Chapter 1

The Commission on July 19, 2005^{^[1]} adopted the Securities Offering Reform (SOR) rules and regulations, which were proposed on November 3, 2004.^{^[2]} As of December 1, 2005,^{^[3]} a new regimen governs the public offering of securities. The rules and regulations as the title suggests involve pervasive reform of the public offering process as it impacts, among other areas, communications while “in registration”; conducting road shows (including electronic road shows), and the delivery of a prospectus. The path to SOR extends over 72 years during which our means of communicating information moved from the written and radio to, among others, television, the fax, CDs, DVDs, the Internet, email, webcasting, and teleconferencing. SOR not only takes into account the changes in technology, but the lack of logic in permitting unlimited oral communications after the filing of the registration statement and at the same time severely restricting written communications other than the preliminary prospectus.

There are few Acts drafted by Congress with the thought and care of the Securities Act that in a relatively few concise sections established the basic framework that has governed the offering of securities, private and public, since 1933. That framework contemplated as to a public offering of securities that the securities would be registered with the Securities and Exchange Commission^{^[4]} by the filing of a registration statement that would include a prospectus, that there would be a minimum of 20 days for the Commission to review the registration statement and determine whether to allow the registration statement to become effective and for the public offering to commence, and that the sole writing that could be used in connection with the offering would be the statutory prospectus. The Commission had to improvise to allow some means for the underwriters to put together the customary underwriting syndicate during the waiting period and informally gave birth to the red herring or preliminary prospectus.^{^[5]} The Act as enacted also required the prospectus to be delivered by dealers in the secondary market for 12 months following the date on which first bona fide offered, envisioning it as a means of keeping the trading market informed.^{^[6]}

In 1954 the Act was amended to codify the practice of using a preliminary prospectus during the waiting period, but precluding the use of any communication (written or oral) before the filing of the registration statement that might be deemed an offer to sell or solicitation of an offer to buy the securities. This was done primarily by dividing the Section 2(a)(3) definition of sale of a security into two parts, one to cover an offer to sell or solicitation of an offer to buy and the other to cover the sale or contract to sell a security. A new Section 5(c) was added that precluded an offer of sale or solicitation of offer to buy before the filing of a registration statement.^{^[7]} The Commission subsequently adopted Rule 135 allowing a very limited announcement of a forthcoming public offering before the filing of a registration statement.^{^[8]} Section 5(b) was amended so as to permit after the filing of a registration statement not only oral communications but to authorize the Commission to define by rule a limited tombstone type communication that would not constitute a prospectus as defined by Section 2(a)(10) and also prescribe by rule a Section 10 preliminary prospectus that omitted information necessary to constitute a final prospectus that could be used after a registration statement was filed and before it became effective.^{^[9]} The Commission adopted Rule 134^{^[10]} authorizing limited communications subject to a number of conditions and Rule 430^{^[11]} providing for a preliminary prospectus that could be delivered after the filing of a registration statement. No other written communication was allowed prior to the effective date except for a seldom used Rule 431 summary prospectus.^{^[12]}

After the registration statement is filed, an initial public offering proceeds in two related fronts—one involving the marketing of the issue by the lead underwriter and the other involving the give and take of the SEC review process with the staff directing a comment letter(s) to the issuer to which the issuer responds by filing a pre-effective amendment(s). When all goes according to plan, the marketing results in indications of interest and conditional offers to buy on a scale that convinces the underwriting syndicate that a distribution can be completed, and about the same time the Commission’s staff advises that it will have no further comments and the effective date will be accelerated in accordance with the request for acceleration. Up to this point, in the case of an IPO, the issue has been marketed with the required estimated range of offering price. Now the issuer and lead underwriter have to agree on pricing the issue. Prior to the adoption of Rule 430A in 1987, this resulted once the pricing decision had been made in preparing in haste a pre-effective amendment with the offering price related information as well as the commitment of each of the members of the underwriting syndicate and managing in some manner (red eye special or otherwise) to file the pre-effective pricing amendment with the Commission early the following morning in order to have the registration statement declared effective by the Commission. As soon as declared effective, the distribution commenced and would be completed in a matter of hours if all went well. In May of 1987, the Commission adopted Regulation 430A, which eliminated the need to file a pre-effective amendment that included the offering price related information by allowing a registration statement to go effective without the offering price related information, permitting it to be included in a Rule 424(b)(1) prospectus supplement or in a post-effective amendment.^{^[13]}

The Exchange Act of 1934 is multi-faceted; one facet of which is Section 12(b) that requires companies in order to list a class of securities on a national securities to register that class of securities with the SEC, which, among other things, subjects the company to the Section 13(a) reporting requirements of that Act as well as the Section 14 proxy rules.^{^[14]} Section 15(d) of the Exchange Act imposes on companies that register an offering of securities under the Securities Act to file with the Commission such reports as the Commission by rule deems necessary and appropriate.^{^[15]} The annual, quarterly, and current reports required by the rules adopted pursuant to Sections 13(a) and Section 15(d) are identical, but a Section 15(d) reporting company is not subject to the proxy rules and other aspects of the ’34 Act regulatory scheme.^{^[16]} In 1964, Congress amended the Exchange Act by adding a Section 12(g), which with the rules adopted by the Commission requires all companies with a class of equity securities held of record by 500 or more security holders and more than $10 million in total assets to register that class of securities underhe Exchange Act. Such registration subjects such companies to the same Section 13(a) reporting obligations as a listed company, to the proxy rules, and other provisions of the Exchange Act to which listed companies are subject.

The continuous reporting provisions of the Exchange Act and the fact that substantially all public companies are subject to Exchange Act registration made the requirement of the Securities Act that a prospectus be delivered by dealers in the secondary market for 12 months a matter of overkill. Section 4(3) of the Securities Act that required such delivery was amended in 1964 to change the period in which dealers had to deliver a prospectus to either 90 days for first-time registrants and 40 days for other issuers. It also authorized the Commission to modify this provision by Rule and the Commission adopted Rule 174, which eliminated the requirement for reporting company and reduced the period to 25 days for companies that are non-reporting companies at the time the registration statement is filed if the securities are listed on a national securities exchange or the Nasdaq stock market before trading is commenced.^{^[17]}

For many years the focus was on the detailed disclosure typically required in the Securities Act registration statement. In 1966 Milton Cohen in a law review article ^{^[18]} suggested that primary emphasis be placed on the continuous disclosure system of the Securities Exchange Act with less emphasis on the spasmodic and fortuitous disclosure resulting from the registration of securities publicly offered under the Securities Act. The Commission eventually listened; strengthening the information required in ’34 Act reports and in 1982 adopted the integrated disclosure system. Under the integrated disclosure system description of the content of disclosure that is common to ’34 Act reports and ’33 Act registration statements as well as that peculiar to proxy statements are included in Regulation S-K.^{^[19]} The reports under the ’34 Act and registration statements under the Securities Act specify the disclosure to be included in the report/registration statement by referring to the relevant Regulation S-K item. The integrated disclosure system included the adoption of Form S-3 allowing issuers meeting specified criteria to furnish significant parts of a ’33 Act registration statement by reference to information included in the company’s ’34 Act reports.

The road to integration extended over a period of time^{^[20]} and involved revisions to rules and regulations and adoption of several new rules and forms finalized in a 1982 Release announcing “the adoption of a comprehensive revision to the rules and forms governing the registration of securities under the Securities Act of 1933.”^{^[21]} The new rules included “a temporary rule (Rule 415) governing the shelf registration of securities.” Rule 415, which subsequently with some modifications was made permanent, provided for the registration of “an offering to be made on a continuous or delayed basis in the future.” Rule 415(a)(1)(x) provided for the registration on a delayed basis of a primary offering made on Form S-3, permitting issuers that are eligible to use Form S-3 for a primary offering to file a registration statement including at the effective date what came to be described as a base prospectus. A delayed shelf permitted the registrant at some future date after the registration statement was effective to negotiate an underwriting arrangement covering a particular takedown of the securities from the shelf. In 1992, this was broadened to include a so-called unallocated shelf, permitting the registration statement at the effective date to cover several different types of securities and allowing the specific security or securities taken down from the shelf to be determined at a future date.^{^[22]} The March 1982 Release also included revisions to Regulation S-K Item 512(a) undertakings setting forth the circumstances under which the registrant agreed to file post-effective amendments to reflect changes in the prospectus prior to the termination of the delayed or continuous offering. Regulation S-K Item 512(a) undertakings and the staff’s informal interpretations of the undertakings have determined for a number of years whether post-effective developments had to be filed as a post-effective amendment or at the election of the registrant could be filed as a Rule 424(b) prospectus supplement. A distinction of considerable significance as a Rule 424(b) supplement although filed can be used immediately without staff review, whereas a post-effective amendment absent a provision to the contrary is subject to staff review and cannot be used until the Commission declares the post-effective amendment effective.

Proposals to reform the legal framework embodied in the Securities Act of 1933 of the public offering of securities go all the way back to the proposed Federal Securities Code drafted by a committee headed by the late Professor Louis Loss under the auspices of the American Law Institute (ALI) and officially endorsed by the ALI on May 19, 1978.^{^[23]} The SEC after extensive negotiations with Professor Loss and the drafting committee and acceptance of a number of revisions proposed by the SEC staff joined in recommending the revised Code to Congress,^{^[24]} but never pressed for its adoption. The Code covered all five securities laws, but an integral aspect was the reform of the regulatory framework governing the offering of securities. The Code if adopted would have provided for the registration of issuers rather than securities (see § 1:14), but a registered company offering securities publicly would have to have filed an offering statement and used a prospectus (see § 1:15). We bypass other efforts and fast forward to November 3, 1998 when the Commission proposed a reform so broad in scope that it was referred to as the “aircraft carrier proposal.”^{^[25]} The Securities Act reform proposal, although but one aspect of the aircraft carrier proposal, would have dramatically reformed the registration of securities process, introducing a whole new set of registration forms and incidentally liberalizing communications while in registration.^{^[26]} The mission, however, was not accomplished when the securities industry and bar association groups found more they disliked about the proposal than they liked, and the proposal went into dry dock for repairs.^{^[27]} One part they did like was the liberalization of communications in connection with business combinations and tender offers and a modified version of that aspect of the proposal was adopted in October of 1999.^{^[28]} The Commission in that Release noted “[a]t this time we are not adopting the Securities Act Reform proposals that are unrelated to business combination transactions. We are continuing to evaluate commenters’ responses to the Securities Act Reform proposals and in the future we may take action on these proposals.”^{^[29]} In April of 2000, the Commission attempted to put some new gloss on old guidance relating to communications while in registration in Interpretative Release III on Use of the Electronic Media.^{^[30]} The Commission noted in that Release it was “considering separately the liberalization of communications by issuers [while in registration] and other market participants.” A footnote to this statement added: “We also are considering separately the use of road shows in the capital-raising context.”^{^[31]} On November 3, 2004, the Commission published the Securities Offering Reform Proposal,^{^[32]} which in most respects was the promised Securities Act Reform Proposal, although it included some modest Exchange Act related provisions. On July 19, 2005, the Commission adopted the final SOR Rules, effective on December 1, 2005. The final rules make a number of significant modifications in the rules as proposed. The changes from the proposal run the gamut of major changes such as those relating to electronic road shows; those that apparently are intended to eliminate redundancies, and those that can be found only in the detail, but which, nonetheless, are important to securities practitioners. We focus on the final rules as they impact the public offering process going forward, noting only the rules as proposed that are significantly changed and those as to which a change in a rule as proposed may raise interpretative issues.

§ 1:2

§ 1:2 Overview of liberalization of communications while in registration

SOR bears many similarities to the aircraft carrier proposal and in many respects is as pervasive as that proposal with respect to the reform of securities offerings, but within the framework of the existing registration forms and for apparent reasons does not cover areas of the aircraft carrier proposal that were implemented such as communications relating to business combinations. A principal stimulus for reform as has been recognized for years is the need to liberalize communications while an issuer is “in registration.” In the process of doing so, SOR classifies issuers into four categories for several purposes and has a generic category, ineligible issuer (see § 1:4), that cuts across all four. The four categories are non-reporting companies, unseasoned issuers, seasoned issuers, and well-known seasoned issuers. See § 1:3. Although the Adopting Release alludes to the four categories, only the well-known seasoned issuer is a defined term. The principal consequence of being an ineligible issuer is that such issuers are precluded from using a free writing prospectus except for a very limited free writing prospectus, but there are other consequences as well. On classification of issuers, see § 1:3, and with respect to ineligible issuers, see § 1:4.

The approach to liberalizing communications while in registration is a multi-faceted one, but the centerpiece is the Rule 433 free writing prospectus. Subject to a number of conditions, Rule 433 permits all but ineligible issuers to use written communications (including press releases and interviews with the media) unrestricted as to content (subject to the anti-fraud provisions and exposure to Section 12(a)(2) liability if false or misleading) after the filing of a registration statement. See § 1:10. Graphic communications, broadly defined to include the Internet and other electronic media, are encompassed within the definition of written communication, subjecting, among other things, communications on the Internet to the strictures on the use of free writing prospectuses. See § 1:9. Conventional road shows are liberalized in some respects, although generally are not tinkered with (see § 1:16), since they long have been recognized as involving oral communications. Internet road shows are facilitated in many respects and do not have to be filed as a free writing prospectus if one bona fide version is made available to everyone seeking access. See § 1:17. Of greater significance, if an electronic roadshow is presented live to a live audience (e.g., a webcast or teleconference), it is deemed an oral communication and essentially treated as an in person roadshow. Historical archived information kept separate and apart on a website would not be deemed an offer of securities. See § 1:14. Rule 163A subject to limited conditions in effect deems an issuer not “in registration” with respect to communications that occur 30 or more days out from the filing of the registration statements. See § 1:6. Rule 168 allows a reporting company, including an unseasoned reporting issuer, to continue to distribute before and after the filing of a registration statement factual business information and forward-looking information that it regularly released in the ordinary course of business. See § 1:7. Rule 169 permits a non-reporting issuer to continue to distribute before and after the filing of a registration statement factual business information (but not forward-looking information) that it regularly released in the ordinary course of business, but subject to some important restrictions. See § 1:8. Rule 163 permits a well-known seasoned issuer before the filing of a registration statement unrestricted ability to communicate with the public (subject to anti-fraud provisions and Section 12(a)(2) exposure), provided written communications that might be deemed an offer of securities are filed with the Commission at the time of filing of the registration statement. See § 1:5. All of the above involve new rules. Rule 134, which is the principal written communication that previously could be used after the filing of a registration statement,^{^[33]} is amended to expand in certain but limited respects the information that can be included. See § 1:9. Rules 139, 138, and 137 relating to the distribution of research reports by participants and non-participants in a distribution are also to be liberalized in certain respects. See §§ 1:20-1:22.

SOR as it relates to liberalizing communications while an issuer is “in registration” builds on the existing conceptual scheme of things, redefining in particular contexts Securities Act terms like the Section 2(a)(10) definition of “prospectus” and the Section 2(a)(3) definition of “offer to sell,” and providing exemptions (e.g., from Section 5(c)) when and to the extent necessary to accomplish the liberalization objectives. The Proposing Release included a table that tied together the manner in which the proposed rules conceptually liberalized communications within the Section 5 framework while an issuer is in registration. The table was modified in some limited respects in the Adopting Release. Because it is helpful in understanding the conceptual basis and underlying implications of a number of SOR rules, we have extracted the table from the Adopting Release and reproduce it below:^{^[34]}

	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)?		Comments of the author
Regularly Released Factual Business Information	Yes	No [R. 168 for reporting companies; R. 169 for non-reporting companies. See conditions]	Rule defines it as not an offer for Section 5(c) purposes	Section 5(b)(1) relates only to “prospectuses”—it is not applicable		Available to ineligible issuers; not a prospectus
Regularly Released Forward-Looking Information	Yes	No [R. 168 for reporting companies. See conditions]	Rule defines it as not an offer for Section 5(c) purposes	Section 5(b)(1) relates only to “prospectuses”—it is not applicable		Is NOT available to a non-reporting issuer. Is available to a reporting ineligible issuer.
Communications Made More Than 30 Days Before Filing of Registration Statement	Yes	Possibly, based on facts and circumstances [Rule 163A. See condition re reasonable steps to keep it from being used within 30 days of filing]	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		Not a free writing prospectus and no filing requirement. NOT available if company is or was during past 3 years a shell company, blank check company, or made penny stock offering
Well-Known Seasoned Issuers—Oral Offers Made Within 30 Days of Filing of Registration Statement [any time before filing)]	Yes [Rule 163]	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		Rule 163 covers both written and oral offers. Written offers as noted below have to be filed, but oral offers do not. N0T available for ineligible issuers
Well-Known Seasoned Issuers—Written Offers Made Within 30 Days of Filing of Registration Statement [any time before filing)]	Yes	Yes. It also, would be a free writing prospectus [Legend required]	Is exempted from prohibition of Section 5(c) [Rule 163]		Section 5(b)(1) does not apply in the pre-filing period—it is not applicable	If a written offer is a free writing prospectus. Must be filed when file registration statement. Is not part of the registration statement.
Well-Known Seasoned Issuers—Free Writing Prospectuses Used Before Filing 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	Not available for ineligible issuers. Filed when file registration statement]
Identifying Statements in Accordance with Rule 134	Yes	No [Rule 134; is existing R. 134 with some changes]	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	Available to ineligible issuers. If solicit indication of interest must be preceded or accompanied by a preliminary prospectus including offering price range in case of a non-reporting company
All Eligible Issuers—Free Writing Prospectuses Used After Filing of Registration Statement	Yes	Yes	Section 5(c) would not be applicable, as it does not apply in the post-filing period		Section 5(b)(1) will be satisfied, as the free writing prospectus will be a permitted Section 10(b) prospectus [R. 433]	Not available to ineligible issuers. Non-reporting and unseasoned reporting issuers must be accompanied or preceded by preliminary prospectus. Filing/legend requirements.

The role of a preliminary prospectus will not diminish significantly in connection with an offering by a non-reporting issuer and an unseasoned reporting issuer since a free writing prospectus has to be accompanied by the latest version of the preliminary prospectus if not previously sent in such offerings. See § 1:11. In the case of a seasoned or well-seasoned issuer, however, a free writing prospectus does not have to be accompanied or preceded by a preliminary prospectus. See § 1:11. Rule 15c2-8 will require that a preliminary prospectus be available to investors who request a copy and available to dealers and their brokers participating in the offering. See § 1:18. In addition, a free writing prospectus must include a legend advising of the availability of the preliminary prospectus on EDGAR with a link to EDGAR and also the availability of a copy by calling a toll-free telephone number. See § 1:11. Delivery of the final prospectus with respect to all registered offerings is likely to be limited under the access equals delivery approach. A confirmation will not have to be accompanied or preceded by a copy of the final prospectus. Rather, those who are allocated and purchase the shares in a registered offering will receive a notice of their right to request a copy of the prospectus. Similarly, to the extent Rule 174 requires dealers to deliver a copy of the prospectus in the aftermarket trading, a notice of the right to request the prospectus constitutes delivery (provided, of course, that it is delivered if requested). See § 1:19.

We shall see that SOR in terms of the registration process places considerable focus on a delayed primary shelf offering including an unallocated shelf and in the process for the most part codifies the existing practice. See § 1:39. The really innovative aspect of SOR, however, is Automatic Shelf Registration (ASR) that is limited to well-known seasoned issuers (see § 1:3) and probably comes as close to company registration as is possible given the statutory framework. See § 1:40. A well-known seasoned issuer can file an unallocated shelf on Form S-3 without indicating the aggregate offering price covering prospective offerings by the issuer and/or unnamed selling security holders that becomes effective on filing. The registrant if it chooses can pay no registration fee on filing the initial registration statement and pay the fee on a pay-as-you-go basis as it takes down shares from the shelf. The registration statement in addition to omitting the information that can be omitted in a delayed unallocated shelf by a seasoned issuer can omit all information relating to distribution terms, description of the securities to be offered, and the name of selling security holders and the securities to be offered by them. When there is a takedown, the registrant can pay the registration fee on a pay-as-you-go basis and complete the prospectus by filing a post-effective amendment that will become effective on filing with the appropriate information relating to the distribution terms, description of the specific security, offering price and offering price related information, name of selling security holders if there are any and any other material information necessary and not incorporated by reference from periodic reports and current reports under the Exchange Act. In the latter regard, SOR also amends the Form 10-K to require disclosure of risk factors and to require quarterly reports on subsequent Form 10-Q any change in risk factors not disclosed in the Form 10-K. See § 1:35. As a result, the registration statement when it went effective will already have incorporated the risk factors disclosed in the last Form 10-K and after the effective date will continue to incorporate risk factor disclosures set forth in the Form 10-Qs. Alternatively, under the amendments to the Regulation S-K, Item 512(a)(1) undertaking all of the above could be provided by a Rule 424(b) prospectus supplement rather than a post-effective amendment and that may be the choice to avoid the need to obtain signatures on the post-effective amendment. See § 1:40.

A seasoned issuer (i.e., an issuer that in accordance with General Instruction I.B.1.) can use Form S-3 for a primary offering (see § 1:3), and is also eligible under Rule 415(a)(1)(x) to file a delayed shelf offering including an unallocated shelf. Although there are some significant differences, such issuers can come close but in a less elegant manner to what we have generically described as company registration. Since the public float requirement is only $75 million in contrast to the $700 million in public float required to be a well-known seasoned issuer, what SOR has to offer to such issuers is likely to have a greater impact. SOR in many respects in this area codifies existing practice based on not easy to find informal staff guidance and in some respects goes beyond that guidance. See § 1:39. The key to what is provided in that regard is to be found in a new Rule 430B, which incorporates the concept of a base prospectus that can omit when the registration statement is declared effective; what we refer to as unavailable information although Rule 430B falls short in providing a better description. Rule 430B is complemented by the Rule 512(a)(1) undertakings, which are amended in certain critical respects. The Regulation S-K, Item 512(a)(1) undertakings are required of all shelf-registrations and how they are interpreted and applied plays a significant role.

The Item 512(a)(1) undertaking requires the filing of a post effective amendment—(1) to bring the prospectus within the aging limitations of Section 10(a)(3); (2) to reflect “any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement,” and (3) to reflect any material change in the plan of distribution.^{^[35]} Item 512(a)(1) includes a proviso to the effect that registrants eligible to use Form S-3 or F-3 (a prerequisite for an unallocated shelf) do not have to file a post-effective amendment to meet the Section 10(a) requirement if the company’s periodic reports filed under Sections 13 or 15(d) and incorporated by reference include the information required to update the prospectus. Similarly, a “fundamental change in information” does not have to be included in a post-effective amendment if incorporated by reference in such a periodic report. The proviso is amended in two important respects. Previously it only could incorporate by reference periodic reports (Form 10-K and Form 10-Q) that can satisfy the undertaking in lieu of a post-effective amendment, which excluded current reports on Form 8-K. The amended proviso in this context references reports filed pursuant to Section 13, which includes reports filed on Form 8-K as well as Form 10-K and Form 10-Q, and such incorporation by reference can be utilized in lieu of a post-effective amendment to reflect material changes in the distribution terms as well. Alternatively, the information called for by the three undertakings can be “contained in a prospectus supplement filed pursuant to Rule 424(b).” See § 1:37. The past practice has been to provide much of the information called for by the undertakings in a prospectus supplement under the guise that the information changed was not fundamental and that changes in the distribution terms were not material. The amended proviso makes it clear that a prospectus supplement can be used in lieu of a post-effective amendment without regard to whether the information other than as to distribution terms is fundamental and without regard as to distribution terms whether the information is material. Unlike automatic shelf registration, post-effective amendments are not effective on filing and for this reason if none other a prospectus supplement is a much preferred alternative.

The delayed unallocated shelf filed by a seasoned issuer on Form S-3 will in many respect be similar to that described above relating to an ASR except it will include an aggregate maximum offering price for all the securities to be offered on which the registration fee will be paid, it will be for an offering by the issuer, it will include the outlines of an underwriting arrangement that might be entered into, a description of each type of security that might be offered, which, except as to common stock, will be a generic one, risk factors to the extent not incorporated by reference from the last Form 10-K and subsequently filed 10-Qs and the other standard registration items to the extent known. The registration statement will go effective (but not on filing) omitting the information allowed by Rule 430B. The omitted information relating to the specific security being taken down, the actual distribution terms and underwriting arrangement, and the offering price related information to the extent not incorporated by reference from reports filed under the Exchange Act will be furnished by a Rule 424(b) prospectus as specifically allowed by the amended proviso to the Regulation S-K, Item 512(a)(1) undertakings. See § 1:39. The prospectus supplement filed to cover a takedown will be filed pursuant to Rule 424(b)(2), which is being expanded in scope, or Rule 424(b)(5), and will become part of the registration statement at the earlier of first use or date of first contract of sale, which determines the effective date of the supplement for Section 11 liability purposes but only as to the issuer and underwriter. See § 1:44. Other prospectus supplements are to be filed as Rule 424(b)(3) prospectus supplements if they do not relate to a takedown. See § 1:44.

SOR attempts to assure that each prospectus supplement becomes part of the registration statement and for some purposes establishes a new effective date for Section 11 purposes, but primarily as to the issuer and the underwriter. See § 1:44. Section 11 may be the lesser aspect of the liability picture. The introduction of an array of communications heretofore not allowed in connection with registered offering necessarily places the spotlight on the Section 12(a)(2) private actions for false or misleading statements made in connection with a public offering of securities by an issuer and to a Section 17(a) enforcement action by the Commission. The Commission in this context has adopted interpretative rules determining when an issuer is a seller for purposes of Section 12(a)(2) that break new ground. SOR also attempts to distinguish between the available information that may be taken into account for purposes of Section 11 liability and for Section 12(a)(2) purposes. See § 1:44 and § 1:31 respectively.

The Division of Corporation Finance staff anticipating questions that may arise in transitioning on and after December 1, 2005 to SOR has issued a Question and Answer release covering transition issues. Although such issues will disappear over time, they will remain relevant for a significant period of time beyond December 1. We have included the “Transition Questions and Answers” as Appendix A to this Chapter.

§ 1:4

§ 1:4 Ineligible issuers

The concept of ineligible issuers as defined by Rule 405 ^{^[44]} cuts across all of the above classifications and is a very long one, although it was revised in some significant respects in the final rule. Securities practitioners should maintain a checklist of such conduct to consult in areas in which eligibility is a prerequisite as it is, for example, as discussed below with respect to Rule 433 and the unlimited use of a free writing prospectus. See § 1:11. The list as might be expected includes issuers that during the last three years were shell companies, blank check companies, offered penny stock, were convicted of a felony or misdemeanors relating to the sale of securities, and other specific crimes. Other grounds that result in classification as an ineligible issuer and of particular significance include as ineligible issuers any issuer that during the past three years “was made the subject of any judicial or administrative decree or order arising out of a governmental action that” resulted in a determination that the issuer violated the anti-fraud provisions of the federal securities laws, or was enjoined from or ordered to cease and desist from a violation of the federal securities laws. This is likely to cast a cloud over settlement negotiations with the SEC arising as they generally do when the Commission’s staff proposes to take enforcement action. Responding to concerns, unlike the other provisions that make an issuer ineligible, this provision is applicable only to a settlement of such actions that occurred after the effective date of the SOR rules and regulations.^{^[45]} One type of ineligible issuer that will not be readily identified by a checklist is a reporting issuer that has not filed “all reports and other materials” required by Sections 13 or 15(d) of the Exchange Act during the preceding 12 months.^{^[46]} The final rule deleted from this provision the language “including any certifications required by any reports.” We assume, however, that it was deleted because it is redundant as such certification is part of the pertinent report and is included within “other materials” if the certification is not deemed part of the report. Under this provision it is not merely a failure to file, but the failure to file all required material. This will require attorneys involved in the process to do a significant amount of due diligence as to Form 8-K filings in particular. The final rules include a significant exclusion from this provision for the failure to file Form 8-K reports “required solely pursuant to an item specified in General Instruction I.A.3(b) of Form S-3.” Such exclusion covers the following Form 8-K items: Item 1.01 [Entry into a Material Definitive Agreement]; 1.02 [Termination of a Material Definitive Agreement]; 2.03 [Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant]; 2.04 [Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement; 2.05 [Costs Associated with Exit or Disposal Activities]; 2.06 [Material Impairments]; 4.02(a) [Company’s registered independent public accountant resigns or declines to stand for reappointment], 6.01 [Asset Backed Securities-ABS Informational and Computational Material]; 6.03 [Asset Backed Securities-Change in Credit Enhancement or Other External Support]; 6.05 [Asset Backed Securities-Securities Act Updating Disclosure]. Although this provides significant relief, the task remains a formidable one. An issuer is also an ineligible issuer if during the past three years a petition for bankruptcy had been filed by or against the issuer or a receiver, fiscal agent, or similar officer was appointed by the court re the issuer’s business or property.^{^[47]} An issuer that is subject to a pending stop order in connection with a registered offering or was during the past three years or is subject to a pending cease and desist proceeding under the Securities Act relating to an offering of securities also is an ineligible issuer.^{^[48]} The Commission may determine, “upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.”^{^[49]}

Although for unrelated reasons (i.e., not involving conduct), an investment company, a business development company, offerings relating to business combinations were ineligible issuers as defined by Rule 405 as proposed,^{^[50]} but are not included in the definition of an ineligible issuer under the final rule. An investment company registered under the Investment Company Act and a business development company as defined by the Investment Company Act, however, are excluded from substantially all of the provisions relating to the liberalization of communications while in registration by the specific relevant rule including the Rule 433 free writing prospectus rule.^{^[51]}

The most significant consequence of being an ineligible issuer is that with limited exceptions such issuers cannot use a Rule 433 free writing prospectus. The manner in which this is accomplished takes a circuitous route through Rule 164, but, nonetheless is clear. See § 1:11. In addition, an issuer otherwise qualified for status as a well-known seasoned issuer is not a well-known seasoned issuer if an ineligible issuer.^{^[52]} As proposed, an ineligible issuer could not rely on Rule 163 pertaining to communications by a well-known seasoned issuer during the pre-filing period.^{^[53]} Although deleted from Rule 163, the inclusion in the rule was redundant as the definition of well-known seasoned issuer excludes an ineligible issuer. As proposed, an ineligible issuer also could not take advantage of the amendments to Form S-1 (and F-1) to allow incorporation by reference for certain items of information contained in periodic or current reports filed under the Exchange Act. The final rules, however, limit the exclusion in this regard to issuers that during the last three years were shell companies, blank check companies, or offered penny stock.^{^[54]}

§ 1:5

PART II.
LIBERALIZING COMMUNICATIONS WHILE IN REGISTRATION—STEP 1

A. Communications during the pre-filing period

§ 1:5 Rule 163 and well-known seasoned issuers

The impact of SOR is pervasive, but in many respects lends itself to the traditional approach of dividing the registration process into pre-filing period, waiting period, and post-effective period of an offering of securities registered under the Securities Act. We start with the pre-filing period, beginning from the moment a company is “in registration” and extending to the filing of the registration statement. During the pre-filing period, once “in registration” Section 5(c) of the Securities Act precludes the issuer from disseminating any communication (written or oral) that constitutes an offer to sell the security (which as defined by Section 2(a)(3) includes solicitation of an offer to buy a security). The Commission after Arvida in this context took a very broad view of an offer to sell or solicitation of offer to buy to include communications “even though not couched in terms of an express offer, [that] condition the public mind or arouse public interest in the particular securities.”^{^[55]} The Commission defined “in registration” as early as 1971 as beginning “at least from the time an issuer reaches an understanding with the broker-dealer which is to act as managing underwriter prior to the filing of a registration.”^{^[56]} Traditionally the understanding takes the form of a letter of intent designed not to be a binding agreement between an investment banking firm and an issuer. Previously, the only announcement of a contemplated offering before the filing of the registration statement was that allowed by Rule 135,^{^[57]} which permits a limited notice of the offering including the name of the issuer, amount of offering, anticipated time of the offering, and manner and purpose of the offering, “without naming the underwriter.”^{^[58]}

Not surprisingly, the greatest liberalization relates to the new category of well-known seasoned issuers, which for apparent reasons leaves out substantially (if not) all IPOs. See § 1:3. The Adopting Release noted that “[i]n 2004, those issuers, which represented approximately 30% of listed issuers, accounted for about 95 percent of U.S. equity market capitalization. They have accounted for more than 96 percent of the total debt raised in registered offerings over the past eight years by issuers listed on a major exchange or equity market.”^{^[59]} A well-known seasoned issuer at any time during the pre-filing period, subject to certain conditions, may make any communication written or oral, including an offer to sell or solicitation of offer to buy, as Rule 163 exempts such communications from Section 5(c).^{^[60]} It is available, however, only for communications “made by or on behalf of an issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it is made.” Accordingly, Rule 163 would not be available for a prospective underwriter or other offering participants.^{^[61]} A written communication must include the following legend:^{^[62]}

The issuer may file a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the company will arrange to send you the prospectus after filing if you request it by calling toll-free 1-8[xx-xxx-xxxx].

The legend may provide an email address at which the documents can be requested, and may indicate that the documents also are available by accessing the issuer’s website, and provide the Internet address and the particular location of the documents on the website.^{^[63]} A Rule 163 written communication is a free writing prospectus^{^[64]} and must be filed with the Commission promptly on the filing of the registration statement or an amendment covering the securities being offered.^{^[65]} In addition to being unavailable to ineligible issuers, since such issuers are excluded from the definition of well-known seasoned issuer, Rule 163 is unavailable for communications relating to a business combination, to registered investment companies or business development companies.^{^[66]} A communication exempt under Rule 163 is not considered to be “in connection with a securities offering registered under the Securities Act” for purposes of Regulation FD,^{^[67]} which has Regulation FD selective disclosure implications. Oral communications subject to the Rule for apparent reasons do not have to include a legend and there is no filing requirement.

§ 1:7

B. Communications Before and After Filing

§ 1:7 Rule 168 limited communications

Rules 168^{^[76]} and Rule 169^{^[77]} allow certain limited written or oral communications prior to the filing of a registration statement and after the filing of a registration statement. For apparent reasons, permissiveness of oral communications is of greater significance before the filing of the registration statement since Section 5(b) of the Securities Act, subject to the anti-fraud provisions and Section 12(a)(2) liability exposure, does not limit oral communications after the filing of a registration statement, whereas Section 5(c) limits them before the filing of a registration statement. Written communications have the benefit of the rule before and after filing the registration statement; and, unlike Rule 433 free writing prospectuses, Rule 168 and 169 written communications do not have to be filed. Rule 168 as proposed was available only to issuers that are required to file reports under Section 13 or 15(d) of the Exchange Act. The final rule limits it to reporting companies and certain foreign private issuers not reporting companies that meet specified criteria, and certain asset-backed securities. For our immediate purposes we consider it applicable to reporting companies and discuss its application to foreign private issuer separately below. Rule 168 does not exclude ineligible issuers; however, it is not available to investment companies and business development companies.^{^[78]} Rule 168 is not available to domestic (U.S.) non-reporting companies; hence, it would seldom be available for an IPO. Rule 169 as discussed below is available to non-reporting companies, but it is a more limited counterpart. Rule 168, as is Rule 169, is limited to communications made and authorized “by or on behalf of the issuer . . . or [by] an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer.”^{^[79]}

Rule 168 permits reporting companies to continue the regular release and dissemination of factual business information and forward-looking information without constituting “an offer to sell or offer for sale” of the security registered or to be registered for purposes of Section 5(c) or Section 2(a)(10).^{^[80]} Insofar as Section 5(c) is concerned, it has application during the pre-filing period as Section 5(c) makes unlawful an “offer to sell or offer to buy . . . unless a registration statement has been filed as to such security” (the term offer to sell includes under § 2(a)(3) solicitation of offer to buy). Accordingly, a Rule 168 communication during the pre-filing period would not be a violation of Section 5(c).The definition of a prospectus in § 2(a)(10) of the Securities Act makes a communication that would otherwise be a prospectus a prospectus only if it “offers any security for sale.” Rule 168 if complied with, therefore, keeps such communications from being a prospectus after the registration statement is filed and after the registration statement is effective as it is not an offer to sell or offer for sale. Since it is not a prospectus it does not trigger the provision of Section 5(b)(1) that precludes the use of a prospectus that is not a Section 10 prospectus after a registration statement is filed. It also is not a free writing prospectus, the Rule 405 definition of which excludes a written communication that falls “within the exception from the definition of prospectus in clause (a) of section 2(a)(10) of the Act.”^{^[81]} Accordingly, such written communications are not subject to the filing requirements pertaining to a free writing prospectus, which, with some exceptions, require a filing with the Commission in order to avoid a violation of § 5(b)(1). See § 1:12. Similarly, after the effective date it does not trigger the need to be accompanied or preceded by the delivery of a final prospectus after the effective date. In some respects Rule 168 codifies with a good deal of detail what the Commission attempted to say back in 1971 in Release 5180^{^[82]} and more recently in Interpretative Release III,^{^[83]} relating to use of electronic media, with respect to factual business information, although Release 5180 did not extend to forward-looking information and Interpretative Release III was not clear in that regard.^{^[84]}

Determining whether the requirements of Rule 168 are met, however, is no easy matter. First, there are the definitions of factual business information and of forward-looking information. Factual business information is limited to the following:^{^[85]}

(i) Factual information about the issuer, business or financial developments, or other aspect of its business;

(ii) Advertisements of, or other information about, the issuer’s products or services, and

(iii) Dividend notices.

Such factual information includes without limitation factual information set forth in any report that the issuer files or furnishes pursuant to the Securities Exchange Act of 1934.

Forward-looking information is limited to:^{^[86]}

(i) Projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items;

(ii) Statements about the issuer management’s plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;

(iii) Statements about the issuer’s future economic performance, including statements of the type contemplated by the management’s discussion and analysis of financial condition and results of operation described in Item 303 of Regulations S-B and S-K (or the operating and financial review and prospects described in Item 5 of Form 20-F for a non-U.S. issuer); and

(iv) Assumptions underlying or relating to any of the information described above.

Forward-looking information includes, without limitation, forward-looking information set forth in any report that the issuer files or furnishes pursuant to the Securities Exchange Act of 1934.

BUT, as to both factual business information and forward-looking information the communication cannot “include information about the registered offering or information released or disseminated as part of the offering activities in the registered offering.”^{^[87]} Further, both factual business information and forward-looking information must meet the continued regular release requirement discussed below. Exclusion of information “released or disseminated as part of the offering activities” will raise some issues. The Adopting Release in reference to “offering activities” as used in Rule 168 includes the following cautionary language: “For example, while the safe harbor could be available for factual business information contained in an Exchange Act report at the time it is initially filed, the safe harbor will not be available for the distribution of that information to investors or potential investors as part of offering activities, such as incorporation by reference into a prospectus that is part of a registration statement, disclosure at a road show, or disclosure in a free writing prospectus. As another example, as permitted by the ‘regularly released’ condition, an issuer could rely on the safe harbor for the publication of an earnings release consistent with past practice, including the posting of and maintaining the release on an issuer’s website, whether or not located in a separate section of the website for historical information. The distribution of that earnings release, however, as part of the marketing activities to potential investors will be outside the scope of the safe harbor.”^{^[88]} The latter needs to be qualified since if communicated orally at a road show after the registration statement is filed and there is no written communication there is no need to rely on Rule 168. The Adopting Release discusses the exclusion from Rule 168 under the sub-caption “Exclusion for Offering Related Information,” stating that it is not available for “any information about the registered offering itself.”^{^[89]} This suggests that any information otherwise within Rule 168 is excluded from its protection if used as part of the selling effort. Further, both factual business information and forward-looking information must also conform to the following conditions:^{^[90]}

(1) The issuer has previously released or disseminated information of the type described in this section in the ordinary course of its business; and

(2) The timing, manner and form in which the information is released or disseminated is materially consistent with similar past disclosures.

Rule 168 is available as in the case of U.S. issuers to foreign private issuers that are reporting companies under the Exchange Act because they have a class of securities registered under the Exchange Act or previously registered an offering of securities under the Securities Act and are subject to the reporting provisions of Section 15(d) of the Exchange Act. Foreign private issuers that are not reporting companies that meet the following criteria also may rely on Rule 168:^{^[91]}

1. Meet the General Requirement I.A. of Form F-3 other than I.A.1 and I.A.2, which primarily requires that since the end of its last fiscal year it not have (a) failed to pay any dividend or sinking fund installment on preferred stock; or (b) defaulted (i) on any installment or installments on indebtedness for borrowed money, or (ii) on any rental on one or more long term leases, “which defaults in the aggregate are material to the financial position of the registrant and its consolidated and unconsolidated subsidiaries, taken as a whole.”;

2. Is making a primary offering and has a worldwide public float of voting and non-voting common equity of $75 million or more, or is offering investment grade non-convertible securities, and

3. Its equity securities trade on and have traded for at least 12 months on a designated overseas trading market or its equity securities have a worldwide public float of $700 million or more.

§ 1:9

C. Rule 134 Communications

§ 1:9 Rule 134 Communications—A little more of the same

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);^{^[100]} 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. Since the SOR regulations provide a route to using free writing after the registration statement has been filed (see § 1:10), 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 § 1:12. This means, among other things, it can be used by ineligible issuers who as discussed at § 1:11 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.^{^[101]} 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.^{^[102]}

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:^{^[103]}

· 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.”^{^[104]} As discussed at § 1:19, 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.

· 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.^{^[105]}

· The type of underwriting.^{^[106]}

· The name of selling security holders.^{^[107]}

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.^{^[108]}

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.”^{^[109]} 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)^{^[110]} definition of underwriter.

§ 1:10

PART III.
LIBERALIZING COMMUNICATIONS—STEP 2

A. Introduction to the Free Writing Prospectus

§ 1:10 Free writing prospectus—Innovation or common sense?

An outside observer would have had a difficult time understanding why almost anything could be said to prospective investors (subject to the anti-fraud provisions) after a registration statement is filed if said in person or over the telephone, but the same information prior to adoption of the SOR rules could not be communicated in a letter, email, brochure or fax.^{^[111]} We noted above that Rules 168 (see § 1:7) and 169 (see § 1:8) allow limited written communications after the registration statement is filed provided, among other things, they are not part of the offering activities. The SOR rules dramatically expand the written communications that include offering/sales material after the filing of a registration statement by providing for the so-called free writing prospectus. The free writing prospectus for the most part comes into play after a registration statement is filed, although, as we noted at § 1:5, Rule 163 permits a well-known seasoned issuer to use a free writing prospectus before a registration statement is filed. Understanding the use of a free writing prospectus requires, among other things, integrating the Rule 405 definitions of a free writing prospectus, of written communications, and of graphic communications with Rule 433, which sets forth the conditions to the use of a free writing prospectus, and Rule 164, which precludes certain issuers from relying on Rule 433.

Rule 405^{^[112]} defines a free writing prospectus, except as otherwise provided, as any written communication used after a registration statement is filed (or in the case of a well-known seasoned issuer whether or not a registration statement is filed). Since, as we discuss at § 1:12, a free writing prospectus generally has to be filed with the Commission, the Rule 405 definition also excludes from the definition some writings that do not have to be filed or are otherwise filed; to wit: a writing that does not constitute an offer to sell or solicitation of an offer to buy; Section 10(a), Rule 430, Rule 430A, Rule 430B, Rule 430C, or Rule 431 prospectus, and a writing that is excluded from the Section 2(a)(10)(a) definition of prospectus (e.g., a Rule 134 communication; see § 1:9). Also excluded are communications within Rule 167 pertaining to asset-backed securities that are filed pursuant to Rule 426. A written communication is defined by Rule 405 as “any communication that is written, printed, a radio or television broadcast, or a graphic communication.” The definition of a graphic communication in Rule 405 in turn is expanded to include “all forms of electronic media, including, but not limited to, audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet websites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks and other forms of computer data compilation.” This eliminates any question as to whether communications on an Internet website are written communications and sweeps in even certain widely distributed telephone messages. The final rules, however, add one very important qualification to the definition of graphic communication as follows: “Graphic communication shall not include a communication that, at the time of the communication, originates live, in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted through graphic means.” Rule 433 as discussed § 1:11 provides that a free writing prospectus, hence virtually any written or graphic communication, can be used after the registration statement has been filed by issuers other than ineligible issuers,^{^[113]} subject to the conditions set forth in the Rule.

To place the interrelated definitions in context, Section 2(a)(10) of the Securities Act^{^[114]} defines a prospectus as a “communication, written or by radio or television, which offers any security for sale or confirms the sale of any security.” That definition in term controls whether a communication is a prospectus that under Section 5(b)(1) of the Securities Act cannot be used after a registration statement is filed unless it is a Section 10 prospectus.^{^[115]} Section 2(a)(9)^{^[116]} defines “write” or “written” to “include printed, lithographed, or any means of graphic communication.” The exclusion of communications to a “live, in real-time audience” from the definition of graphic communication is specifically applicable to both the definition of “written communication” and the definition of “write” or “written” in Section 2(a)(9). Accordingly, a communication that is within this exclusion is not within the definition of a prospectus and can be made without any formalities after a registration statement is filed, but is subject to provisions of the Securities Acts that may give rise to an enforcement or private action. Not coincidentally, the Adopting Release in listing the principal changes in the final rules from the rules as proposed includes first on the list “the definitions of graphic communication and written communication (including as to road shows) exclude live, in real-time communications to a live audience that are transmitted graphically.”<