Online Public Offering

The Commission prior to SOR took a number of steps albeit limited to facilitate the use of electronic means and the Internet to conduct a public offering. The Commission, after taking some tentative steps to allow the use of electronic media for the delivery of a prospectus, announced at the time a bold initiative in the form of an Interpretative Release (hereinafter “Interpretative Release I”) to allow electronic delivery of virtually any document required or permitted to be delivered under the Securities Acts and the Investment Company Act.[1] The Commission subsequently adopted a number of technical amendments to its rules[2] to make them compatible with the procedures allowed under the Interpretative Release. The principal proviso was that certain criteria be met that assure that the electronic media is the equivalent of a delivery on paper. Interpretative Release I was extensive in explaining the relevant criteria that had to be met and included a number of examples of what was and what was not appropriate. The Commission has also authorized electronic delivery under specific conditions among dealers and institutional investors participating in a proprietary delivery system. The one exception noted in Interpretative Release I related to the confirmation broker-dealers had to deliver in accordance with Rule 10b-10 under the Exchange Act. See § 19:10 for discussion of Rule 10b-10. The Commission on May 9, 1996 issued a second Interpretative Release (hereinafter “Interpretative Release II”) authorizing broker-dealers by following the outlined procedures to use electronic media for delivery confirmations and other information to customers and receiving information electronically from customers.[3]

Electronic media for this purpose includes “audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, bulletin boards, Internet web sites and computer networks (e.g., local area networks and commercial on-line services).” We focus on the use of the Internet as that has been the medium use to conduct electronic offerings to the extent they have taken place and is likely to be the medium in the future.. The documents that can be delivered by electronic media, if the appropriate criteria are complied with, included “prospectuses required to be delivered in connection with offerings under the Securities Act; annual reports to security holders and proxy or information statements required to be furnished pursuant to Section 14 of the Exchange Act . . .; annual and semi-annual reports required by Section 30(d) of the Investment Company Act . . .; documents furnished to investors in connection with tender offers or going private transactions; offering circulars delivered in connection with Regulation A offerings; and disclosure required to be furnished in connection with Regulation D offerings.” Caution must be exercised in connection with Regulation D Rule 505 and 506 offerings that the means adopted do not result in a general solicitation. See § 9:17. Other documents may include annual reports on Form 10-K and other reports required to be furnished upon request to a security holder or the recipient of a prospectus using incorporation by reference. Elective information, such as quarterly reports to security holders and sales literature, may be delivered electronically, but with some qualification as to sales literature since nothing in the Interpretative Release relaxes substantive requirements such as the requirement that sales literature can be used in a registered offering only after the registration statement has become effective and then only if accompanied or preceded by a copy of the final prospectus.

The focus in this section is on the delivery of the prospectus (including a prospectus subject to completion) and supplemental material, when appropriate to do so. SOR at least as to deliver of a preliminary prospectus appears to eliminate the need to obtain consent of the prospective investor and the procedures to be followed in that respect. Rule 433 as noted at § 5:14 requires a free writing prospectus of a non reporting company or an unseasoned reporting company to be accompanied or preceded by a copy of the latest preliminary prospectus. Rule 433 expressly provides that if the free writing prospectus is an electronic communication that the requirement to deliver a preliminary prospectus “would be satisfied if a free writing prospectus that is an electronic communication contained an active hyperlink to such most recent prospectus.”[4] The delivery of a final prospectus, of course, is no problem since under Rule 172 access is delivery and there is nothing in Rule 173 that precludes the Notice required of the right to receive a prospectus if it requests same to be given electronically. A written notification of allocation, however, can be given only after the registration statement is effective since the Adopting Release regards them as a “written confirmation of sale and, thus, statutory prospectuses.”[5] As discussed at § 5:30, in connection with the delivery of a final prospectus, after the registration statement is effective such notices subject to certain conditions are exempt from Section 5(1) by Rule 172. Rule 172(a)(2) provides that a notice of allocation for this purpose “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. Although SOR does not expressly provide that a confirmation or notice of allocation can be delivered electronically without consent of the purchasers such consent can be obtained routinely as part of the process.

SOR otherwise facilitates an online offering in a number of respects, including the following:

Rule 134 as in the past can be utilized to give notice on the website of the underwriter of the offering and to solicit indications of interest and conditional offers to buy. A preliminary prospectus can be available for downloading to satisfy the requirement of Rule 134(d) that indications of interest can be solicited only if a preliminary prospectus is delivered. The information that can be disclosed by Rule 134 has been expanded, among other respects, to include a description of the procedures by which the underwriters will conduct the offering and the procedures for completing transactions in connection with the offering with an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy). See § 5:19. This formalizes and eliminates any question concerning procedures generally followed in connection with Internet public offerings.

Although Rule 134 permits and has been relied upon in this context to describe the company’s business and has been expanded in some respects, the information that can be furnished about the company’s business under Rule 134 is still limited. See § 5:19. Underwriters now, however, have the alternative of including as extensive as they desire information about the company on the website in connection with the offering as a free writing prospectus. In that event, the required legend (see § 5:14) would have to be included and it would have to be filed. See § 5:15. A preliminary prospectus would have to be and readily could be available for downloading as noted above.

The whole array of electronic road shows from a webcast live presentations to a live audience to a recorded archived road show could be available on the underwriter’s Internet site. Whereas prior to SOR access to electronic road show under the applicable no-action letters which have been superseded, had to be limited, SOR encourages making electronic road shows accessible to everyone. See § 5:21, It remains to be seen as to what investment bankers, if any, and the extent to which electronic public offerings become commonplace. SOR in large part provides a route for doing an electronic offering effectively and efficiently.

The principal guidance prior to SOR for electronic offerings was the Wit Capital no-action letter that generally has been superseded. See § 5:21. One aspect of that letter is not resolved by SOR. The letter reflects the staff’s long-standing preference for soliciting oral indications of interest rather than conditional offers during the waiting period that can be accepted after the effective date if not withdrawn. Wit Capital’s procedures made the matter of revoking a conditional offer as simple as placing an x in a cancel box on the list of conditional offers reflected in the customer’s electronic account available on-line at any time during any day. Wit Capital, nonetheless, presumably to obtain the no-action letter, imposed upon itself a commitment before confirming any transaction to require a reconfirmation of all conditional offers at a point of time in the process related to the effective date,.[6] and this has been the general approach. Conceptually, if conditional offers to buy are received the offering can be accepted after the effective date if they have not been revoked. The Commission’s staff, perhaps, regards as inadequate the Rule 134(d) disclosure “[n]o 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.”

Electronic public offerings have not been widely utilized since Wit Capital disappeared from the landscape. WR Hambrecht (www.wrhambrecht.com) utilizes them for its Open IPO version of a Dutch Auction and for its participation in underwriting although it generally is not the lead underwriter in such offerings. HARRISdirect (/www.harrisdirect.com) also distributes its participation in IPOs to its qualified customers relying primarily on the Internet. E*Trade (us.etrade.com), which acquired Wit Capital and more recently HARRISdirect) does occasional electronic public offerings. It remains to be seen whether the Internet will b more widely used as a medium for conducting public offerings.

Harrisdirect (http://www.harrisdirect.com/) an online broker that among other things takes indications of interest on line as a distributor (i.e. member of the selling group) as appears as close to the Wit Capital format as any. The major investment banks for the most part are content to syndicate their underwritings in the traditional fashion, secure in their belief that the institutional investors who are the primary purchasers of public offerings can be and prefer to be reached through personal contact and via road shows. That does mean they don’t have information available on their website relating to IPOs. Goggle in effect was an electronic offering and force many investment banks to participate in an electronic offering although some are reputed to have dropped out because of that aspect of the offering (and, perhaps, the low commission). WR Hambrecht initiated what it refers to as the OpenIPO, a form of dutch option and was a co-manager of the Google offering (probably because of its know-how), but doesn’t have too many deals of late. Below we provide a walk-through of the Harrisdirect approach and also the IPO center of CreditSuisse First Boston.
Harrisdirect to the extent it participates as a member of the selling group provides an online approach to offering IPOs to its customers, adapting the procedures used byWit Capital. Of course, it may not get a large allocation, is dependent on the managing underwriter for participation, and it determines how it will allocate its participation to customers whereas Wit Capital did it in effect on a lottery basis. Hence, there is no assurance of participating in the IPO and/or the quality of the IPO as to which participations are available at Harrisdirect. CSFB makes available on its website a listing of its current offerings that can be accessed by anyone willing to register, and which includes the preliminary prospectus, but participation depends upon contacting an account representative. Use the bookmarks to follow IPO online information/procedures as appropriate.

Harrisdirect.

CreditSuisse First Boston (CSFB)

· Rule 134 Communications Expanded

Rule 134 communications previously were the exclusive written communication other than a subject to completion prospectus that could be used after the filing of a registration statement. Conceptually a Rule 134 communication does not constitute a prospectus as defined by § 2(a)(10);[1] hence, the delivery of such communication does not trigger the requirement of Section 5(b)(1) that only a Section 10 prospectus can be sent through the jurisdictional means after a registration statement is filed. See § § 10:14. Since the SOR regulations provide a route to using free writing after the registration statement has been filed (see § 5:13), why do we need Rule 134? A modified Rule 134 has been retained that in effect permits under limited circumstances the use of written communications after the registration statement has been filed without constituting a free writing prospectus and, hence, without the need of complying with the filing requirements, if applicable, and other conditions of Rule 433. See § 5:15. This means, among other things, it can be used by ineligible issuers who as discussed at § 5:13 are limited as to the extent they can use a free writing prospectus. The revised Rule 134 makes this clear at the outset by providing that a communication conforming with the Rule not only is not a prospectus for purposes of the Section 2(a)(10) definition of a prospectus, but is not a “free writing prospectus” as defined by Rule 405.

The revised Rule 134 as proposed required that the communication be used only after a registration statement has been filed that included a prospectus meeting the requirement of Section 10 “including a price range when required.” The prospectus included in a registration statement filed by a non-reporting issuer prior to pricing must include on the cover page an estimate of the offering price range before it can be circulated.[2] The proposed modification of Rule 134 in this respect received a number of unfavorable comments as it is now common practice of non-reporting companies going public to leave the offering price range on the cover of the prospectus blank (so-called pink prospectus) until they have received comments from the staff and the underwriter is ready to market the issue. This among other things would have precluded in the case of IPOs relying on Rule 134 for limited press releases relating to the forthcoming offering until the price range was included in a prospectus filed as part of the registration statement. The Commission responded by eliminating the price range if required by rule qualification to using a Rule 134 communication, except as to a limited number of categories of otherwise permitted information. The latter category includes price information, interest rates as to certain fixed income securities, security rating assigned or expected to be assigned by a nationally recognized rating organization.[3]

A Rule 134 communication has to include either the Rule 134(b) legend, which requires the name and address from whom a preliminary prospectus can be obtained or, if a Rule 134(c) tombstone is used, must state from whom and the URL where a preliminary prospectus can be obtained. Accordingly, to the extent such prospectus of a non-reporting issuer distributes a preliminary prospectus in response to the Rule 134(b) legend or Rule 134(c) tombstone, it has not complied with the provisions of Instruction 1 to Item 501(b)(3) of Regulation S-K, which has not been modified, and which precludes the circulation of such prospectus. We assume that to the extent that Rule 134 provides otherwise, it trumps such instruction. We also assume on the basis of the comments objecting to the provision in the rule as proposed, that the practice had been to ignore the instruction under the old Rule 134. If the other alternative of using a Rule 134(c) tombstone is followed, it is to be accompanied by a preliminary prospectus that in the case of a non-reporting company must include the offering price range on the cover page.

The limited information that can be included in a Rule 134 communication is expanded in the following respects:[4]

Expanded vita re the issuer (e.g., email address, phone number, contacts for investors).

Description of business still very limited, but can include segments in which the company conducts its business.

Information relating to underwriters now includes in addition to managing underwriters names of underwriters participating in the offering and their additional roles, if any, within the underwriting syndicate.

The approximate date proposed offering is expected to commence expanded significantly—can include anticipated schedule and “a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them).”

A description of the procedures by which the underwriters will conduct the offering and the procedures for completing transactions in connection with the offering with an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy). This formalizes and eliminates any question concerning procedures generally followed in connection with Internet public offerings. The Adopting Release makes it clear that such communication, however, cannot include written notices of allocations of securities, including those delivered electronically. These notices constitute written confirmation of sale and, thus, statutory prospectuses.”[5] As discussed at § 5:30, in connection with the delivery of a final prospectus, after the registration statement is effective notices of allocation subject to certain conditions are exempt from Section 5(1) by Rule 172.

Procedures regarding directed share plans and other participation in offerings by officers, directors, and employees of the issuer.

The names of securities exchanges or other securities markets where any class of the issuer’s securities are, or will be, listed; and the ticker symbol or proposed ticker symbol and CUSIP number.

Information disclosed in order to correct inaccuracies previously contained in a communication made pursuant to this section.

The following items can be included in a Rule 134 communication, but only if included in the prospectus filed as part of the registration statement:

A brief description of the use of proceeds.[6]

The type of underwriting.[7]

The name of selling security holders.[8]

The legend required by Rule 134(b) is modified to omit the communication is not an offer to sell in any state in which it would be unlawful caveat. The Rule 134(b) legend must include the name and address of the person from whom a Section 10 prospectus (other than a free writing prospectus) can be obtained. A Rule 134(c) communication does not have to include the Rule 134(b) legend under either of the following circumstances: (1) The communication does no more than identify the security, state the price, and by whom orders will be executed and state from whom and the Uniform Resource Locator (URL) where a prospectus meeting the requirements of Section 10 (other than a free writing prospectus) can be obtained. (2) Is accompanied or preceded by a prospectus meeting the requirements of Section 10 (other than a free writing prospectus) which includes a price range if required by rule at the time of the communication. The “price range if required by rule” would include in the case of a non-reporting company prior to pricing the filing of a registration statement that on the cover page of the prospectus includes the estimated offering price range rather than a so-called pink prospectus that leaves the offering price range blank.[9]

Rule 134(d) imposes additional requirements if the Rule 134 communication is used to solicit indications of interest or an offer to buy in that it requires that the communication be accompanied or preceded by a Section 10 prospectus (generally a Rule 430 prospectus used during the waiting period) other than a free writing prospectus and include a prescribed legend to the effect that no offer to buy can be accepted or part of the purchase price be received before the registration statement becomes effective. Rule 134(d) also requires that the prospectus include the offering price range “where required by rule” (e.g., Rule 430 prospectus of a non-reporting company) and that the legend re no offer to buy can be accepted etc. does not have to be included if sent to a dealer. Since in a conventional firm underwriting such communications are sent primarily to prospective members of the selling group, the legend would seldom be required, but a preliminary prospectus would have to accompany or precede the communication to the dealer. If, on the other hand, a written communication is sent to members or prospective members of the underwriting group, the communications do not have to comply with Rule 134 and are not dependent upon being a free writing prospectus as the Section 2(a)(3) definition of sale, offer to sell, or offer excludes “preliminary negotiations and agreements” between the issuer and any underwriter and “among underwriters who are or are to be in privity of contract with an issuer.”[10] This would not be applicable to prospective members of the selling group as they are not in privity of contract with the issuer and they are also excluded from the Section 2(a)(11)[11] definition of underwriter.

Rule 134(f) provides that the (c)(2) and (d) requirement that a preliminary prospectus preceded or accompany the Rule 134 communication “will be satisfied if such communication is an electronic communication containing an active hyperlink to such prospectus.” As noted at § 5:33, Rule 134 should facilitate registered offerings that are made primarily if not exclusively through the Internet. The Adopting Release cautions that a Rule 134 statement cannot contain a hyperlink or URL where information can be obtained beyond that allowed under Rule 134.[12]

[1] Rule 134, 17 C.F.R. § 230.134.

[2] Form S-1, Item 1 references Regulation S-K Item 501 as to the content of the cover page of the prospectus. Instruction 1 to Item 501(b)(3) provides that if a non-reporting company circulates a preliminary prospectus it must include “a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered.”

[3] Rule 134(a)(4), 17 C.F.R. § 230.134(a)(4).

[4] Rule 134(a), 17 C.F.R. § 230.134(a).

[5] Sec. Act Release No. 8591 (July 19, 2005), 2005 WL 1692642, at 36 n.188, also available at http://www.sec.gov/rules/final/33-8591.pdf. (“These notices [of allocation] will be a type of written confirmation of sale and, thus, prospectuses. The rules we are adopting regarding prospectus delivery reforms, as discussed later, will apply to these notices.”).

[6] Rule 134(a)(7), 17 C.F.R. § 230.134(a)(7).

[7] Rule 134(a)(9), 17 C.F.R. § 230.134(a)(9).

[8] Rule 134(a)(18), 17 C.F.R. § 230.134(a)(18).

[9] See Form S-1, Item 1 and Regulation S-K Item 501, Instruction 1 to Item 501(b)(3).

[10] 15 U.S.C.A. § 77b(a)(3).

[11] 15 U.S.C.A. § 77b(a)(11).

[12] Sec. Act Release No. 8591 (July 19, 2005), 2005 WL 1692642, at 37 n.197.

[1] See Sec. Act Release No. 7233 (Oct. 6, 1995) 1995 WL 588462.

[2] See Sec. Act Release No. 7289 (May 9, 1996), 1996 WL 242455.

[3] Sec. Act Release No. 7288 (May 9, 1996) 1996 WL 242455. The Release also sets forth appropriate circumstances under which transfer agents and investment advisers may deliver information electronically. The Release contains some additional examples of appropriate and inappropriate uses of electronic media.

[4] See Rule 433(b)(2)(i), Instruction 1, 17 C.F.R. § 230.433(b)(2)(i).

[6] Wit Capital Corp., SEC No-Action Letter (July 14, 1999), 1999 WL 498545, at *6 (“Wit Capital proposes to obtain from its customers affirmative reconfirmation of all conditional offers to buy on a pre-effective basis.”).