1. Proposals Regarding Securities Offering Reform
The Commission voted to propose modifications to the registration, communications, and offering processes under the Securities Act of 1933. The proposals would address communications related to registered securities offerings, delivery of information to investors, and registration and other procedures in the offering and capital formation process.
Categories of Issuers
In many cases, the amount of flexibility granted to issuers under the proposed revisions to the registration, communications, and offering processes would be contingent on the characteristics of the issuer, including the type of issuer, the issuer's reporting history, and the issuer's equity market capitalization or historical debt issuance. The proposals divide issuers into four categories.
- A non-reporting issuer would be an issuer that is not required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act.
- An unseasoned issuer would be 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 would be an issuer that is eligible to use Form S-3 or Form F-3 to register a primary offering of securities.
- A well-known seasoned issuer would be a new class of issuer that is eligible to register a primary offering of its securities on Form S-3 or Form F-3 and has either $700 million of public common equity float or, for limited purposes, has issued $1 billion of registered debt in the preceding three years.
The most significant revisions to the Commission's communications rules and registration processes would apply to well-known seasoned issuers.
Liberalizing Communications Around the Time of Registered Offerings
The proposals would update and liberalize permitted offering activity and communications to allow more information to reach investors by revising the "gun-jumping" provisions under the Securities Act of 1933. The cumulative effect of the proposals under the gun-jumping provisions would be the following.
- Well-known seasoned issuers would be permitted to engage at any time in oral and written communications, including use at any time of a new type of written communication called a "free writing prospectus, "subject to enumerated conditions (including, in some cases, filing with the Commission).
- All reporting issuers would, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information.
- Non-reporting issuers would, at any time, be permitted to continue to publish factual business information that is regularly released to persons other than in their capacity as investors or potential investors.
- Communications by issuers more than 30 days before filing a registration statement would not be considered prohibited offers so long as they did not reference a securities offering.
- All issuers and other offering participants would be permitted to use a free writing prospectus after the filing of the registration statement, subject to enumerated conditions (including, in some cases, filing with the Commission).
- 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, would be excluded from the definition of "prospectus."
- The exemptions for research reports would be expanded.
A number of these new proposals would include conditions of eligibility. Most of the proposals, for example, would not be available to blank check companies, penny stock issuers, or shell companies.
The proposals would address the treatment under the Securities Act of electronic communications, including electronic road shows and information located on or hyperlinked to an issuer's website.
Liability Timing Issues
The proposals address the liability provisions under the Securities Act as follows.
- The release includes an interpretation that, for purposes of disclosure liability under Section 12(a)(2) and Section 17(a)(2) of the Securities Act, the assessment of whether a material misstatement or material omission exists would be made against information conveyed to an investor at the time of its investment decision, and not information that is only conveyed or filed subsequently.
- The proposals would also
- ensure that prospectus supplements would be included in the registration statement for disclosure liability purposes; and
- establish a new effective date for each prospectus filing reflecting a takedown of securities off a shelf registration statement that would largely eliminate the timing discrepancy in the application of disclosure liability to issuers, underwriters, and other parties.
Improvements to Registration Procedures
The proposals would modernize the operation of the requirements for the shelf registration process under the Securities Act. These proposals would
- codify in a single rule the information that may be omitted from a base prospectus in a shelf registration statement at effectiveness and included later;
- replace the requirement that issuers register only securities they intend to offer within two years with a requirement that the issuer update the registration statement with a new registration statement that is filed every three years;
- eliminate restrictions on "at-the-market" offerings;
- permit immediate takedowns of securities off of shelf registration statements;
- permit issuers to use prospectus supplements (rather than post-effective amendments) to make material changes to the plan of distribution described in the base prospectus;
- for seasoned issuers with a $75 million public float, revise the requirement to identify selling security holders by permitting selling security holders to be identified in prospectus supplements (rather than post-effective amendments), where the securities to be sold are outstanding when the registration statement is filed; and
- establish a significantly more flexible version of shelf registration, referred to as "automatic shelf registration" for offerings by well-known seasoned issuers. Automatic shelf registration would feature automatic effectiveness, pay-as-you-go registration fees, and maximum flexibility in the offering process.
The proposals also contain procedural changes that would allow reporting issuers that are current in filing their Exchange Act reports to incorporate by reference previously filed Exchange Act reports into a Securities Act registration statement on Form S-1 or Form F-1.
Prospectus Delivery Reforms
The proposals would change the way in which the final prospectus delivery obligations under the Securities Act are satisfied. The proposed change would create an "access equals delivery" model for final prospectuses. Under the proposed model, filing a final prospectus with the Commission and complying with other conditions would satisfy delivery requirements. In addition, to preserve an investor's ability to trace securities to a registered offering, the proposals include a separate requirement to notify investors that they purchased securities in a registered offering
Required Disclosure in Exchange Act Reports
The proposals would require issuers to include the following in their Exchange Act periodic reports:
- for Form 10-K filers, disclosure regarding risk factors;
- disclosure regarding the issuer's status as a "voluntary" filer of Exchange Act reports; and
- for "accelerated filers," disclosure in their Exchange Act annual reports of written staff comments that were issued more than 180 days before the end of the fiscal year to which the annual report relates, where those comments remain unresolved at the time of filing the annual report and the issuer believes those comments to be material.
Comments on the proposals should be submitted to the Commission within 75 days following publication in the Federal Register.
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The full text of the detailed release concerning these proposals will be posted to the SEC Web site as soon as possible.
2. Registration Under the Advisers Act of Certain Hedge Fund Advisers
The Commission voted to adopt new Rule 203(b)(3)-2 that will require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940 by Feb. 1, 2006. The Commission also adopted related rule amendments.
The rule is the culmination of an initiative to study hedge funds and their advisers that commenced over two years ago. Registration under the new rule will permit the Commission to--
- collect important information about the operations of hedge fund advisers, which represent a significant and growing component of the U.S. financial system.
- conduct examinations of hedge fund advisers. Examinations permit the SEC to identify compliance problems at an early stage, identify practices that may be harmful to investors and provide a deterrent to unlawful conduct.
- require all hedge fund advisers to adopt basic compliance controls to prevent violation of the federal securities laws.
- improve disclosures made to prospective and current hedge fund investors.
- prevent felons or individuals with other serious disciplinary records from managing hedge funds.
The new rule will eliminate the ability of hedge fund advisers to rely on an exemption from adviser registration designed for advisers providing advice only to a small number of clients.
The new rule contains special provisions for advisers located outside the United States designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S. investors.
The compliance date for the new rule will be Feb. 1, 2006.
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The full text of the detailed release concerning this rule will be posted to the SEC Web site as soon as possible.
