Securities Offering Reforms-Amendments to the Securities Act and the Exchange Act

Client Alert


To:   Our Clients and Friends
From:   Olshan Grundman Frome Rosenzweig & Wolosky LLP
Date:   December 2005
Re:   Securities Offering Reforms-Amendments to the Securities Act and the Exchange Act

On July 19, 2005 the Securities and Exchange Commission ("SEC") issued a release that implemented sweeping reforms of its rules governing public offerings under the Securities Act of 1933, as amended (the "Securities Act"). The new rules are intended to streamline the public offering process, especially for companies that are classified as well-known seasoned issuers ("WKSIs"). In addition, the rules will ease restrictions on issuer and participant communications before and during public offerings, improve the shelf registration process for seasoned issuers and will facilitate electronic public roadshows during initial public offerings. The reforms were effective on December 1, 2005. This memorandum provides an overview of the highlights of the adopting release; the 468-page release can be accessed at

I. Areas Addressed by the New Rules

The new rules address three main areas concerning the offering process for all issuers:

  1. Communications related to registered securities offerings;
  2. Registration and other procedures in the offering process; and
  3. Delivery of information to investors.

II. Categories of Issuers

Under the new rules, the amount of flexibility granted to issuers depends on the characteristics of the issuer, including the type of issuer, the issuer's reporting history and the issuer's equity market capitalization or amount of previously registered non-convertible securities, other than common equity. The rules divide issuers into four categories.

  • A WKSI is a new class of issuer that meets the following criteria:
  • Eligible to register a primary offering of its securities on Form S-3 or F-3;
  • Current and timely in its Securities Exchange Act of 1934, as amended (the "Exchange Act") reports for at least one year;
  • As of a date within 60 days of its eligibility determination date has either $700 million of worldwide public common equity float held by non-affiliates, or has issued $1 billion of non-convertible securities, other than common equity, in registered offerings for cash, in the preceding three years; and
  • Not an "ineligible issuer" or "asset backed issuer".
  • A majority owned subsidiary of a WKSI may also be considered a WKSI in the sale of its own securities if certain conditions are met.
  • A seasoned issuer is an issuer that is eligible to use Form S-3 or F-3 to register primary offerings of its securities pursuant to general instruction I.B.1 of such forms or is relying on general instruction I.B.2, I.B.5 or I.C. of Form S-3 or I.A.5 or I.B.2 of Form F-3.
  • An unseasoned issuer is an issuer that is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act, but that does not qualify to use Form S-3 or F-3 for primary offerings; and
  • 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.
  • Ineligible issuers are excluded from using most of the new rules, because, amongst other things, they may not be current in their Exchange Act filings, have filed for bankruptcy within the past three years, have been or are subject to refusal or stop orders under the Securities Act or have violated the anti-fraud provisions of the federal securities laws.

The most significant revisions to the Commission's communications rules and registration processes apply to WKSIs.

III. Expanding Communications Around the Time of Registered Offerings

The new SEC rules ease restrictions on offering activity and communications to allow more information to reach investors, by revising the "gun-jumping" provisions under the Securities Act. For an overview of the new communications rules, see Appendix A attached hereto.

Pre-filing Period Restrictions on Business Communications and Offers by Certain Issuers

The new rules provide that communications by issuers more than 30 days before filing a registration statement will be permitted, however such communications may not reference a securities offering that is the subject of a registration statement (Rule 163A). The issuer must also take reasonable steps to prevent further distribution of the information during the 30-day period immediately before filing of the registration statement. The 30-day bright-line exclusion is not available for offerings by blank check companies, shell companies, penny stock companies, registered investment companies or business development companies. Further, the rules provide for two non-exclusive safe harbors from gun-jumping provisions both pre- and post-filing of a registration statement. The first safe harbor (Rule 168) allows a reporting issuer (not a voluntary filer) to continue to disseminate regularly released factual business communications and forward-looking information during the course of an offering. The second safe harbor (Rule 169) allows a non-reporting issuer (an IPO issuer or a voluntary filer, for example) to disseminate factual business information, but not forward-looking information, during an offering. The information must be of a type that has been regularly released in the past to persons other than in their capacity as investors or potential investors; information may be disseminated if it is intended for use by a non-investor audience, even if accessible by investors.

The new rules also exempt WKSIs altogether from the restrictions on pre-filing offers (Rule 163). WKSIs are 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" (which is subject to certain conditions, including, in certain circumstances, filing with the SEC).

New Rules Relating to the Registration Period: Expansion of Rule 134 and the Free Writing Prospectus

Rule 134 of the Securities Act provides a safe harbor for limited public notices about an offering, made after the filing of a registration statement that includes a statutory prospectus. New 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;
  • Expand the scope of permissible factual information about the offering itself, including underwriter information, more details about the mechanics of procedures for transactions in connection with the offering process, the anticipated schedule of the offering and a description of marketing events;
  • Allow more factual information about procedures for account opening and submitting indications of interest and conditional offers to buy the offered securities;
  • 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 this Rule; and
  • Expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned.

A Rule 134 notice must be preceded or accompanied by a statutory prospectus.

The Free Writing Prospectus

All issuers and other offering participants will be permitted to use a free writing prospectus after the filing of the registration statement, subject to certain conditions. A free writing prospectus is any written communication (almost any type of communication other than a purely oral communication or a statutory prospectus) that constitutes an offer to buy or sell securities relating to a registered offering.

A WKSI may use a free writing prospectus at any time, regardless of whether a registration statement has been filed with the SEC. If a WKSI provides a free writing prospectus before filing a registration statement, it must file with the SEC the free writing prospectus once the registration statement is filed. The free writing prospectus must contain a legend that notifies the recipient where the statutory prospectus may be accessed or must provide a link to the SEC's website where the registration statement may be accessed.

A seasoned issuer that is not a WKSI must have already filed the registration statement with the SEC in order to use a free writing prospectus. A non-reporting or unseasoned issuer must ensure that a statutory prospectus is either filed with or before the free writing prospectus. For a seasoned issuer, the use of a free writing prospectus is not conditioned upon delivery of the statutory prospectus, so long as the free writing prospectus contains a legend notifying recipients of the filing of the registration statement and a link to the SEC website where the registration statement may be accessed. The legend must contain a toll-free telephone number through which an interested person may request a statutory prospectus.

In most instances, issuers and sometimes underwriters must file the free writing prospectus on or prior to distribution. An issuer must file any written communication containing (1) the final terms of the offering, or (2) the final terms of the securities being offered within two days after the later of the date the terms become final or the date of first use. The new rules provide cures for unintentional or immaterial failures to retain or file the free writing prospectus, or failure to include the legend.

In connection with initial public offerings, a free writing prospectus may be used only if it is accompanied or preceded by a preliminary prospectus, which must include a price range. In the case of electronic communications, a hyperlink to the preliminary prospectus would satisfy this delivery requirement. The use of free writing prospectuses is not available to every issuer. Ineligible issuers including those not current in periodic filings, those that are or were in the past three years the subject of bankruptcy proceedings and those who violated anti-fraud provisions of the federal securities laws. Free writing prospectuses may not be used in offerings that are exchange offers or business combination transactions subject to Regulation M-A.

IV. Media and Electronic Communications

Electronic Road Shows and Hyperlinks

The new rules 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. An electronic road show constitutes a free writing prospectus under the new rules. Live road shows that are transmitted in real time are still oral communications; however, if transmitted by radio or television broadcast they could be considered written communications. Visual aids that are used simultaneously with a live transmittal of a road show will not be written communications. A non-reporting issuer using electronic road shows for initial public offerings of common equity or convertible equity securities will have to make a bona fide electronic road show readily available to an unrestricted audience to avoid filing the electronic road show with the SEC. No other road shows will be subject to filing. Further, a statutory prospectus containing a price range must be disseminated before or concurrent with an electronic road show if the non-reporting issuer is using an electronic road show for the reasons stated previously.

The new rules also address the issue of information constituting an offer of the issuer's securities, when such information is on the issuer's website or the website contains a hyperlink to the information. The offer is considered a free writing prospectus under the new rules and must be filed with the SEC, with the same guidelines as other free writing prospectuses.


The new rules provide that communications, whether oral or written, that are prepared and published or disseminated by the media are free writing prospectuses and are generally required to be filed with the SEC. These media free writing prospectuses are subject to the other rules concerning free writing prospectuses discussed above, such as the requirement that a registration statement be filed with the SEC and, in the case of an unseasoned issuer or non-reporting issuer, the free writing prospectus must also be preceded or accompanied by a statutory prospectus (and in the IPO context, a statutory prospectus containing a price range). If no payment is made or consideration given to the media source for the publication of the free writing prospectus, then it does not have to be accompanied by a statutory prospectus. However, a media communication that is treated as a free writing prospectus must be filed by the issuer or offering participant within four business days of learning of the media communication (unless the substance has been previously filed with the SEC).

V. Prospectus Delivery Reforms

New Rule 172 creates an "access equals delivery" model for final prospectuses. Under this model, filing a final prospectus with the SEC within the requisite Rule 424 time period and complying with other conditions will enable offering participants to conduct securities offerings without printing and actually delivering final prospectuses. A cure provision for inadvertent failures to file is included. In addition, Rule 173 includes a separate requirement that underwriters or dealers in an offering notify investors that they purchased securities in a registered offering no later than two business days after the sale. An investor is permitted to request a copy of the final prospectus, but one does not have to be provided before settlement. The new rules also allow dealers subject to aftermarket delivery obligations to rely on the new "access equals delivery" rules (other than in connection with blank check companies).

VI. Regulation FD and Liability Issues

Regulation FD

The new rules amend Regulation FD to narrow the current exception to that regulation for communications made in registered offerings, as a result of general easing of the communications rules. 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 Regulation FD:

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 the Securities Act;
  • Any other Section 10(a) prospectus;
  • A notice permitted by Securities Act Rule 134; or
  • Any oral communication made in connection with the registered securities offering after the filing of the registration statement for the offering under the Securities Act.

Liability Issues

One of the goals of the new rules is to reduce the legal "speed bumps" that affect the timing of securities offerings. Free writing prospectuses are not subject to Section 11 liability; however, they are subject to Sections 12(a)(2) and 17(a)(2) of the Securities Act. The SEC has reaffirmed its position that liability for material misstatements and omissions is determined based on the information conveyed to an investor at the time a security is sold, rather than the information provided later. Consequently, liability will often attach prior to delivery of a final prospectus. The SEC has indicated that issuers or other offering participants may want to terminate an old contract and enter into a new contract once new information has been conveyed in order to avoid liability based on stale information. This procedure has the possibility of conflicting with federal law so the new rules also contain technical changes regarding liability provisions of the federal securities laws.

VII. Use of Research Reports

The new rules significantly amend the existing safe harbors provided by the Securities Act for research reports.

  • Rule 137 of the Securities Act now applies to all issuers, rather than solely issuers required to file periodic reports under the Exchange Act, and the prohibition on issuers compensation to the authors of such reports now applies to compensation for a particular research report;
  • Rule 138 of the Securities Act now covers research reports on all reporting issuers current in their Exchange Act reports, rather than solely Form S-3 or F-3 eligible issuers and certain non-reporting foreign private issuers;
  • Rule 139 of the Securities Act now (i) permits publication of research about any issuer eligible to use Form S-3 or F-3 for a primary offering of securities, (ii) covers any research report by certain foreign private issuers, (iii) extends the safe harbor for industry reports to registered offerings of any reporting issuer other than voluntary filers of Exchange Act reports and (iv) eliminates the "publication with reasonable regularity" requirement.

The new rules also amend Rules 138 and 139 to:

  • Permit a broker or dealer to issue a more favorable 139 report than their last research report;
  • Provide that neither Rule constitutes an offer or general solicitation or general advertisement under Rule 144A or Regulation S; and
  • Permit research reports under these rules to be published or distributed in connection with any transaction that is subject to the proxy rules under the Exchange Act.

Blank check companies, shell companies and penny stock issues cannot avail themselves of the preceding safe harbors.

VIII. Registration and Other Procedures in the Offering Process

Elimination of Forms S-2 and F-2 and Expanded Use of Incorporation by Reference

The new rules eliminate Forms S-2 and F-2, as new changes to Forms S-1 and F-1 make those forms unnecessary according to the SEC. Forms S-1 and F-1 were amended to permit expanded use of incorporation by reference to Exchange Act filings for all issuers, other than ineligible issuers, that (i) have filed at least one annual report and are current in their Exchange Act filings and (ii) make Exchange Act filings readily available on their websites.

Changes in the Shelf-Registration Process: Content in the Base Prospectus and Section 11 Liability

The new rules make improvements to the shelf registration process under the Securities Act. The new rules clarify which information may be omitted from a base prospectus in a shelf registration statement at effectiveness and included later and 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. Under new Rules 430B and 430C, a seasoned issuer may exclude from the base prospectus information that is not known or reasonably available at the time of effectiveness of the registration statement and the identities of selling shareholders and amounts of securities to be registered on behalf of those shareholders. Further, the information in the base prospectus regarding the company may be incorporated by reference from Exchange Act reports; however, they will need to be filed on a prospectus supplement.

The prospectus supplement to a shelf registration statement will now be considered part of the registration statement for purposes of Section 11 liability and liability will attach for material misstatements and omissions. The new rules discuss the date on which information in a prospectus supplement will be deemed part of the registration statement. If the prospectus supplement is filed for any reason other than a shelf takedown, then the supplement will be deemed to be part of the registration statement on the date that it is first used (such as date of availability to the managing underwriter or prospective purchaser). If the prospectus supplement is used in connection with a shelf takedown, it will be deemed to be part of the registration statement on the earlier of the date the supplement is first is used and the date of the first sale of securities.

Amendments to Rule 415 of the Securities Act

The new rules amend Rule 415 of the Securities Act to change certain of the procedural requirements for registering securities. First, the requirement that an issuer only register securities on Form S-3 that it reasonably expects to offer and sell within two years has been eliminated. Instead, eligible issuers will have to file a new shelf registration statement every three years to have securities available for shelf takedowns. New Rule 415 also allows for primary offerings to occur immediately following effectiveness of a shelf-registration statement. Finally, amendments to Rule 415 eliminate restrictions on primary "at-the-market" offerings of equity securities for seasoned issuers, such as the requirement to identify underwriters in the registration statement and certain volume limitations.

Shelf Registrations and WKSIs

Under the new SEC reforms, WKSIs will be able to use an "automatic shelf registration" process under Form S-3 or Form F-3. Automatic shelf registration permits automatic effectiveness of the registration statement without any SEC review. Automatic shelf registration permits the WKSI to register unspecified amounts and types of securities without allocating between primary and secondary offerings. A WKSI may add additional classes of securities and eligible majority-owned subsidiaries as additional registrants after the effectiveness of the automatic shelf registration statement. The base prospectus may omit whether the offering is primary or secondary, a description of the securities offered (other than name and class), names of selling shareholders and disclosure of a plan of distribution. The omitted information may be added through use of prospectus supplements that will be deemed part of the registration statement. Further, WKSIs may, but do not have to, utilize a pay-as-you-go registration fee process, allowing the issuer to pay the applicable SEC registration fee for the securities being taken off the shelf for that takedown. The SEC hopes that the new rules will alleviate the need to use Rule 144A offerings on an unregistered basis.

IX. Required Disclosure in Exchange Act Reports

The new rules require issuers to include the following in their Exchange Act reports on Form 10-K and 20-F:

  • For Form 10-K filers, disclosure of risk factors in plain English under the caption "Risk Factors" (quarterly updates on Form 10-Q are only required if necessary to report material changes);
  • Disclosure regarding the issuer's status as a "voluntary" filer of Exchange Act reports; and
  • For accelerated filers and WKSIs, disclosure of outstanding unresolved written comments received from the SEC that the issuer believes are material and that were issued more than 180 days before the end of the fiscal year covered under the annual report.

Small business issuers that file annual reports on Form 10-KSB are not subject to these new disclosure requirements.


These are only brief descriptions of the SEC's new rules. This memorandum provides general information only and does not constitute legal advice that may be applied to any particular situation. Please contact the Partners in our Corporate Department for further advice and assistance.


  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 Information Yes No Rule defines it as not an offer for Section 5(c) purposes Section 5(b)(1) relates only to "prospectuses" — it is not applicable
Regularly Released Forward-Looking Information Yes No Rule defines it as not an offer for Section 5(c) purposes Section 5(b)(1) relates only to "prospectuses" — it is not applicable
Communications Made More Than 30 Days Before Filing of Registration Statement Yes Possibly, based on facts and circumstances Rule defines it as not an offer for Section 5(c) purposes Section 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 Statement Yes No Is 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 Statement Yes Yes It also is a free-writing prospectus Is 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-Free Writing Prospectuses Used BeforeFiling of Registration Statement Yes Yes Is 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 134 Yes No Section 5(c) is not applicable, as Rule 134 relates only to the period after the filing of a registration statement Section 5(b)(1) relates only to "prospectuses" — it is not applicable
All Eligible Issuers-Free Writing Prospectuses Used After Filing of Registration Statement Yes Yes Section 5(c) is not applicable, as it does not apply in the post-filing period Section 5(b)(1) be satisfied, as the free writing prospectus will be a permitted Section 10(b) prospectus

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