SECTION 2
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SECTION 3
Securities Act
Exchange Act
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'33 ACT Reg
'34 ACT Reg
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Title 6

Pricing and Rule 430A

On the culmination of the marketing effort, the issue is priced. Prior to pricing, the preliminary prospectus (Rule 430A prospectus after the registration statement becomes effective) leaves the pricing and related information blank. In the case of an initial public offering price, the preliminary prospectus must include on the cover page a bona fide estimate of a range of offering price and the maximum number of shares offered.[1] Such range is not fixed in stone and the issue may be priced outside of the range (whether higher or lower), if the circumstances warrant. Until the marketing effort is complete, however, the lead underwriter will not have a good handle on how the offering is being received by prospective investors, the number of shares (or other units) that are likely to be purchased at different price levels. The actual pricing is a matter of agreement between the issuer and the underwriters, who are typically represented by the lead or managing underwriter. The issuer typically is looking for the highest price that will permit the distribution of the number of shares being offered. The underwriters are looking for a price that assures that the offering will be oversubscribed and assures that there will be strength in the secondary market. In some instances (except in the case of real hot issue markets, not the rule), the demand may be so overwhelming that the price is set above the maximum range and/or the number of shares (or other units) are increased. In other situations, the demand for the offering may be lukewarm and the issue is priced near the lower part or below the range and the number of shares (or other units) may be decreased. Negotiations continue to the last moment until there is agreement. In some instances, the offering may be aborted at this point because the parties can’t agree on price, or the issuer is not willing to make the offering at the price the market is willing to pay, or the underwriter has concluded that the offering cannot be completed. For an interesting description of the pricing process see opinion of Judge Scheindlin in the Initial Public Offering litigation.

In the usual situation, on culmination of the marketing effort there is agreement on price and such agreement is reflected in commitments from the members of the underwriting group and formalized as part of the agreement among underwriters and the agreement between the issuer and the underwriters, with managing underwriter executing same on behalf of all members of the underwriting group, and the issuer. The underwriting agreement sets forth the number of shares the underwriting group has agreed to purchase, the price of the shares to be offered to the public, and the underwriters’ discount. Historically, pricing and execution of the underwriting agreements took place the evening before the registration statement became effective and decisions as to pricing and the number of shares being purchased by the under­writer depended upon the marketing situation as it existed at that time. This remains a common, but not exclusive, time and procedure for determining pricing. Prior to the adoption of Rule 430A in February of 1988, a pricing amendment, typically, was flown overnight for filing early the following morning and the staff processed it on a priority basis with the registration statement becoming effective early that morning. This was essential to permit the distribution to be completed within hours after effectiveness. The Commission in one simple, but brilliant, stroke eliminated the anxieties and frustrations associated with pricing amendments since the adoption of the Securities Act by the simple expedient of permitting the registration statement to become effective without the pricing information and allowing the pricing information[2] to be included in a Rule 424(b) prospectus filed after the effective date or under certain circumstances as a post-effective amendment.[3]

The only limitations on the reliance of Rule 430A to permit a registration statement to become effective without the pricing information are (1) the offering must be for cash; (2) it cannot be used in the case of securities offered pursuant to competitive bidding, and (3) registrant must comply with the undertaking required by item 512(j) of Regulation S‑K to the effect that the information included in a Rule 424(b) prospectus for the purpose of satisfying the requirements of Rule 430A shall be deemed to have been a part of the registration statement at the time it was declared effective. This appears to be redundant since Rule 430A(b) provides that the information omitted pursuant to Rule 430A(a) and included in a Rule 424(b) pro­spectus shall be deemed to be a part of the registration statement as of the time it was declared effective.

Rule 430A as amended changed the distribution process in several respects. First, it continues to be common to price the issue and complete the underwriting arrangements the evening before the registration statement becomes effective and to make the distribution on the effective date. In that event, the principal impact of Rule 430A is to eliminate the necessity for filing a pricing amendment. Rule 424(b) requires the filing with the Commission of each prospectus used after the effective date and serves a variety of purposes, one of which permits the Rule 424(b) prospectus including the pricing information to substitute for the pricing amendment..

Rule 430A also permits the marketing effort to continue after the effective date without actually making the distribution on the effective date or immediately thereafter. In some instances, the marketing effort for a variety of reasons may lag behind the staff review of the registration statement. If the issuer and the underwriter are comfortable that the prospectus included as Part I of the last amendment to the registration statement will not have to be changed materially, they may choose to allow the registration statement to become effective even though the marketing effort has not been completed and the issue has not been priced. Under these circumstances, the registration statement becomes effective under Rule 430A and the marketing effort continues with the Rule 430A prospectus serving as the preliminary prospectus (more accurately, at that point the preliminary prospectus becomes a Rule 430A subject to completion prospectus) until the issue is priced. A Rule 430A pre-pricing prospectus must be clearly marked on the cover page to indicate that it is subject to completion or amendment. The delivery of a prospectus omitting the Rule 430(a) information will not satisfy the Section 5(b)(1) requirement that a final prospectus be delivered prior to or with the confirmation.[4] Similarly, it will not satisfy the requirement that free writing (supplemental written material) does not constitute a prospectus if accompanied or preceded by a Section 10 prospectus.[5] It will, however, satisfy both requirements if it is supplemented with a term sheet as is now permitted by Rule 434. Once the issue is priced after the registration statement becomes effective, the Rule 430A prospectus as such cannot continue to be used and the pricing information must be filed as a Rule 424(b) prospectus or a post-effective amendment in order for the distribution to be made.

Once pricing has been determined, the distribution can take place and typically is completed within a matter of hours, although if at an untimely hour of the day it will be delayed until the following morning. For the indications of interest that have been accumulated by the participants to the distribution to be turned into contracts of sales certain additional considerations come into play after the SEC declares the registration statement effective. Rule 10b-10 adopted under the Exchange Act requires that each person who has offered to purchase the security and whose offer has been accepted must be sent a confirmation. Prior to SOR Section 5(b)(1) of the Securities Act requires the confirmation be preceded or accompanied by a final definitive prospectus (as distinguished from the preliminary prospectus) that includes the pricing information. As we discuss below, one of the most dramatic change of SOR is to eliminate the need, subject to certain conditions, for the confirmation to be accompanied by a final Section 10(a) prospectus.

We are not ready to get to the nitty-gritty of preparing a prospectus, but this may be a good time to look at a fine Rule 424B prospectus. SalesForce.Com (Use the Bookmark to go to the Rule 424(b) prospectus and the Prospectus Table of Contents to move around)   

Completing The Distribution and Delivering a Final Prospectus

The sequence of events following the effectiveness of the registration statement depends to some degree on when pricing occurs. If pricing occurs before (generally the evening before) the date the registration statement becomes effective, as always was the case before Rule 430A and continues to be the common situation after Rule 430A, as soon as the registration statement is effective the underwriter will notify members of the selling group and members of the underwriting group who have retained shares for sale and the distribution will take place within a matter of hours. The lead underwriter, acting on behalf of members of the underwriting group, will have available substantial offers to buy or indications of interest from broker-dealers throughout the country who are members of the selling group. The broker-dealers, in turn, through their salesman will have been in contact with prospective investors either as the result of oral (telephone) conversations, Rule 134 statements or the preliminary prospectus. To the extent the lead underwriter has received offers to buy from prospective members of the selling group, upon the registration statement becoming effective, the lead underwriter can finalize the transaction by sending a confirmation accompanied by a copy of the definitive prospectus.[6] Much of this fueled by roadshows and the distribution of free writing prospectuses. If the members of the underwriters group have received only indications of interest, as distinguished from offers to buy, the indications of interest can immediately be converted into a contract of sale through oral telephonic conversations, which are then formalized by the transmission of a confirmation and the the Rule 173 Notice. The members of the selling group employ similar means to contact interested investors among their clientele from whom they received indications of interest, and as soon as the registration statement is effective can turn them into an oral agreement to purchase through a telephone call followed by the mailing of a written confirmation and a Rule 173 Notice. In a typical firm commitment underwriting in which the offering has been “pre-sold” during the waiting period, as soon as the registration statement is declared effective all transactions are effected within a matter of hours in the manner described by contacting the investors from whom indications of interest were obtained during the waiting period and turning the indication of interest into an oral agreement to buy the security. The same or following day written confirmations accompanied will be sent by the selling dealers to their customers who orally agreed to purchase shares immediately after the registration statement became effective and confirmations will be exchanged between the lead underwriter and members of the selling group (and members of the underwriting group who retain shares for sale). The final prospectus in accordance with Rule 172 no longer has to be delivered with the confirmation provided if a Section 10(a) prospectus orthe Rule 424(b) prospectus with the pricing information is filed timely.  Under the assumptions made, since the Rule 424(b) prospectus is intended to satisfy the requirement that the Rule 430A omitted information be furnished by a Rule 424(b) prospectus, it must be filed with the Commission within two days after the earlier of the pricing decision or its first use after the effective date.[7] Since the pricing decision under our assumptions was made the day prior to the effective date, the Rule 424(b) prospectus with the pricing information would have to be filed on the first business day following the effective date. Filing electronically through EDGAR facilitates this process, and all registrants, including foreign governments and foreign private issuers, are now required to file electronically. Filing the 424(b) prospectus timely, however is critical since Rule 172(c)(3) conditions the fact the confirmation does not have to be accompanied or preceded by a prospectus that "a good faith and reasonable effort to file such a prospectus within the time required under Rule 424 (§230.424) and, in the event that the issuer fails to file timely such a prospectus, the issuer files the prospectus as soon as practicable thereafter.." The member of the underwriting or selling group responsible for the transaction also has an obligation to send the purchaser the Rule 173 Notice.

The other scenario is that marketing continues for a period of time after the effective date; preferably, and probably in most instances, a relatively short period of time. Until pricing, the prospectus without the pricing information (a Rule 430A subject to completion prospectus) can be used in the same manner as a preliminary prospectus before the effective date and must include a similar subject to completion legend. The manner in which indications of interest and offers are solicited is subject to substantially the same restrictions as during the waiting period. Although “free writing” can be used after the effective date, it can be used only if accompanied or preceded by a copy of the final prospectus and at this point there is no final prospectus. A Rule 430A prospectus without more is not a final prospectus and there can be no final prospectus until there is pricing and the pricing information has become part of the registration statement. Once there has been agreement on pricing, a prospectus including the pricing information is filed pursuant to Rule 424(b). The Rule 424(b) prospectus with the pricing information must be filed no later than the second business day following pricing or the first use of such prospectus after the effective date.[8] The procedure after pricing would not differ significantly from that followed if pricing were determined prior to the effective date. Once agreement on pricing has been reached and the underwriting and related agreements executed, the distribution will commence and ordinarily will be completed within a few hours and followed with confirmations and a Rule 173 Notice on the same or following day.

Rule 172 is not available (hence, a final prospectus must be delivered) with respect to an investment company registered under the investment company act, a business development company, a business combination transaction, or registration on Form S-8.

Although not our focus, a third scenario is a best-efforts underwriting with respect to which the real selling effort does not begin until the registration statement is priced and effective, and may extend over a significant period of time. Since there is an effective registration statement, "free writing" is now permitted (subject to the anti-fraud provisions of the securities acts) provided it is accompanied or preceded by a copy of the final definitive prospectus. This follows from the Section 2(a)(10) definition of a prospectus to the effect that "a communication sent or given after the effective date of the registration statement" shall not be deemed a prospectus precluded by Section 5(b)(1) if accompanied or preceded by a prospectus meeting the requirements of Section 10(a) (a definitive prospectus).[ed. Only a lawyer is expected to understand that under Section 2(a)(10) a prospectus constitutes virtually any communication, but for purposes of Section 5(b)(1) every Section 2(a)(10) prospectus is not a Section 10 prospectus and unless it is that it is unlawful to use it after a registration statement has been filed, but once the registration statement is effective every Section 2(a)(10) prospectus is no longer a prospectus provided it is accompanied or preceded by a Section 10(a) prospectus (the final prospectus); hence it is not unlawful under Section 5(b)(1) after the registration statement is effective to use any section 2(10) prospectus if it is accompanied or preceded by a definitive prospectus because under section 2(10) the other communication is no longer a prospectus.] Selling material accordingly can be used under such circumstances in connectio172n with a best-efforts underwriting after a registration statement is effective. It could also be used in connection with a firm underwriting if the pre-effective selling efforts fell short, provided accompanied or preceded by the final definitive prospectus. Rule 405 excludes it from the definition of a free writing prospectus, and the statute excludes it from the definition of a prospectus. The Adopting Release specifically referring to “sales literature used after effectiveness [accompanied or preceded by a final prospectus] will continue to be permitted without having to satisfy the requirements of any safe harbor or other rule permitting its use or Rule 433.” See Sec. Act Release No. 8591 (July 19, 2005), 2005 WL 1692642, at *39 n.206, also available at http://www.sec.gov/rules/final/33-8591.pdf.

Rule 10b-10 requires that confirmations be sent to each of the purchasers, and the confirmation constitutes a prospectus under the Section 2(10) definition of a prospectus unless accompanied or preceded by a definitive prospectus.. Accordingly, to avoid a violation of Section 5(b)(1),[9] prior to SOR the confirmation could be sent only if accompanied or preceded by a copy of the definitive prospectus, which includes the pricing information.  A preliminary prospectus will not satisfy this requirement as Rule 430 specifically provides that a preliminary prospectus "shall be deemed to meet the requirements of section 10 of the Act for the purpose of section 5(b)(1) thereof prior to the effective date of the registration statement." Emphasis added. This always posed a problem in terms of making the final printed prospectus available for national distribution on the effective date or the day following the effective date if, as is not unusual, the confirmations are sent on the day following the transaction date. To facilitate this process and in the hope of reducing the costs, the Commission in June of 1995 adopted new Rule 434 to facilitate the distribution of a final prospectus with the confirmation by allowing (1) pricing related information to be included in a discrete up-front section of the prospectus (permitting the balance of the prospectus to be printed before the pricing information is available) or (2) alternatively allowing a term sheet together with a previously delivered preliminary prospectus or Rule 430A prospectus to serve as the final prospectus. A registrant offering securities registered on Form S-1 could satisfy its prospectus delivery requirements in a firm-commitment offering for cash and certain other offerings by delivering a “prospectus subject to completion” and a “term sheet” prior to or with the confir­ma­tion,[11] provided, inter alia, that such prospectus and term sheet, together, “are not materially different from the prospectus in the registration statement at the time of its effectiveness or an effective post-effective amendment thereto (including, in both instances, information deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A(b)). . . .”[12] The Commission  as part of SOR abolished Rule 434, which was not being used, but more important as noted above in view of Rule 172 it is not needed.  A Rule 173 Notice must be sent, and a final prospectus must be delivered if requested. The Adopting Release, however, states if requested a “final prospectus does not have to be provided before settlement.” See Sec. Act Release No. 8591 (July 19, 2005), 2005 WL 1692642, at *10 n.394.

Delivering a prospectus in the aftermarket

In connection with a registered offering by a reporting company, the prospectus must be delivered only in connection with those transactions involving the initial distribution and once the distribution is completed there is no obligation to deliver a prospectus in connection with trading transactions.[19] In connection with a registered offering by a non-reporting company (an IPO), a prospectus had to be delivered by all dealers (including those who did not participate in the offering) in connection with trading transactions for a specified period of time from the effective date of the registration statement (or from the first date the securities are bona fide offered to the public, if later), the length of which depends on the category in which the offering falls as described below:[20]

1.  For 25 days if at the time of the offering the security is listed on a national securities exchange or quoted on Nasdaq.[21]

2.  For other securities, 90 days if a first registered offering; 40 days if the company has previously registered an offering under the Securities Act.

 Under the amendment of Rule 174, SOR also eliminates the need to deliver a final prospectus with the confirmation in connection with such aftermarket purchases. The dealer must send the Rule 173 Notice and if requested a final prospectus.