Legal spotlight

Stacy Kanter, partner, and Laura Kaufmann Belkhayat, associate, at Skadden, Arps, Slate, Meagher & Flom look at reforms of the registration and public offering process of securities

Bill of reform

On July 19, the US Securities and Exchange Commission (SEC) published new rules modifying the registration and public offering processes for sales of securities, known as the Reform. The Reform, which becomes effective on December 1, 2005, aims to modernise the securities registration and public offering processes by encouraging increased flow of information to investors, eliminating outmoded restrictions and ensuring timely delivery of information to investors at the time they commit to purchase a security.

Several components of the Reform are likely to enhance flexibility for issuers and underwriters that wish to access the public debt market: (i) a new form of registration statement, the Automatic Shelf Registration, (ii) the introduction of the free writing prospectus that allows the use of written offering materials other than the prospectus filed with the SEC and (iii) the elimination of the obligation to deliver a final prospectus in connection with a public offering of securities.

The Reform creates several new classes of issuers, which include foreign private issuers as well as US issuers. Issuers eligible to register a primary offering of securities on the short forms S-3 or F-3, typically referred to as 'shelf issuers', have been categorised as well-known seasoned issuers (WKSIs) and seasoned issuers. WKSIs and all other shelf issuers are considered seasoned issuers. WKSIs are shelf issuers who have either $700 million of worldwide common equity market capitalisation held by non-affiliates or those who issued an aggregate of $1 billion of non-convertible securities, other than common equity, in registered offerings for cash during the past three years. Much of the flexibility under the Reform is available only to WKSIs.

Unseasoned issuers include those issuers who voluntarily file periodic reports with the SEC. Non-reporting issuers are not required to, and do not voluntarily, file periodic reports with the SEC. Voluntary filers would include issuers who are not required by the securities laws to file SEC reports but do so because of a requirement contained in an indenture or other contract.

Lastly, ineligible issuers are excluded from making use of most features of the Reform. Ineligible issuers include those issuers who:

• are not current in their periodic reports for the prior 12 months,

• have filed for bankruptcy or insolvency during the past three years, or

• during the past three years have been found to have violated or have been made the subject of a judicial or administrative decree or order prohibiting certain conduct or activities regarding certain provisions of the federal securities laws.

One of the most dramatic benefits of being classified as a WKSI is the ability to use a significantly more flexible category of shelf registration for the registration of debt and equity securities. This is referred to as automatic shelf registration and features: automatic effectiveness; pay-as-you-go registration fees; and the ability to add both additional classes of securities and eligible majority-owned subsidiaries as additional registrants at a later time.

In addition, WKSIs are not required to specify the amount of securities to be registered and are permitted to omit more information from the initial filing with the SEC than is currently permitted for a typical shelf registration statement.

This omitted information would then be included at or before the time of issuance of the particular securities, allowing issuers to utilise shelf registration for the issuance of securities. The terms of this issuance would be largely determined at the time of the offering, rather than at the time the shelf registration statement was filed, as is the case under current practice. Automatic shelf registration statements, as well as other shelf registration statements, must also be updated with a new registration statement every three years.

The free writing prospectus

In a departure from long-standing historical practice, the Reform permits the use of written offering materials other than a statutory prospectus throughout the registration process, provided certain conditions are met. Free writing prospectuses include written communications that constitute offers, including electronic communications, outside the statutory prospectus and other limited communications that were previously permitted by the Securities Act. Written communications by underwriters or other participants in an offering would also be considered free writing prospectuses.

An issuer's classification affects its ability to use a free writing prospectus. WKSIs may use a free writing prospectus at any time without regard to whether or not a related registration statement has been filed. Non-reporting, unseasoned and seasoned issuers and other offering participants are not allowed to use a free writing prospectus until a registration statement for the offering has been filed. Certain ineligible issuers are permitted to use free writing prospectuses that are limited to descriptions of the terms of the securities being offered and the offering.

In many cases, a free writing prospectus must be filed with the SEC. A free writing prospectus that contains the final terms of the offered securities must be filed by the issuer, regardless of whether it was prepared by the issuer.

Regardless of whether it is filed with the SEC, a free writing prospectus will not be deemed a part of a registration statement subject to liability under Section 11 of the Securities Act unless an issuer files it as part of the registration statement. However, any seller offering or selling securities by means of a free writing prospectus will be subject to liability under Section 12(a)(2) of the Securities Act with respect to such a free writing prospectus. In general, offering participants, other than the issuer, are liable under Section 12(a)(2) of the Securities Act for a free writing prospectus only if they use, refer to or participate in the planning and use of the free writing prospectus by another offering participant who uses it. An issuer is liable for any issuer information provided by or on behalf of such an issuer contained in any other offering participant's free writing prospectus as well as any free writing prospectus such issuer prepares, uses or refers to.

Prospectus delivery

Physical delivery of a final prospectus to investors in a public offering is no longer required under the Reform. Rather, the SEC has adopted an 'access equals delivery' model such that a final prospectus is deemed to precede or accompany a security for sale so long as the final prospectus is filed or the issuer makes a reasonable effort to file it with the SEC within the time-frame required by SEC rules. Furthermore, the Reform eliminates the requirement that confirmations of allocations sent by underwriters for a registered offering be accompanied or preceded by physical delivery of a final prospectus.

To preserve an investor's ability to relate purchased securities to a registered offering, the Reform implements a separate requirement that each underwriter, broker or dealer participating in a registered offering must send to each purchaser, in lieu of the final prospectus, a notice stating that the sale was made pursuant to a registration statement or a final prospectus pursuant to a registration statement. An investor may request a final prospectus, but issuers are not obliged to provide a requested final prospectus prior to settlement.

See http://www.sec.gov/rules/final/33-8591.pdf for more information.