Securities Act Release No. 5010

Securities Exchange Act Release No. 8710

October 7, 1969. 34 F. R. 17034. Corrected in 34 F. R. 17343.

Proposal to Adopt Rules Relating to Publication of Information and Delivery of Prospectus by Broker-Dealer Prior to or After the Filing of a Registration Statement under the Securities Act of 1933.

 The rules proposed herein by the Securities and Exchange Commission are designed to establish standards for determining circumstances under which broker-dealers may publish certain types of information regarding an issuer which proposes to or has registered securities under the Securities Act of 1933 ("Act"). Concurrently with the publication of these proposals the Commission is publishing a Securities Act Release No. 5009 discussing various aspects of this subject which may best be dealt with without the promulgation of formal rules at this time.

The Commission is also proposing rules relating to the obligation of dealers to deliver prospectuses under Section 4(3) of the Act and the antifraud provisions of the Securities Exchange Act of 1934 ("Exchange Act").

Consideration of these proposals was prompted by a report to the Commission from its staff entitled "Disclosure to Investors--A Reappraisal of Administrative Policies under the '33 and '34 Acts" (Report).

Information, opinion or recommendations by a broker-dealer concerning an issuer which proposes to offer securities to be registered under the Act may, under certain circumstances, be deemed to be offers of a security for sale within the meaning of Sections 2(3) and 5 of the Act, particularly when the broker-dealer is to participate in the distribution. If so, the publication of such information may result in a violation of the registration provisions of Section 5 of the Act. Thus, under this statutory pattern, no offers or sales may be made of a security to be registered prior to the filing of the registration statement although preliminary negotiations or agreements may be made with underwriters and certain limited announcements may be published under Rule 135 during this period. The Act permits oral offers but not sales after filing the registration statement but before it becomes effective. During this period the preliminary prospectus provided for in Rule 433, the summary prospectus provided for in Rules 434 and 434A, and the so-called "tombstone" advertisement provided for in Section 2(10) and Rule 134 may be used.

After the effective date written offers (including confirmations) may also be made of the registered securities if the recipient has received or contemporaneously receives a final prospectus and such material is not false or misleading. Under Section 4(3) of the Act this requirement extends to all transactions by dealers in the registered securities, whether or not they participated in the distribution, for a period of 40 or 90 days after the later of the commencement of the offering or the effective date of the registration statement.

Various questions have arisen concerning the restrictions placed on the distribution of such information by broker-dealers during the period an issuer's shares are "in registration." ¹  The proposed rules and release are intended to furnish some guidance to broker-dealers and others subject to those restrictions. The Commission, recognizing the value of the free flow of material information concerning actively traded securities, believes such guidance will remove some potential impediments to that flow.

Analysis of Proposed Rules

Proposed Amendments to Rule 135

Rule 135 presently provides that notices by an issuer of certain proposed offerings given in accordance with the rule are not deemed offers for the purpose of Section 5 of the Act. The proposed amendments would add two types of offerings for which notice may be given pursuant to Rule 135.

Proposed subparagraph (a)(1) permits a notice that an issuer is proposing to make a public offering of securities to be registered under the Act, if the notice is properly limited. It may only identify the security, state the amount of securities expected to be registered and the approximate dollar amount and time of the offering.

The Commission is aware that a number of issuers have published such notices. The rule is proposed to remove doubts as to the validity of the practice under the Act. It also establishes standards for the contents of the notice, in order to prevent such notices from being used to generate unwarranted interest in the contemplated offering.

Proposed subparagraph (a)(4) of Rule 135 would permit notice of offerings relating to certain forms of business combinations. Timely disclosure policies of certain self regulatory agencies and disclosure practices of corporate managements and others have resulted in notices of such offerings prior to the filing of a registration statement with the Commission. The proposed rule is intended to establish standards for the contents of such notices.

This amendment will be necessary if the Commission should amend Rule 133 to require registration of securities to be issued in connection with certain business combinations as recommended in the Report.

The Commission also is proposing certain minor technical amendments to Rule 135.

Proposed Rule 137

Proposed Rule 137 would clarify the status of persons not participating in a distribution. It would permit a person who does not have any arrangement with any participant regarding the publication, to publish information concerning an issuer which has securities in registration. The need for such a rule is primarily evidenced in connection with actively traded securities of issuers concerning which adequate information is available to the public. Accordingly, the rule would be limited to distribution of information concerning issuers required to file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934. The rule would not preclude adverse comments on any offering.

Proposed Rule 138

Proposed Rule 138 would permit a broker-dealer participating in an offering of non-convertible senior securities registered on Form S-17 or S-9 to publish opinions or recommendations concerning the issuer's common stock.

Existing restrictions on such recommendations have proved troublesome, particularly with respect to public utilities which are continuously seeking debt financing. However, investment conditions with respect to the common stock and the senior securities of established corporations are significantly different, and the market for senior securities is largely institutional. Accordingly, since the danger of creating unwarranted interest in the offering is reduced, the Commission believes that restrictions may be relaxed, subject to a qualification:  The proposed rule would apply only with respect to offerings of non-convertible or debt or preferred stock which are registered on Form S-7 or S-9.

For similar reasons the proposed rule would also permit a broker-dealer participating in a distribution of common stock registered on Form S-7 to publish opinions or recommendations concerning the issuer's non-convertible senior securities.

Proposed Rule 139

Proposed Rule 139 would permit a broker-dealer participating in an offering to publish opinions or recommendations concerning the issuer, if certain conditions are met. The issuer must have securities registered under Section 12 or be subject to the reporting requirements of Section 15(d) of the Exchange Act. The publication containing the opinion or recommendation must contain a comprehensive list of other securities and have been distributed with reasonable regularity for at least two years. Finally, the opinion or recommendation must not be given special prominence and must not be more favorable than the last previous recommendation distributed prior to the time the broker-dealer became subject to the restrictions of Section 5 due to its participation.

Some relaxation of restrictions in this area appears necessary, particularly with respect to issuers which are continuously "in registration."  Otherwise investors may be deprived of the broker-dealer's opinion when buying or selling securities in the trading markets.

Proposed Amendments to Rule 174

Rule 174 presently contains exemptions from the prospectus delivery requirements imposed on dealers by Section 4(3) of the Act. Section 4(3) requires a participating dealer to deliver a prospectus in connection with sales of securities subject to a registration statement under the Act for the duration of the offering for any unsold allotment and as to all dealers for 40 or 90 days, depending on the status of the issuer, after the effective date of the registration statement or the commencement of the offering, whichever is later.

The proposed amendment would eliminate the 40-day requirement for securities of issuers required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Dealers have experienced difficulties in complying with the requirements of Section 4(3), in part because of problems of obtaining copies of the prospectus for delivery. The information supplied by the reports filed under the Exchange Act and widely distributed by newly developed methods of dissemination would appear to be an adequate substitute for prospectus delivery by dealers in connection with such trading transactions.

Proposed Rule 15c2-8

The prospectus required under the Act was intended in part to act as a deterrent to fraudulent statements by securities salesmen. This intention cannot be reconciled with prevailing practices. Salesmen who offer newly issued securities by telephone may never see a copy of the preliminary prospectus. Customers who may wish to review a proposal carefully or check a salesman's statements may be unable to obtain a copy of that document.

Proposed Rule 15c2-8 is designed to prevent the fraud which could possibly result from these circumstances.

The proposed rule would be adopted under Section 15(c)(2) of the Exchange Act which permits the Commission to "prescribe means reasonably designed to prevent such acts or practices that are fraudulent, deceptive or manipulative . . .."  Basically the proposed rule provides:

1. A broker-dealer participating in a distribution should take reasonable steps to see to it that any person desiring a copy of a preliminary or final prospectus receives a copy.

2. Each salesman who is expected to offer the securities should receive a copy of the preliminary prospectus and, if he is expected to offer the security after the effective date of the registration statement, the final prospectus.

3. The managing underwriter should take reasonable steps to see that broker-dealers participating in the distribution receive sufficient copies of the prospectus to comply with the rule and with Section 5(b) of the Act.

It should be emphasized that the rule only requires that the broker-dealer take reasonable steps to comply with the rule. In addition, Securities Act Release No. 4968 (April 24, 1969) 77,685 is also relevant to the obligations of broker-dealers to provide prospective customers with copies of the preliminary prospectus prior to the effective date of a registration statement under the Act.

The Text of the Proposed Rules

[Text omitted.]

All interested persons are invited to submit their views and comments on the above proposals, in writing, to the Securities and Exchange Commission, Washington, D. C. 20549, on or before November 7,  1969. All such communications will be considered available for public inspection.

By the Commission.

¹  "In registration" is used herein to mean the entire process of registration, at least from the time an issuer reaches an understanding with the broker-dealer which is to act as managing underwriter, until the completion of the offering and the period of 40 or 90 days during which dealers must deliver a prospectus.