Securities Act Release No. 33-4697

May 28, 1964

Stock Offering Rules Clarified.

In view of recent comments in the press concerning the rights and obligations of, and limitations on, dealers in connection with distributions of registered securities, the Commission takes this opportunity to explain the operation of Section 5 of the Securities Act of 1933 with particular reference to the limitations upon, and responsibilities of, underwriters and dealers in the offer and sale of an issue of securities prior to and after the filing of a registration statement.

The discussion below assumes that the offering is not exempt from the registration requirements of the Act and, unless otherwise stated, that the mails or facilities of interstate or foreign commerce are used.

The period before the filing of a registration statement.

Section 5 of the Securities Act prohibits both offers to sell and offers to buy a security before a registration statement is filed. Section 2(3) of the Act, however, exempts preliminary negotiations or agreements between the issuer or other person on whose behalf the distribution is to be made and any underwriter or among underwriters. Thus, negotiation of the financing can proceed during this period but neither the issuer nor the underwriter may offer the security either to investors or to dealers, and dealers are prohibited from offering to buy the securities during this period. ¹  Consequently, not only may no steps be taken to form a selling group but also dealers may not seek inclusion in the selling group prior to the filing.

It should be borne in mind that publicity about an issuer, its securities or the proposed offering prior to the filing of a registration statement may constitute an illegal offer to sell. Thus, announcement of the underwriter's identity should be avoided during this period. Experience shows that such announcements are very likely to lead to illegal offers to buy. This subject will not be further discussed in this release since it has been extensively considered elsewhere. ²

There principles, however are not intended to restrict the normal communications between an issuer and its stockholders or the announcement to the public generally of information with respect to important business and financial developments. Such announcements are required in the listing agreements used by stock exchanges, and the Commission is sensitive to the importance of encouraging this type of communication. In recognition of this requirement of certain stock exchanges, the Commission adopted Rule 135, which permits a brief announcement of proposed rights offerings, proposed exchange offerings, and proposed offerings to employees as not constituting an offer of a security for the purposes of Section 5 of the Act.

The period after the filing and before the effective date.

After the registration statement is filed, and before its effective date, offers to sell the securities are permitted but no written offer may be made except by means of a statutory prospectus. For this purpose the statutory prospectus includes the preliminary prospectus provided for in Rule 433 as well as the summary prospectus provided for in Rules 434 and 434A. In addition the so-called "tombstone" advertisement permitted by Rule 134 may be used.

During the period after the filing of a registration statement, the freedom of an underwriter or dealer expecting to participate in the distribution, to communicate with his customers is limited only by the antifraud provisions of the Securities Act and the Securities Exchange Act, and by the fact that written offering material other than a statutory prospectus or tombstone advertisement may not be used. In other words, during this period "free writing" is illegal. The dealer, therefore, can orally solicit indications of interest or offers to buy and may discuss the securities with his customers and advise them whether or not in his opinion the securities are desirable or suitable for them. In this connection a dealer proposing to discuss an issue of securities with his customers should obtain copies of the preliminary prospectus in order to have a reliable source of information. This is particularly important where he proposes to recommend the securities, or where information concerning them has not been generally available. The corollary of the dealer's obligation to secure the copy is the obligation of the issuer and managing underwriters to make it readily available. Rule 460 provides that as a condition to acceleration of the effective date of a registration statement, the Commission will consider whether the persons making the offering have taken reasonable steps to make the information contained in the registration statement available to dealers who may participate in the distribution.

It is a principal purpose of the so-called "waiting period" between the filing date and the effective date to enable dealers and, through them, investors to become acquainted with the information contained in the registration statement and to arrive at an unhurried decision concerning the merits of the securities. Consistently with this purpose, no contracts of sale can be made during this period, the purchase price may not be paid or received and offers to buy may be cancelled.

The period after the effective date.

When the registration statement becomes effective oral offerings may continue and sales may be made and consummated. A copy of the final statutory prospectus must be delivered in connection with any written offer or confirmation or upon delivery of the security, whichever first occurs. Supplemental sales literature ("free writing") may be used if it is accompanied or preceded by a prospectus. However, care must be taken to see that all such material is at the time of use not false or misleading under the standards of Section 17(a) of the Act. If the offering continues over an extended period, the prospectus should be current under the standards of Section 10(a)(3). All dealers trading in the registered security must continue to employ the prospectus for the period referred to in Section 4.

¹  The reason for this provision was stated in the House Report on the bill as originally enacted, as follows:

". . . Otherwise, the underwriter . . . could accept them in the order of their priority and thus bring pressure upon dealers, who wish to avail themselves of a particular security offering, to rush their orders to buy without adequate consideration of the nature of the security being offered."  H. R. Report No. 85, 73rd Cong., 1st Sess. (1933), p. 11.

²  See Securities Act Release No. 3844 (1957); Carl M. Loeb, Rhoades & Co., 38 S. E. C. 843 (1959); First Maine Corporation, 38 S. E. C. 882 (1959).