2(a)(10) and 5(c) of the Act for certain communications of regularly released factual business information and forward-looking information

Preliminary Notes to § 230.168.

1. This section is not available for any communication that, although in technical compliance with this section, is part of a plan or scheme to evade the requirements of section 5 of the Act.

2. This section provides a non-exclusive safe harbor for factual business information and forward-looking information released or disseminated as provided in this section. Attempted compliance with this section does not act as an exclusive election and the issuer also may claim the availability of any other applicable exemption or exclusion. Reliance on this section does not affect the availability of any other exemption or exclusion from the definition of prospectus in section 2(a)(10) or the requirements of section 5 of the Act.

3. The availability of this section for a release or dissemination of a communication that contains or incorporates factual business information or forward-looking information will not be affected by another release or dissemination of a communication that contains all or a portion of the same factual business information or forward-looking information that does not satisfy the conditions of this section.

(a) For purposes of sections 2(a)(10) and 5(c) of the Act, the regular release or dissemination by or on behalf of an issuer (and, in the case of an asset-backed issuer, the other persons specified in paragraph (a)(3) of this section) of communications containing factual business information or forward-looking information shall be deemed not to constitute an offer to sell or offer for sale of a security which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective, if the conditions of this section are satisfied by any of the following:

(1) An issuer that is required to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));

(2) A foreign private issuer that:

(i) Meets all of the registrant requirements of Form F-3 (§ 239.33 of this chapter) other than the reporting history provisions of General Instructions I.A.1. and I.A.2.(a) of Form F-3;

(ii) Either:

(A) Satisfies the public float threshold in General Instruction I.B.1. of Form F-3; or

(B) Is issuing non-convertible investment grade securities meeting the provisions of General Instruction I.B.2. of Form F-3; and

(iii) Either:

(A) Has its equity securities trading on a designated offshore securities market as defined in Rule 902(b) (§ 230.902(b)) and has had them so traded for at least 12 months; or

(B) Has a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; or

(3) An asset-backed issuer or a depositor, sponsor, or servicer (as such terms are defined in Item 1101 of Regulation AB (§ 229.1101 of this chapter)) or an affiliated depositor, whether or not such other person is the issuer.

(b) Definitions.

(1) Factual business information means some or all of the following information that is released or disseminated under the conditions in paragraph (d) of this section, including, without limitation, such factual Start Printed Page 44808business information contained in reports or other materials filed with, furnished to, or submitted to the Commission pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.):

(i) Factual information about the issuer, its business or financial developments, or other aspects of its business;

(ii) Advertisements of, or other information about, the issuer's products or services; and

(iii) Dividend notices.

(2) Forward-looking information means some or all of the following information that is released or disseminated under the conditions in paragraph (d) of this section, including, without limitation, such forward-looking information contained in reports or other materials filed with, furnished to, or submitted to the Commission pursuant to the Securities Exchange Act of 1934:

(i) Projections of the issuer's revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items;

(ii) Statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;

(iii) Statements about the issuer's future economic performance, including statements of the type contemplated by the management's discussion and analysis of financial condition and results of operation described in Item 303 of Regulations S-B and S-K (§ 228.303 and § 229.303 of this chapter) or the operating and financial review and prospects described in Item 5 of Form 20-F (§ 249.220f of this chapter); and

(iv) Assumptions underlying or relating to any of the information described in paragraphs (b)(2)(i), (b)(2)(ii) and (b)(2)(iii) of this section.

(3) For purposes of this section, the release or dissemination of a communication is by or on behalf of the issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves such release or dissemination before it is made.

(4) For purposes of this section, in the case of communications of a person specified in paragraph (a)(3) of this section other than the asset-backed issuer, the release or dissemination of a communication is by or on behalf of such other person if such other person or its agent or representative, other than an underwriter or dealer, authorizes or approves such release or dissemination before it is made.

(c) Exclusion. A communication containing information about the registered offering or released or disseminated as part of the offering activities in the registered offering is excluded from the exemption of this section.

(d) Conditions to exemption. The following conditions must be satisfied:

(1) The issuer (or in the case of an asset-backed issuer, the issuer and the other persons specified in paragraph (a)(3) of this section, taken together) has previously released or disseminated information of the type described in this section in the ordinary course of its business;

(2) The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations; and

(3) The issuer is not an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

Start Amendment Part

21. Add § 230.169 to read as follows:

End Amendment Part
Exemption from sections 2(a)(10) and 5(c) of the Act for certain communications of regularly released factual business information.

Preliminary Notes to § 230.169.

1. This section is not available for any communication that, although in technical compliance with this section, is part of a plan or scheme to evade the requirements of section 5 of the Act.

2. This section provides a non-exclusive safe harbor for factual business information released or disseminated as provided in this section. Attempted compliance with this section does not act as an exclusive election and the issuer also may claim the availability of any other applicable exemption or exclusion. Reliance on this section does not affect the availability of any other exemption or exclusion from the definition of prospectus in section 2(a)(10) or the requirements of section 5 of the Act.

3. The availability of this section for a release or dissemination of a communication that contains or incorporates factual business information will not be affected by another release or dissemination of a communication that contains all or a portion of the same factual business information that does not satisfy the conditions of this section.

(a) For purposes of sections 2(a)(10) and 5(c) of the Act, the regular release or dissemination by or on behalf of an issuer of communications containing factual business information shall be deemed not to constitute an offer to sell or offer for sale of a security by an issuer which is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective, if the conditions of this section are satisfied.

(b) Definitions.

(1) Factual business information means some or all of the following information that is released or disseminated under the conditions in paragraph (d) of this section:

(i) Factual information about the issuer, its business or financial developments, or other aspects of its business; and

(ii) Advertisements of, or other information about, the issuer's products or services.

(2) For purposes of this section, the release or dissemination of a communication is by or on behalf of the issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves such release or dissemination before it is made.

(c) Exclusions. A communication containing information about the registered offering or released or disseminated as part of the offering activities in the registered offering is excluded from the exemption of this section.

(d) Conditions to exemption. The following conditions must be satisfied:

(1) The issuer has previously released or disseminated information of the type described in this section in the ordinary course of its business;

(2) The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations;

(3) The information is released or disseminated for intended use by persons, such as customers and suppliers, other than in their capacities as investors or potential investors in the issuer's securities, by the issuer's employees or agents who historically have provided such information; and

(4) The issuer is not an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

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22. Add § 230.172 to read as follows:

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Delivery of prospectuses.

(a) Sending confirmations and notices of allocations. After the effective date of a registration statement, the following are exempt from the provisions of section 5(b)(1) of the Act if the Start Printed Page 44809conditions set forth in paragraph (c) of this section are satisfied:

(1) Written confirmations of sales of securities in an offering pursuant to a registration statement that contain information limited to that called for in Rule 10b-10 under the Securities Exchange Act of 1934 (§ 240.10b-10 of this chapter) and other information customarily included in written confirmations of sales of securities, which may include notices provided pursuant to Rule 173 (§ 230.173); and

(2) Notices of allocation of securities sold or to be sold in an offering pursuant to the registration statement that may include information identifying the securities (including the CUSIP number) and otherwise may include only information regarding pricing, allocation and settlement, and information incidental thereto.

(b) Transfer of the security. Any obligation under section 5(b)(2) of the Act to have a prospectus that satisfies the requirements of section 10(a) of the Act precede or accompany the carrying or delivery of a security in a registered offering is satisfied if the conditions in paragraph (c) of this section are met.

(c) Conditions. (1) The registration statement relating to the offering is effective and is not the subject of any pending proceeding or examination under section 8(d) or 8(e) of the Act;

(2) Neither the issuer, nor an underwriter or participating dealer is the subject of a pending proceeding under section 8A of the Act in connection with the offering; and

(3) The issuer has filed with the Commission a prospectus with respect to the offering that satisfies the requirements of section 10(a) of the Act or the issuer will make a good faith and reasonable effort to file such a prospectus within the time required under Rule 424 (§ 230.424) and, in the event that the issuer fails to file timely such a prospectus, the issuer files the prospectus as soon as practicable thereafter.

(4) The condition in paragraph (c)(3) of this section shall not apply to transactions by dealers requiring delivery of a final prospectus pursuant to section 4(3) of the Act.

(d) Exclusions. This section shall not apply to any:

(1) Offering of any investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.);

(2) Offering of any business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));

(3) A business combination transaction as defined in Rule 165(f)(1) (§ 230.165(f)(1); or

(4) Offering registered on Form S-8 (§ 239.16b of this chapter).

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23. Add § 230.173 to read as follows:

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Notice of registration.

(a) In a transaction that represents a sale by the issuer or an underwriter, or a sale where there is not an exclusion or exemption from the requirement to deliver a final prospectus meeting the requirements of section 10(a) of the Act pursuant to section 4(3) of the Act or Rule 174 (§ 230.174), each underwriter or dealer selling in such transaction shall provide to each purchaser from it, not later than two business days following the completion of such sale, a copy of the final prospectus or, in lieu of such prospectus, a notice to the effect that the sale was made pursuant to a registration statement or in a transaction in which a final prospectus would have been required to have been delivered in the absence of Rule 172 (§ 230.172).

(b) If the sale was by the issuer and was not effected by or through an underwriter or dealer, the responsibility to send a prospectus, or in lieu of such prospectus, such notice as set forth in paragraph (a) of this section, shall be the issuer's.

(c) Compliance with the requirements of this section is not a condition to reliance on Rule 172.

(d) A purchaser may request from the person responsible for sending a notice a copy of the final prospectus if one has not been sent.

(e) After the effective date of the registration statement with respect to an offering, notices as set forth in paragraph (a) of this section, are exempt from the provisions of section 5(b)(1) of the Act.

(f) Exclusions. This section shall not apply to any:

(1) Transaction solely between brokers or dealers in reliance on Rule 153 (§ 230.153);

(2) Offering of any investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.);

(3) Offering of any business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));

(4) A business combination transaction as defined in Rule 165(f)(1) (§ 230.165(f)(1)); or

(5) Offering registered on Form S-8 (§ 239.16b of this chapter).

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24. Amend § 230.174 by removing the authority citations following the section and adding paragraph (h) to read as follows:

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Delivery of prospectus by dealers; exemptions under section 4(3) of the Act.
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(h) Any obligation pursuant to Section 4(3) of the Act and this section to deliver a prospectus, other than pursuant to paragraph (g) of this section, may be satisfied by compliance with the provisions of Rule 172 (§ 230.172).

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25. Amend § 230.401 by removing the authority citations following the section and revising paragraph (g) to read as follows:

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Requirements as to proper form.
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(g)(1) Subject to paragraph (g)(2) of this section, except for registration statements and post-effective amendments that become effective immediately pursuant to Rule 462 and Rule 464 (§ 230.462 and § 230.464), a registration statement or any amendment thereto is deemed filed on the proper registration form unless the Commission objects to the registration form before the effective date.

(2) An automatic shelf registration statement as defined in Rule 405 (§ 230.405) and any post-effective amendment thereto are deemed filed on the proper registration form unless and until the Commission notifies the issuer of its objection to the use of such form. Following any such notification, the issuer must amend its automatic shelf registration statement onto the registration form it is then eligible to use, provided, however, that any continuous offering of securities pursuant to Rule 415 (§ 230.415) that the issuer has commenced pursuant to the registration statement before the Commission has notified the issuer of its objection to the use of such form may continue until the effective date of a new registration statement or post-effective amendment to the registration statement that the issuer has filed on the proper registration form, if the issuer files promptly after notification the new registration statement or post-effective amendment and if the offering is permitted to be made under the new registration statement or post-effective amendment.

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26. Amend § 230.405 as follows:

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a. Add new definitions of “automatic shelf registration statement,” “free writing prospectus,” “ineligible issuer,” “well-known seasoned issuer,” and “written communication,” in alphabetical order; and

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b. Revise the definition of “graphic communication.”

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The additions and revision read as follows:

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Definition of terms.
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Automatic shelf registration statement. The term automatic shelf registration statement means a registration statement filed on Form S-3 or Form F-3 (§ 239.13 or § 239.33 of this chapter) by a well-known seasoned issuer pursuant to General Instruction I.D. or I.C. of such forms, respectively.

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Free writing prospectus. Except as otherwise specifically provided or the context otherwise requires, a free writing prospectus is any written communication as defined in this section that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed (or, in the case of a well-known seasoned issuer, whether or not such registration statement is filed) and is made by means other than:

(1) A prospectus satisfying the requirements of section 10(a) of the Act, Rule 430 (§ 230.430), Rule 430A (§ 230.430A), Rule 430B (§ 230.430B), Rule 430C (§ 230.430C), or Rule 431 (§ 230.431);

(2) A written communication used in reliance on Rule 167 and Rule 426 (§ 230.167 and § 230.426); or

(3) A written communication that constitutes an offer to sell or solicitation of an offer to buy such securities that falls within the exception from the definition of prospectus in clause (a) of section 2(a)(10) of the Act.

Graphic communication. The term graphic communication, which appears in the definition of “write, written” in section 2(a)(9) of the Act and in the definition of written communication in this section, shall include all forms of electronic media, including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet Web sites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks and other forms of computer data compilation. Graphic communication shall not include a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted through graphic means.

Ineligible issuer. (1) An ineligible issuer is an issuer with respect to which any of the following is true as of the relevant date of determination:

(i) Any issuer that is required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) that has not filed all reports and other materials required to be filed during the preceding 12 months (or for such shorter period that the issuer was required to file such reports pursuant to sections 13 or 15(d) of the Securities Exchange Act of 1934), other than reports on Form 8-K (§ 249.308 of this chapter) required solely pursuant to an item specified in General Instruction I.A.3(b) of Form S-3 (§ 239.13 of this chapter) (or in the case of an asset-backed issuer, to the extent the depositor or any issuing entity previously established, directly or indirectly, by the depositor (as such terms are defined in Item 1101 of Regulation AB (§ 229.1101 of this chapter) are or were at any time during the preceding 12 calendar months required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 with respect to a class of asset-backed securities involving the same asset class, such depositor and each such issuing entity must have filed all reports and other material required to be filed for such period (or such shorter period that each such entity was required to file such reports), other than reports on Form 8-K required solely pursuant to an item specified in General Instruction I.A.4 of Form S-3);

(ii) The issuer is, or during the past three years the issuer or any of its predecessors was:

(A) A blank check company as defined in Rule 419(a)(2) (§ 230.419(a)(2));

(B) A shell company, other than a business combination related shell company, each as defined in this section;

(C) An issuer in an offering of penny stock as defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (§ 240.3a51-1 of this chapter);

(iii) The issuer is a limited partnership that is offering and selling its securities other than through a firm commitment underwriting;

(iv) Within the past three years, a petition under the federal bankruptcy laws or any state insolvency law was filed by or against the issuer, or a court appointed a receiver, fiscal agent or similar officer with respect to the business or property of the issuer subject to the following:

(A) In the case of an involuntary bankruptcy in which a petition was filed against the issuer, ineligibility will occur upon the earlier to occur of:

(1) 90 days following the date of the filing of the involuntary petition (if the case has not been earlier dismissed); or

(2) The conversion of the case to a voluntary proceeding under federal bankruptcy or state insolvency laws; and

(B) Ineligibility will terminate under this paragraph (1)(iv) if an issuer has filed an annual report with audited financial statements subsequent to its emergence from that bankruptcy, insolvency, or receivership process;

(v) Within the past three years, the issuer or any entity that at the time was a subsidiary of the issuer was convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of section 15(b)(4)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b)(4)(B)(i) through (iv));

(vi) Within the past three years (but in the case of a decree or order agreed to in a settlement, not before December 1, 2005), the issuer or any entity that at the time was a subsidiary of the issuer was made the subject of any judicial or administrative decree or order arising out of a governmental action that:

(A) Prohibits certain conduct or activities regarding, including future violations of, the anti-fraud provisions of the federal securities laws;

(B) Requires that the person cease and desist from violating the anti-fraud provisions of the federal securities laws; or

(C) Determines that the person violated the anti-fraud provisions of the federal securities laws;

(vii) The issuer has filed a registration statement that is the subject of any pending proceeding or examination under section 8 of the Act or has been the subject of any refusal order or stop order under section 8 of the Act within the past three years; or

(viii) The issuer is the subject of any pending proceeding under section 8A of the Act in connection with an offering.

(2) An issuer shall not be an ineligible issuer if the Commission determines, upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer. Any such determination shall be without prejudice to any other action by the Commission in any other proceeding or matter with respect to the issuer or any other person.

(3) The date of determination of whether an issuer is an ineligible issuer is as follows:

(i) For purposes of determining whether an issuer is a well-known seasoned issuer, at the date specified for purposes of such determination in paragraph (2) of the definition of well-known seasoned issuer in this section; and Start Printed Page 44811

(ii) For purposes of determining whether an issuer or offering participant may use free writing prospectuses in respect of an offering in accordance with the provisions of Rules 164 and 433 (§ 230.164 and § 230.433), at the date in respect of the offering specified in paragraph (h) of Rule 164.

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Well-known seasoned issuer. A well-known seasoned issuer is an issuer that, as of the most recent determination date determined pursuant to paragraph (2) of this definition:

(1)(i) Meets all the registrant requirements of General Instruction I.A. of Form S-3 or Form F-3 (§ 239.13 or § 239.33 of this chapter) and either:

(A) As of a date within 60 days of the determination date, has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or

(B)(1) As of a date within 60 days of the determination date, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Act; and

(2) Will register only non-convertible securities, other than common equity, and full and unconditional guarantees permitted pursuant to paragraph (1)(ii) of this definition unless, at the determination date, the issuer also is eligible to register a primary offering of its securities relying on General Instruction I.B.1. of Form S-3 or Form F-3.

(3) Provided that as to a parent issuer only, for purposes of calculating the aggregate principal amount of outstanding non-convertible securities under paragraph (1)(i)(B)(2) of this definition, the parent issuer may include the aggregate principal amount of non-convertible securities, other than common equity, of its majority-owned subsidiaries issued in registered primary offerings for cash, not exchange, that it has fully and unconditionally guaranteed, within the meaning of Rule 3-10 of Regulation S-X (§ 210.3-10 of this chapter) in the last three years; or

(ii) Is a majority-owned subsidiary of a parent that is a well-known seasoned issuer pursuant to paragraph (1)(i) of this definition and, as to the subsidiaries' securities that are being or may be offered on that parent's registration statement:

(A) The parent has provided a full and unconditional guarantee, as defined in Rule 3-10 of Regulation S-X, of the payment obligations on the subsidiary's securities and the securities are non-convertible securities, other than common equity;

(B) The securities are guarantees of:

(1) Non-convertible securities, other than common equity, of its parent being registered; or

(2) Non-convertible securities, other than common equity, of another majority-owned subsidiary being registered where there is a full and unconditional guarantee, as defined in Rule 3-10 of Regulation S-X, of such non-convertible securities by the parent; or

(C) The securities of the majority-owned subsidiary meet the conditions of General Instruction I.B.2 of Form S-3 or Form F-3.

(iii) Is not an ineligible issuer as defined in this section.

(iv) Is not an asset-backed issuer as defined in Item 1101 of Regulation AB (§ 229.1101(b) of this chapter).

(v) Is not an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).

(2) For purposes of this definition, the determination date as to whether an issuer is a well-known seasoned issuer shall be the latest of:

(i) The time of filing of its most recent shelf registration statement; or

(ii) The time of its most recent amendment (by post-effective amendment, incorporated report filed pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) of this chapter), or form of prospectus) to a shelf registration statement for purposes of complying with section 10(a)(3) of the Act (or if such amendment has not been made within the time period required by section 10(a)(3) of the Act, the date on which such amendment is required); or

(iii) In the event that the issuer has not filed a shelf registration statement or amended a shelf registration statement for purposes of complying with section 10(a)(3) of the Act for sixteen months, the time of filing of the issuer's most recent annual report on Form 10-K (§ 249.310 of this chapter) or Form 20-F (§ 249.220f of this chapter) (or if such report has not been filed by its due date, such due date).

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Written communication. Except as otherwise specifically provided or the context otherwise requires, a written communication is any communication that is written, printed, a radio or television broadcast, or a graphic communication as defined in this section.

Note:

Note to definition of “written communication.”

A communication that is a radio or television broadcast is a written communication regardless of the means of transmission of the broadcast.

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27. Amend § 230.408 as follows:

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a. Designate the current text as paragraph (a); and

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b. Add paragraph (b).

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The addition reads as follows:

Additional information.
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(b) Notwithstanding paragraph (a) of this section, unless otherwise required to be included in the registration statement, the failure to include in a registration statement information included in a free writing prospectus will not, solely by virtue of inclusion of the information in a free writing prospectus (as defined in Rule 405 (§ 230.405)), be considered an omission of material information required to be included in the registration statement.

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28. Amend § 230.412 as follows:

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a. Remove the authority citation following the section; and

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b. Revise paragraph (a).

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The revision reads as follows:

Modified or superseded documents.

(a) Any statement contained in a document incorporated or deemed to be incorporated by reference or deemed to be part of a registration statement or the prospectus that is part of the registration statement shall be deemed to be modified or superseded for purposes of the registration statement or the prospectus that is part of the registration statement to the extent that a statement contained in the prospectus that is part of the registration statement or in any other subsequently filed document which also is or is deemed to be incorporated by reference or deemed to be part of the registration statement or prospectus that is part of the registration statement modifies or replaces such statement. Any statement contained in a document that is deemed to be incorporated by reference or deemed to be part of a registration statement or the prospectus that is part of the registration statement after the most recent effective date or after the date of the most recent prospectus that is part of the registration statement may modify or replace existing statements contained in the registration statement or the prospectus that is part of the registration statement.

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29. Revise § 230.413 to read as follows:

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Registration of additional securities and additional classes of securities.

(a) Except as provided in section 24(f) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(f)) and in paragraph (b) of this section, where a registration statement is already in effect, the registration of additional securities shall only be effected through a separate registration statement relating to the additional securities.

(b) Notwithstanding paragraph (a) of this section, the following additional securities or additional classes of securities may be added to an automatic shelf registration statement already in effect by filing a post-effective amendment to that automatic shelf registration statement:

(1) Securities of a class different than those registered on the effective automatic shelf registration statement identified as provided in Rule 430B(a) (§ 230.430B(a)); or

(2) Securities of a majority-owned subsidiary that are permitted to be included in an automatic shelf registration statement, provided that the subsidiary and the securities are identified as provided in Rule 430B and the subsidiary satisfies the signature requirements of an issuer in the post-effective amendment.

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30. Amend § 230.415 as follows:

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a. Remove the authority citations following the section;

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b. Revise paragraph (a)(1)(x);

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