Release No. 33-8591

Release No. 34-52056

Release No. IC-26993

Financial Reporting Rel. No. 75

International Series Rel. No. 1294

70 Fed. Reg. 44721

Table of Contents

Securities Offering Reform

I. Introduction

A. Overview

On November 3, 2004, we issued proposed rule and form changes under the Securities Act and the Exchange Act that would modernize the securities offering and communication processes while maintaining protection of investors under the Securities Act.¹⁷ We received over 130 comment letters on the proposals.¹⁸ While a large number of letters focused on only one area of the proposals,¹⁹ a significant number of the other letters addressed many aspects of the proposals. In general, commenters strongly supported the proposals and their objectives. A number of commenters believed that the proposals struck the appropriate balance between improving the capital formation process and modernizing offering communications, while preserving investor protection and avoiding unnecessary impediments to the capital formation process. As with other rulemakings, including those of the magnitude that the proposals represented, commenters provided many thoughtful comments and useful suggestions. We are adopting the rules and amendments as proposed with certain modifications to address a number of points that commenters raised. The rules we are adopting today continue the evolution of the offering process under the Securities Act that began as far back as 1966, when Milton Cohen noted the anomaly of the structure of the disclosure rules under the Securities Act and the Exchange Act and suggested the integration of the requirements under the two statutes.²⁰Mr. Cohens article was followed by a 1969 study led by Commissioner Francis Wheat²¹and the Commissions Advisory Committee on Corporate Disclosure in 1977.²² These studies eventually led to the Commissions adoption of the integrated disclosure system, short-form registration under the Securities Act, and Securities Act Rule 415 permitting shelf registration of continuous offerings and delayed offerings.²³

The Commissions attention to the offering and communications processes under the Securities Act continued more recently. In particular, in March 1996, members of the Commission staff delivered the Report of the Task Force on Disclosure Simplification to the Commission.²⁴ It recommended a number of areas where simplification and modernization of the registration and offering process could be accomplished. In July 1996, the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report to the Commission.²⁵ Its principal recommendation was that the Securities Act registration and disclosure processes be more directly tied to the philosophy and structure of the Exchange Act through the adoption of a system of "company registration." Under company registration, the focus of Securities Act and Exchange Act registration and disclosure would move from transactions to issuers, and corollary steps would be taken to provide for disclosure and registration of individual offerings within the company registration framework.

Promptly after the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report, the Commission issued a concept release regarding regulation of the securities offering process.²⁶ The release sought input on a number of significant issues, including:

• whether the concept of company registration should be pursued;

• whether other methods of increasing the integration of Securities Act and Exchange Act disclosure and other processes should be considered;

• whether existing or further reliance on Exchange Act filings should be accompanied by enhancements to Exchange Act reporting;

• whether companies make information about their public securities offerings available to investors in an appropriate and timely manner, including:

  • at what point in the offering process delivery of, or access to, information should be assured in connection with registered offerings under the Securities Act and whether current requirements ensure timely delivery of information to the secondary market in connection with such offerings;

  • whether prospectus supplements in shelf offerings should be made part of the registration statement;

  • whether and, if so, in what circumstances electronic access should replace actual delivery of information in connection with offerings registered under the Securities Act; and

  • whether restrictions on written offers under the Securities Act should be liberalized and what liability standards should attach to such communications;

• whether adjustments to the roles and responsibilities of traditional "gatekeepers" in the Securities Act offering process, such as underwriters and accountants, should be made in light of increases in the speed of and other evolutions in the offering process;

• whether changes should be made to address evolution in the relationships between the public and private offering processes, including:

  • whether changes in Rules 144A²⁷ and 144²⁸ under the Securities Act should be considered; and

  • whether there should be any relaxation in our prohibition against general solicitations of interest or offers in unregistered private offerings; and 

  • whether the review process of issuer filings under the Securities Act and the Exchange Act by the staff of the Division of Corporation Finance should be modified to limit the impact of the process on access to capital markets, at least for some category of large seasoned issuers.²⁹

In 1998, the Commission proposed new rules under the Securities Act that were intended to modernize the securities offering process.³⁰ As we recognized in the Proposing Release, much of the comment in response to the 1998 proposals suggested that the system of regulating capital formation in the registered offering market provides a number of advantages that should be considered carefully and retained if we are to make other changes.

The rules we are adopting today are focused primarily on constructive, incremental changes in our regulatory structure and the offering process rather than the introduction of a far-reaching new system, as we believe that we can best achieve further integration of Securities Act and Exchange Act disclosure and processes by making adjustments in the current integrated disclosure and shelf registration systems. Further, consistent with our belief that investors and the securities markets will benefit from greater permissible communications by issuers while retaining appropriate liability for these communications, we have sought to address the need for timeliness of information for investors by building on existing statutory provisions and processes without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to the securities markets and capital.

We are adopting the proposed revisions to the registration, communications, and offering processes for registered transactions under the Securities Act with certain modifications. We believe the rules we are adopting, while limited in scope, properly address the areas that are in need of modernization. The adopted rules involve three main areas:

• communications related to registered securities offerings;

• registration and other procedures in the offering and capital formation processes; and

• delivery of information to investors, including delivery through access and notice, and timeliness of that delivery.

Todays rules reflect our view that revisions to the Securities Act registration and offering procedures are appropriate in light of significant developments in the offering and capital formation procedures and can provide enhanced protection of investors under the statute. We believe that the rule changes we adopt today will:

• facilitate greater availability of information to investors and the market with regard to all issuers;

• eliminate barriers to open communications that have been made increasingly outmoded by technological advances;

• reflect the increased importance of electronic dissemination of information, including the use of the Internet;

• make the capital formation process more efficient; and

• define more clearly both the information and the timeliness of the availability of information against which a sellers statements are evaluated for liability purposes.

The rules we are adopting today reflect certain modifications from the proposals to address important points commenters raised. The modifications to the proposals include the following:

• 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;

• the free writing prospectus rules address "cross-liability" concerns among offering participants arising from the use of free writing prospectuses;

• the free writing prospectus rules clarify the filing conditions applicable to media publications, descriptions of the final terms of securities and offerings, and electronic and other road shows, and modify the record retention provisions;

• the shelf registration rules address issues regarding the liability of officers, directors, and accountants and other experts arising from the new effective dates triggered by the filing of prospectus supplements;

• the definition of ineligible issuer more closely conforms the definition to other ineligibility provisions in the Securities Act;

• the rule permitting specified written notices that are not prospectuses narrows the types of information for which a preliminary prospectus will have to include a price range as a condition;

• the definition of well-known seasoned issuer enables issuers to include all registered non-convertible securities, other than common equity, issued for cash in measuring the amount of registered fixed income securities over the prior three years; and

• the prospectus delivery rule addresses concerns about potential underwriter liability due to an issuers failure to timely file its final prospectus.

We also have endeavored to provide more guidance to market participants regarding our interpretation of the liability provisions of Securities Act Sections 12(a)(2) and 17(a)(2).³¹

B. Background

1. Advances in Technology

As we noted in the Proposing Release, significant technological advances over the last three decades have increased both the markets demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate this information. Computers, sophisticated financial software, electronic mail, teleconferencing, videoconferencing, webcasting, and other technologies available today have replaced, to a large extent, paper, pencils, typewriters, adding machines, carbon paper, paper mail, travel, and face-to-face meetings relied on previously. The rules we are adopting today seek to recognize the integral role that technology plays in timely informing the markets and investors about important corporate information and developments.

2. Exchange Act Reporting Standards

The role that a public issuers Exchange Act reports play in investment decision making is a key component of the rules we are adopting today. Congress recognized that the ongoing dissemination of accurate information by issuers about themselves and their securities is essential to the effective operation of the trading markets. The Exchange Act and underlying rules have established a system of continuing disclosure about issuers that have offered securities to the public, or that have securities that are listed on a national securities exchange or are broadly held by the public. The Exchange Act rules require public issuers to make periodic disclosures at annual and quarterly intervals, with other important information reported on a more current basis. The Exchange Act specifically provides for current disclosure to maintain the timeliness and adequacy of information disclosed by issuers, and we have significantly expanded our current disclosure requirements consistent with the provision in the Sarbanes-Oxley Act of 2002³² that "[e]ach issuer reporting under Section 13(a) or 15(d) disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer as the Commission determines is necessary or useful for the protection of investors and in the public interest."³³

A public issuers Exchange Act record provides the basic source of information to the market and to potential purchasers regarding the issuer and its management, business, financial condition, and prospects. Because an issuers Exchange Act reports and other publicly available information form the basis for the markets evaluation of the issuer and the pricing of its securities, investors in the secondary market use that information in making their investment decisions. Similarly, during a securities offering in which an issuer uses a short-form registration statement, an issuers Exchange Act record is very often the most significant part of the information about the issuer in the registration statement.

With the enactment of the Sarbanes-Oxley Act and our recent rulemaking and interpretive actions, we have enhanced significantly the disclosure included in issuers Exchange Act filings and accelerated the filing deadlines for many issuers. The following are examples of recent regulatory actions that have improved the delivery of timely, high-quality information to the securities markets by issuers under the Exchange Act:

• requiring the establishment of disclosure controls and procedures;³⁴

• requiring a public issuers top management to certify the content of periodic reports and highlight their responsibilities for and evaluation of the issuers disclosure controls and procedures and internal control over financial reporting;³⁵

• modifying the approach to current disclosure by increasing significantly the types of events that must be reported on a current basis and shortening the time for filing current reports;³⁶

• approving listing standard changes intended to improve corporate governance and enhance the role of the audit committee of the issuers board of directors with regard to financial reporting and auditor independence;³⁷ and

• providing further interpretive guidance regarding the content and understandability of Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) a disclosure item we believe is at the core of a reporting issuers periodic reports.³⁸

Many of the recent changes to the Exchange Act reporting framework provide greater rigor to the process that issuers must follow in preparing their financial statements and Exchange Act reports. Senior management now must certify the material adequacy of the content of periodic Exchange Act reports. Moreover, issuers, with the involvement of senior management, now must implement and evaluate disclosure controls and procedures and internal controls over financial reporting. Further, we believe the heightened role of an issuers board of directors and its audit committee provides a structure that can contribute to improved Exchange Act reports.

As we recognized in the Proposing Release, the 1996 Concept Release and the 1998 proposals also considered the role of enhanced Exchange Act reporting as an important corollary to reform of the offering process under the Securities Act.³⁹ We believe that the enhancements to Exchange Act reporting described above enable us to rely on these reports to a greater degree in adopting our rules to reform the securities offering process.

¹⁷ Securities Offering Reform, Release No. 33-8501 (Nov. 3, 2004)[69 FR 67392] ("Proposing Release").

¹⁸ The public comments we received are available for inspection in our Public Reference Room at 100 F Street, NE, Washington, DC 20549 in File No. S738-04, or may be viewed at http://www.sec.gov/rules/proposed/s73804.shtml.

¹⁹ A large number of commenters submitted comments that addressed only issues regarding electronic road shows. See, e.g., letters from Robert Alpert; E. Price Ambler; Kenneth Arnot; Richard Barrera; Lisa Baudot; Thomas Bengtsson; Barry Bruner; Harold Candland; Nikita Chitnis; Herbert Chung; Rick Dowdle; Pat Gilbert; Ira Ginsburg; Naval Goel; Bernard Krieg; Francis Lanio; Jimmy Liu; Marvin Lutz; Peter Martin; Craig Millar; Piers Monckton; NetRoadshow Inc. ("NetRoadshow"); F. Thomas OHalloran, Paul J. Rasplicka; Kim Redding; Eric Ribner; David Schumacher, Andre Shih; Susquehanna International Group, LLP ("SIG"); Steve Smart-OConnor; Bob Smith, Forrest Tempel; Chris Wallis; and Adam White.

²⁰ Milton H. Cohen, Truth in Securities Revisited, 79 Harv. L. Rev. 1340 (1966). ("It is my thesis that the combined disclosure requirements of these statutes would have been quite different if the 1933 and 1934 Acts ... had been enacted in opposite order, or had been enacted as a single, integrated statute that is, if the starting point had been a statutory scheme of continuous disclosures covering issuers of actively traded securities and the question of special disclosures in connection with public offerings had then been faced in this setting. Accordingly, it is my plea that there now be created a new coordinated disclosure system having as its basis the continuous disclosure system of the 1934 Act and treating the 1933 Act disclosure needs on this foundation.")

²¹ See Disclosure to Investors A Reappraisal of Federal Administrative Policies under the 33 and 34 Acts, Policy Study (the "Wheat Report"), www.sechistorical.org/museum/Museum_Papers/museum_Papers_Chron.php#19 60 (Mar. 27, 1969).

²² See Report of the Advisory Committee on Corporate Disclosure, Cmte. Print 9529, House Cmte. On Interstate and Foreign Commerce, 95th Cong., 1st. Sess., Nov. 3, 1977 (Nov. 3, 1977). In addition, beginning in 1968, the American Law Institute ("ALI") began its work on a Federal Securities Code, which was approved in 1978 by the ALI membership. The ALI Federal Securities Code included company registration as a central component. See American L. Inst., Federal Securities Code (1980).

²³ See Adoption of Integrated Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380] ("Integrated Disclosure Release"): Delayed or Continuous Offering and Sale of Securities, Release No. 33-6423 (Sept. 2, 1982) [47 FR 39799]; and Shelf Registration, Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889].

²⁴ Report of the Task Force on Disclosure Simplification, available at www.sec.gov/news/studies/smpl.htm (Mar. 5, 1996).

²⁵ Report of the Advisory Committee on the Capital Formation and Regulatory Process (the "Advisory Committee Report"), available at www.sec.gov/news/ studies/capform.htm (July 24, 1996).

²⁶ Securities Act Concepts and Their Effects on Capital Formation, Release No. 33-7314 (July 25, 1996) [61 FR 40044] (the "1996 Concept Release").

²⁷ 17 CFR 230.144A.

²⁸ 17 CFR 230.144.

²⁹ In addition, the 1996 Concept Release sought input on a number of items suggested for consideration by the Task Force on Disclosure Simplification, including the following: allowing smaller issuers that have been reporting for one year to make delayed offerings (without altering the disclosure requirements or permitting forward incorporation by reference); eliminating "at-the-market" offering restrictions; allowing universal shelf registration for secondary offerings; allowing issuers and majority-owned subsidiaries to be named as possible issuers on a shelf registration (without designating the issuer until takedown); allowing reallocation of securities on a shelf registration statement by post-effective amendment; allowing registration by seasoned issuers without any specification of the classes registered; and allowing seasoned issuers to pay registration fees at the time of the takedown.

³⁰ See The Regulation of Securities Offerings, Release No. 33-7606A (Nov. 13, 1998 [63 FR 67174] (the "1998 proposals"). The Commission proposed these new rules after it was granted general exemptive authority under the Securities Act. The National Securities Markets Improvement Act of 1996 (NSMIA) (Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996)) provided the Commission with general authority to adopt exemptive rules under the Securities Act to the extent that such exemptive action is "necessary or appropriate in the public interest and consistent with the protection of investors.; See Securities Act Section 28 [15 U.S.C. 77z-3].

³¹ 15 U.S.C. 77l(a)(2) and 15 U.S.C. 77q(a)(2).

³² Pub. L. 107-204, 116 Stat. 745 (2002).

³³ See Section 409 of the Sarbanes-Oxley Act, which added Section 13(l) to the Exchange Act (15 U.S.C. 78m(l)). See also Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69 FR 15594] and Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date; Correction, Release No. 33-8400A (Aug. 4, 2004) [69 FR 48370] ("Form 8-K Releases").

³⁴ See Certification of Disclosure in Companies Quarterly and Annual Reports, Release No. 33-8124 (Aug. 28, 2002) [67 FR 57276] ("Certification Release").

³⁵ See Managements Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Release No. 33-8238 (June 5, 2003) [68 FR 36636]; Certification Release, note 34.

³⁶See Form 8-K Releases, note 33.

³⁷ See Standards Relating to Listed Company Audit Committees, Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788].

³⁸ See Commission Guidance Regarding Managements Discussion and Analysis of Financial Condition and Results of Operations, Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056] (the "2003 MD&A Release").

³⁹ Enhanced Exchange Act reporting also was central to the recommendations of the Advisory Committee. See note 25.