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33-3844--PUBLICATION OF INFORMATION PRIOR TO OR AFTER THE EFFECTIVE DATE OF A REGISTRATION STATEMENT |
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| SECTION 1 Title 1 Title 2 Title 3 SECTION 2 SECTION 3 SECTION 4 |
Sec. Act Release No. 3844 (Oct. 8, 1947), 1957 WL 3605 *1 Securities Act of 1933
October 8, 1957
Re: PUBLICATION OF INFORMATION PRIOR TO OR AFTER THE EFFECTIVE DATE OF A REGISTRATION STATEMENT Questions frequently are presented to the Securities and Exchange Commission and its staff with respect to the impact of the registration and prospectus requirements of Section 5 of the Securities Act of 1933 on publication of information concerning an issuer and its affairs by the issuer, its management, underwriters and dealers. Some of the more common problems which have arisen in this connection and the nature of the advice given by the Commission and its staff are outlined herein for the guidance of industry, underwriters, dealers and counsel. A basic purpose of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is to require the dissemination of adequate and accurate information concerning issuers and their securities in connection with the offer and sale of securities to the public, and the publication periodically of material business and financial facts, knowledge of which is essential to an informed trading market in such securities. There has been an increasing tendency, particularly in the period since World War II, to give publicity through many media concerning corporate affairs which goes beyond the statutory requirements. This practice reflects a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments. This trend should be encouraged. It is necessary, however, that corporate management, counsel, underwriters, dealers and public relations firms recognize that the Securities Acts impose certain responsibilities and limitations upon persons engaged in the sale of securities and that publicity and public relations activities under certain circumstances may involve violations of the securities laws and cause serious embarrassment to issuers and underwriters in connection with the timing and marketing of an issue of securities. These violations not only pose enforcement and administrative problems for the Commission, they may also give rise to civil liabilities by the seller of securities to the purchaser. Absent some exemption, Section 5(c) of the Securities Act of 1933 makes it unlawful for any person directly or indirectly to make use of any means or instruments of interstate commerce or of the mails to offer to sell a security unless a registration statement has been filed with the Commission as to such security. Section 5(a) of the Act makes it unlawful to sell a security unless a registration statement with respect to such security has become effective. Section 5(b) makes it unlawful to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to transmit a prospectus with respect to any security as to which a registration statement has been filed unless such prospectus contains the information specified by Section 10 of the Act. *2 A prospectus is defined to include any notice, circular, advertisement, letter or communication, written or by radio or television, which offers any security for sale except that any communication sent after the effective date of a registration statement shall not be deemed a prospectus if, prior to or at the same time with such a communication, a written prospectus meeting the requirements of Section 10 of the Act was sent or given. Stated otherwise, it is illegal to offer a security prior to the filing of a registration statement. [FN1] A security may be offered legally after filing and before the effective date of a registration statement, provided that any prospectus employed for this purpose meets the standards of Section 10 of the Act. [FN2] Thus, in general during this period (after the filing and before the effective date), no written communication offering a security may be transmitted through the mails or in interstate commerce other than a prospectus authorized or permitted by the statute or relevant rules thereunder. [FN3] After the effective date, sales literature in addition to the prospectus may be employed legally, provided the Section 10(a) prospectus precedes or accompanies the supplemental literature. [FN4] These provisions with respect to the time and manner of offering and selling securities apply during the period of distribution of the security, i.e., the statutory prospectus must be employed by an underwriter or a dealer participating in the distribution so long as he is offering an unsold allotment. All underwriters and dealers must use the prospectus during the 40- day period following the effective date of a registration statement or the commencement of the public offering, whichever later occurs. The terms 'sale,' 'sell,' 'offer to sell' and 'offer for sale' are broadly defined in Section 2(3) of the Act and these definitions have been liberally construed by the Commission and the courts. It follows from the express language and the legislative history of the Securities Act that an issuer, underwriter or dealer may not legally begin a public offering or initiate a public sales campaign prior to the filing of a registration statement. It apparently is not generally understood, however, that the publication of information and statements, and publicity efforts, generally, made in advance of a proposed financing, although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort. Nor is it generally understood that the release of publicity and the publication of information between the filing date and the effective date of a registration statement may similarly raise a question whether the publicity is not in fact a selling effort by an illegal means; i.e., other than by means of the statutory prospectus. Similar problems will arise from publicity and the release of information after the effective date, but before a distribution is completed. *3 Apart from the impropriety of such publicity under the Securities Act, a collateral problem is presented by reason of the fact that the dissemination of information, other than that contained in a prospectus, prior to or during a distribution may tend to affect the market price of the issuer's securities artificially. Instances have come to the attention of the Commission in which information of a misleading character, gross exaggeration and outright falsehood have been published by various means for the purpose of conveying to the public a message designed to stimulate an appetite for securities--a message which could not properly have been included in a statutory prospectus in conformity with the standards of integrity demanded by the statute. Many of the cases have reflected a deliberate disregard of the provisions and purpose of the law. Others have reflected an unawareness of the problems involved or a failure to exercise a proper control over research and public relations activities in relation to the distribution of an issue of securities. Example #1 An underwriter-promoter is engaged in arranging for the public financing of a mining venture to explore for a mineral which has certain possible potentialities for use in atomic research and power. While preparing a registration statement for a public offering, the underwriter-promoter distributed several thousand copies of a brochure which described in glowing generalities the future possibilities for use of the mineral and the profit potential to investors who would share in the growth prospects of a new industry. The brochure made no reference to any issuer or any security nor to any particular financing. It was sent out, however, bearing the name of the underwriting firm and obviously was designed to awaken an interest which later would be focused on the specific financing to be presented in the prospectus shortly to be sent to the same mailing list. The distribution of the brochure under these circumstances clearly was the first step in a sales campaign to effect a public sale of the securities and as such, in the view of the Commission, violated Section 5 of the Securities Act. Example #2 An issuer in the promotional stage intended to offer for public sale an issue of securities the proceeds of which were to be employed to explore for and develop a mineralized area. The promoters and prospective underwriter prior to the filing of the required registration statement or notification under Regulation A arranged for a series of press releases describing the activities of the company, its proposed program of development of its properties, estimates of ore reserves and plans for a processing plant. This publicity campaign continued after the filing of a registration statement and during the period of the offering. The press releases, which could be easily reproduced and employed by dealers and salesmen engaged in the sales effort, contained representations, forecasts and quotations which could not have been supported as reliable data for inclusion in a prospectus or offering circular under the sanctions of the Act. *4 It is the Commission's view that issuing information of this character to the public by an issuer or underwriter through the device of the press release and the press interview is an evasion of the requirements of the Act governing selling procedures, a violation of Sections 5 and 17(a) of the Act, and that such activity subjects the seller to the risk of civil and penal sanctions and liabilities of the Act. Example #3 An issuer filed a registration statement for an issue of securities to be offered through underwriters. Following the effective date of the registration statement, efforts to market the issue were not wholly successful and a substantial amount of the securities remained in the hands of the underwriters and dealers. At this point the issuer published an advertisement which received wide newspaper and magazine circulation and which included data purporting to show reserves of raw materials in terms of estimated future dollar realization per share. The advertisement took the conventional form of a product advertisement except for the inclusion of calculations of per-share asset values. The Commission brought an action to enjoin further publication of the advertisement on the theory that its content and use, at a time when the existence of unsold allotments in the hands of underwriters and dealers indicated clearly that the distribution of the registered securities had not been completed, involved a violation of Sections 5 and 17(a) of the Securities Act. Example #4 An issuer negotiating with a prospective underwriter for a public offering of common stock supplied the underwriter with financial information concerning the issuer's operations for the first quarter of the fiscal year. The prospective underwriter incorporated this material in a brochure containing other information concerning the issuer and its prospects and distributed the brochure widely among the membership of the N.A.S.D. at a time when a registration statement was being prepared but prior to its filing. When the registration statement was filed it was discovered that the financial statements included therein reflected a history of operations and a current position much less favorable than suggested by the first quarter figures shown in the brochure. In the view of the Commission the distribution of the brochure violated Section 5 of the Act and in addition raised questions as to violation of Section 17(a) of the Act. The Commission also considered that these activities of the underwriter justified denial of acceleration of the effective date of the registration statement pending a circulation of the prospectus co-extensive with the distribution of the brochure. Example #5 Immediately preceding the filing of a registration statement for an issue of securities by a large industrial company, the research department of an investment banking firm distributed to a substantial number of the firm's institutional customers a brochure which referred specifically to the securities and described the business and prospects of the parent company of the prospective issuer. The business of the prospective issuer represented the principal part of the over-all operations of the total enterprise. The investment banking firm had been a principal underwriter of prior issues of securities by the parent and in accordance with policy of the firm from time to time distributed reports to its clients concerning securities of issuers which the firm had financed. It appeared, in this particular case, that the research department of the banking firm had prepared and distributed such a report to its clients without being fully aware of the activities of the underwriting department or the timing of the forthcoming offering. *5 The Commission advised the representatives of the issuer and the prospective underwriters that under all the circumstances, including the content, timing and distribution given to the brochure, participation of the firm in the distribution of the securities would pose difficulties from the point of view of the enforcement of the provisions of Section 5 of the Securities Act. In order to avoid any question as to violations of this provision of the Act, the banking firm did not participate in the distribution. Example #6 In recognition of the problems presented, the Commission's staff frequently receives inquiries from company officials or their counsel with respect to circumstances such as the following: The president of a company accepted, in August, an invitation to address a meeting of a security analysts' society to be held in February of the following year for the purpose of informing the membership concerning the company, its plans, its record and problems. By January a speech had been prepared together with supplemental information and data, all of which was designed to give a fairly comprehensive picture of the company, the industry in which it operates and various factors affecting its future growth. Projections of demand, operations and profits for future periods were included. The speech and the other data had been printed and it was intended that several hundred copies would be available for distribution at the meeting. In addition, since it was believed that stockholders, creditors, and perhaps customers might be interested in the talk, it was intended to mail to such persons and to a list of other selected firms and institutions copies of the material to be used at the analysts' meeting. Later in January, a public financing by the company was authorized, preparation of a registration statement was begun and negotiation with underwriters was commenced. It soon appeared that the coming meeting of analysts, scheduled many months earlier, would be or about the time the registration statement was to be filed. This presented the question whether, in the circumstances, delivery and distribution of the speech and the supporting data to the various persons mentioned above would contravene provisions of the Securities Act. It seemed clear that the scheduling of the speech had not been arranged in contemplation of a public offering by the issuer at or about the time of its delivery. In the circumstances, no objection was raised to the delivery of the speech at the analysts' meeting. However, since printed copies of the speech might be received by a wider audience, it was suggested that printed copies of the speech and the supporting data not be made available at the meeting nor be transmitted to other persons. Example #7 Two weeks prior to the filing of a registration statement the president of the issuer had delivered, before a society of security analysts, a prepared address which had been booked several months previously. In his speech the president discussed the company's operations and expansion program, its sales and earnings. The speech contained a forecast of sales and referred to the issuer's proposal to file with the Commission later in the month a registration statement with respect to a proposed offering of convertible subordinated debentures. Copies of the speech had been distributed to approximately 4,000 security analysts. *6 The Commission denied acceleration of the registration statement and requested that the registrant distribute copies of its final prospectus to each member of the group which had received a copy of the speech. Example #8 A registration statement had become effective for the purpose of competitive bidding. Prior to the opening of the bids, it was learned that an investment banking member of one of the bidding groups had published a brochure discussing the prospects of the company and forecasting a rise in the market price of its stock. It appeared that neither the company nor other members of the bidding group had received advance information as to the publication of the brochure. In the circumstances, counsel for the proposed underwriters' group was advised that publication and distribution of the brochure must be deemed to contravene the provisions of Section 5 of the Securities Act if the firm publishing it was a member of the underwriting or selling group. This group was the successful bidder. However, the firm publishing the brochure was not included either as an underwriter or as a member of the selling group. Example #9 An issuer was about to file a registration statement for a proposed offering on behalf of a controlling person. The timing of the issue was fixed in accommodation to the controlling person. It appeared, however, that registration would coincide with the time when the company normally distributed its annual report to security holders and others. In recognition of the problem posed, inquiry was made whether such publication and distribution of the report at such time would create any problems. The issuer was advised that, if the annual report was of the character and content normally published by the company and did not contain material designed to assist in the proposed offering, no question would be raised. Example #10 A report concerning a registrant had been prepared by an engineering firm for use by prespective underwriters. The report contained a 5-year projection of earnings. It appeared that, in addition to the distribution of the report among prospective underwriters, copies of the report had been made available, after the filing of a registration statement but before it became effective, to broker-dealers, to salesmen who would be engaged in the offering and sale of the securities and to certain investors. One broker-dealer firm had made available to salesmen excerpts from the report. The Commission advised the persons responsible for the distribution of the report that in its view distribution of the report to persons other than to persons bona fide concerned with the question of considering and undertaking an underwriting commitment, contravened the provisions of Section 5. FN1 By virtue of internal procedural standards, or agreements with stock exchanges on which securities are listed, managements with, or are required, to advise security holders promptly of important decisions which may affect materially their interests as security holders. In recognition of the propriety of such action, Rule 230.135 permits a brief announcement, which does not 'offer a security,' of a forthcoming rights offering. FN2 Rule 230.433 permits the use of a 'preliminary' prospectus which contains substantially all of the information in the registration statement which at this stage does not usually include the offering price, related and underwriting data. Rule 230.134 also permits a form of brief advertisement or written communication advising of the pendency of the offering and indicating where the preliminary prospectus may be obtained. FN3 Rule 230.434 provides in certain cases for the use of cards prepared by independent statistical organizations which fairly summarize the information contained in the prospectus filed with the Commission. Rule 230.434A permits the use in many cases of a similar summary prospectus prepared by or on behalf of the issuer. FN4 Rule 230.494 provides for the use, in addition, of the so-called 'newspaper prospectus' in an offering by certain issuers.
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