US developments - SEC reforms the Securities Act

By Brian Salter and Lidia Muhieddine.

Key Points:
The changes introduce a new concept of "issuer" and expand current restrictions on them when it comes to communicating with prospective investors.

New rules substantially changing the registration, communications and offering process for companies conducting capital raising transactions under the US' Securities Act 1933 were adopted by the Securities Exchange Commission (SEC) on 29 June 2005.

Well-known seasoned issuer ("WKSI")

Under the new rules a new concept of issuer has been coined and issuers have been divided into the following four categories:

• non-reporting issuers (including non US companies listing in the US market for the first time and all companies conducting an initial public offering);
• unseasoned issuers;
• seasoned issuers; and
• WKSIs (the newly introduced category of issuer).

To fall within the category of a WKSI the issuer must:

• have been reporting and is timely in its filings under the Securities Exchange Act 1934 for a period of one year; and
• either (1) have $700 million of worldwide public common equity float or (2) have issued $1 billion of non-convertible securities, other than common equity in registered offering for cash, not exchange, in the preceding three years.

Benefits for WKSIs

Subject to certain specified conditions WKSIs will:

• be able to use a free writing prospectus (discussed below) at any time, without regard to whether a registration statement has been filed; and
• have available more flexible shelf registration, also known as "Automatic Shelf Registration", which provides for automatic registration by WKSIs without staff review regardless of the type of securities being offered.

As part of those new shelf registration changes WKSIs will also be able to:

• register unspecified amounts of different classes of securities without allocation between primary and secondary offerings;
• add different classes of securities and eligible majority owned subsidiaries as registrants;
• exclude more information from the base prospectus then currently permitted; and
• pay filing fees in advance or on a "pay as you go" basis at the time of each offering.

Expansion of permitted communications during securities offering process

The new rules expand current restrictions imposed under the Securities Act of the types of communications that can be used by issuers to communicate with prospective investors during a public offering.

Before adopting the subsequent changes the SEC took the opportunity to clarify what was meant by the term "written communication". The term was defined as any communication that is written, printed, broadcast on television or on radio, or is a graphic communication. The SEC made it clear that the term excluded oral communications such as telephone calls and real time communications to live audiences.

The three substantive changes the SEC made to the Permitted Communications process are:

• 30 day bright-line test: Issuers will be allowed a bright-line time period ending 30 days prior to the filing of a registration statement to be made without violating the gun-jumping provisions as long as the communication does not reference a securities offering that is the subject of a registration statement and the issuer take reasonable steps to prevent distribution or publication of the communication in the 30 day period prior to filing a registration statement.
• Free-writing prospectus: The second change made was to introduce a new concept called "free-writing prospectuses" allowing issuers to deliver a variety of written materials to investors earlier in the offering process other than the standard statutory prospectus (including electronic communication). The use of free writing prospectuses however will be subject to satisfaction of certain conditions. A free writing prospectus may take any form and is not required to meet the informational requirements applicable to statutory prospectuses. Whilst non-reporting, seasoned and unseasoned issuers have the benefit of also using a free-writing prospectus they can only do so once a registration statement for the offering has been filed. Ineligible issuers may not use free writing prospectuses.
• Electronic road shows: The third change will permit electronic presentations known as "road shows" to be used by issuers to market their securities and the classification of such as a free-writing prospectus subject to specified conditions.

Access equal delivery

Aside from expanding the communication processes, changes to the regulatory regime for prospectus delivery have also been adopted. Issuers will no longer be required to physically deliver the final prospectus to purchasers. Rather, the rules will create an "access equals delivery" model whereby filing a final prospectus and complying with other conditions will enable issuers to conduct securities offering without printing and delivery of final prospectuses.

Incorporation by reference

Finally, the last substantive change adopted by the SEC was to allow reporting issuers who are current in their Securities Exchange Act reports, to incorporate by reference previously filed Securities Exchange Act reports and other materials into a registration statement on Form S-1 or Form F-1 to comply with their disclosure requirements.

More information on all these changes is available from the SEC's Release 33-8591.