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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. _____ - ____
Table of Contents
Securities Offering ReformVI. Prospectus Delivery ReformsA. Current Prospectus Delivery RequirementsThe Securities Act requires delivery of a prospectus meeting the requirements of Securities Act Section 10(a), known as a “final prospectus,” to each investor in a registered offering.552 After the effective date of a registration statement, a written communication that offers a security for sale or confirms the sale of a security may be provided if a final prospectus is sent or given previously or at the same time. Otherwise, such a communication is a prospectus and may not be provided unless it meets the requirements of Securities Act Section 10(a).553 A written confirmation is not designed to meet these requirements. Therefore, a final prospectus must accompany or precede a written confirmation. In addition, Securities Act Section 5(b)(2) makes it unlawful to deliver a security “unless accompanied or preceded” by a final prospectus. Under these requirements, in the current system, if no preliminary prospectus or written selling materials are distributed, the final prospectus is the only prospectus received by investors. However, an investor’s purchase commitment and the resulting contract of sale of securities to the investor in the offering generally occur before the final prospectus is required to be delivered under the Securities Act. Moreover, for sales occurring in the aftermarket, as a result of our rules, investors in securities of reporting issuers generally are not delivered a final prospectus.554 Accordingly, the greatest utility of a final prospectus may be as a document that informs and memorializes the information for the aftermarket. Actual delivery to purchasers is not necessary to satisfy this purpose.555 We have previously adopted a number of other rules to address prospectus delivery in primary offerings and secondary market transactions. Securities Act Rule 153 addresses delivery of final prospectuses in transactions between brokers taking place over a national securities exchange. Securities Act Rule 434 was intended to ease the burden of prospectus delivery within the T+3 settlement cycle by permitting delivery of a final prospectus to be made in multiple documents at different intervals in the offering 556 process. Many of our recent rulemakings to improve the content and timing of a reporting issuer’s Exchange Act filings, together with the communications and procedural changes we are adopting today, are aimed at providing more information to investors at the time they commit to purchase a security. As we discussed in the Proposing Release, the increase in the flow of current information about a reporting issuer and the ability of offering participants to use free writing prospectuses in connection with offerings will give offering participants a greater ability to provide information to investors about the securities at that time. Further, rapid technological advances in the area of information delivery have resulted in greater access to information. For example, prospectuses and other filings now are available through EDGAR and other electronic sources, including the Internet, immediately upon filing.557 B. Prospectus Delivery RevisionsWe are adopting revisions to the prospectus delivery requirements. Our new and amended rules are intended to facilitate effective access to information, while taking into account advancements in technology and the practicalities of the offering process. These changes are intended to alleviate timing difficulties that may arise under the current securities clearance and settlement system, and also to facilitate the successful delivery of, and payment for, securities in a registered offering. As we discussed in the Proposing Release, given that the final prospectus delivery obligations generally affect investors only after they have made their purchase commitments and that investors and the market have access to the final prospectus upon its filing, we believe that delivery obligation should be able to be satisfied through a means other than physical delivery. Because the contract of sale has already occurred, we also believe that delivery of a written confirmation and the delivery of the final prospectus need not be linked. Many commenters and market participants have encouraged us to adopt an "access equals delivery" model for final prospectus delivery.558 Under such an "access equals delivery" model, investors are presumed to have access to the Internet, and issuers and intermediaries can satisfy their delivery requirements if the filings or documents are posted on a web site. The access concept is premised on the information or filings being readily available. At this time, we believe that Internet usage has increased sufficiently to allow us to adopt a final prospectus delivery model for issuers and their intermediaries that relies on timely access to filed information and documents.559 Issuers, brokers, and dealers can satisfy their final prospectus delivery obligations if a final prospectus is or will be on file with us within the time required by the new rules, including the cure period. As adopted, the new and amended rules will:
1. Access Equals Deliverya. Rule 172(i) Scope of Rule We are adopting new Rule 172 with some refinements from the proposals to implement our access equals delivery model.560 Under Rule 172(b), as adopted, a final prospectus will be deemed to precede or accompany a security for sale for purposes of Securities Act Section 5(b)(2) as long as the final prospectus meeting the requirements of Securities Act Section 10(a) is filed or the issuer will make a good faith and reasonable effort to file it with us as part of the registration statement within the required Rule 424 prospectus filing timeframe.561 Our “access equals delivery” model will continue to satisfy the principal statutory purposes of final prospectus delivery while recognizing the need to modernize the obligations in view of technological and market structure developments.562 (ii) Comments on Rule 172 Most commenters supported the proposals that would deem the final prospectus delivery requirements satisfied through the filing of the final prospectus with the Commission.563 Some commenters believed that the “access equals delivery” concept should extend to delivery obligations for preliminary prospectuses in initial public offerings as well as those applicable to proxy statements and other documents.564 One commenter was concerned that an access equals delivery method for providing information would not provide older persons with the information they needed for their investment decisions.565 A number of commenters were concerned about the condition to the proposed rule that the final prospectus would have to be on file with the Commission within the time frame required under Securities Act Rule 424.566 The commenters were concerned about retroactive violations of Section 5 if underwriters or dealers sent written confirmations and then the issuer failed to file the final prospectus within the required time frame. These commenters recommended including a cure provision in the Rule. Other commenters recommended eliminating this condition entirely and instead relying on Commission enforcement actions as the penalty for issuers failing to timely file final prospectuses.567 As we note above, we have adopted Rule 172 to continue to cover only delivery of final prospectuses. We do not currently believe that extension of access equals delivery is appropriate for preliminary prospectus delivery obligations in initial offerings because we believe that it is important for potential investors to be sent the preliminary prospectus. We have, however, revised the Rule in response to commenters’ concerns about the filing condition. As adopted, we have provided that the filing condition is satisfied if the issuer makes a good faith and reasonable effort to file the prospectus within the timeframe required by Rule 424. We have included a cure provision that allows the issuer an ability to cure an unintentional failure to file if it has made such a good faith and reasonable effort to comply with the filing condition and files the prospectus as soon as practicable after discovery of the failure to file. We believe that these revisions to the Rule will address commenters’ concerns regarding retroactive violations of Section 5 due to an issuer’s failure to timely file the final prospectus.568 We also have provided new paragraph (b)(8) of Rule 424 under which the issuer will file a form of prospectus that is not timely filed. We also have provided that the filing condition does not apply to transactions by dealers requiring delivery of a final prospectus pursuant to Securities Act Section 4(3). b. Exceptions to the RuleWe have excluded certain types of offerings from the Rule as adopted because either they do not raise the same issues as in corporate capital formation transactions or they are already subject to rules unique to their offerings. For example, in offerings made pursuant to Form S-8, the final prospectus is never filed with us and thus, these offerings do not raise the same types of issues as other capital formation transactions. Business combination transactions and exchange offers also differ from other types of offerings registered under the Securities Act because the proxy rules and tender offer rules in conjunction with state law impose informational and delivery requirements in those transactions. The information contained in the final prospectus, therefore, will be delivered regardless of the Securities Act’s requirements. Moreover, it is important to retain consistency among the various rules and regulations applicable to these business combination transactions and exchange offers.569 Finally, registered investment companies and business development companies will not be able to rely on the Rule. These entities are subject to a separate framework governing communications with investors, and we believe that it would be more appropriate to consider any changes to our prospectus delivery requirements as they apply to registered investment companies and business development companies in the context of a broader reconsideration of this framework.570 c. Notification(i) Rule 173 In addition to providing access to information, prospectus delivery can serve the function of informing investors that they purchased securities in a registered transaction. This notification will provide investors the ability to trace their purchases for purposes of asserting their rights under the liability provisions of the federal securities laws. To preserve this investor protection function, we are adopting Rule 173 substantially as proposed. Rule 173 addresses each transaction involving:
Rule 173 provides that, in these transactions, each underwriter or dealer participating in a registered offering (or, if the sale was effected by the issuer and not by or through an underwriter or dealer, then the issuer) must provide to each purchaser from it, not later than two business days after the completion of the sale, a copy of the final prospectus or, in lieu of the final prospectus, a notice providing that the sale was made pursuant to a registration statement or in a transactions in which a final prospectus would have been required to have been delivered in the absence of Rule 172. The Rule also provides that an investor can request a final prospectus. Under the Rule, a requested final prospectus does not have to be provided before settlement.571 Rule 173, as adopted, provides that compliance with Rule 173 is not a condition to reliance on Rule 172 to satisfy final prospectus delivery. Accordingly non-compliance with Rule 173 will not result in a violation of Securities Act Section 5. Rule 173 is, however, an important component of the prospectus delivery modifications we are adopting today. As adopted, the same offerings excluded pursuant to Rule 172, as discussed above, also are excluded from this notification provision.572 We also have revised Rule 173 to exclude transactions solely between brokers or dealers in reliance on Rule 153. (ii) Comments on Rule 173 Commenters suggested certain clarifications to proposed Rule 173 including providing a cure provision for failure to provide the required notification,573 eliminating required compliance with Rule 173 for aftermarket sales covered by Rule 174,574 and providing that compliance with Rule 153 would be deemed compliance with Rule 173.575One commenter also requested that we confirm that the Rule 173 notification may be included in Rule 10b-10 confirmations.576 We have adopted Rule 173 substantially as proposed. We have made clear that Rule 173 does not apply to transactions between dealers or brokers in reliance on Rule 153, but it continues to apply to the transaction between the broker or dealer and the underlying purchaser on whose behalf or for whose account the transaction is effected. We believe that it is important that purchasers in registered offerings are notified that they have acquired their securities in the registered transaction and so we also have not taken commenters’ suggestions to eliminate compliance with the Rule for aftermarket sales. The Rule 173 notification can be sent separately or can be included in a Rule 10b-10 confirmation. 2. Written Confirmations and Notices of AllocationsWe are adopting Rule 172(a), substantially as proposed, to provide an exemption from Securities Act Section 5(b)(1) that allows written confirmations and notices of allocation to be sent after effectiveness of a registration statement without being accompanied or preceded by a final prospectus.577 The exemption is conditioned on the registration statement being effective and the final prospectus meeting the requirements of Securities Act Section 10(a) being filed with us.578 The exemption permits:
Under the exemption, for example, broker-dealers could send e-mail notices after effectiveness to inform investors in a public offering of their allocations. Under the Rule as adopted, the notices of allocations may include the name of the securities, the CUSIP number, the amount allocated to the customer, the price of the securities, and the date or expected date of settlement and incidental information. Similar information is permitted in notices to participating dealers. The exemption is not available for the same offerings excluded from the prospectus delivery provision of the Rule discussed above. One commenter suggested that the notice of allocation be permitted to included CUSIP numbers and also suggested that, especially for asset-backed securities, the notice of allocation should be expanded to permit communication of demand for securities and “price talk” or a communication of information regarding expected or actual allocation of classes of securities in order to facilitate an investment decision.579 We have included specific reference permitting inclusion of a CUSIP number. However, we believe that the other information identified in this comment, if communicated in writing, should be the subject of a free writing prospectus. It is not an appropriate subject for a notice of allocation. The notice of allocation is intended to be a notice of actual allocation of securities to the investor or participating dealer to which the notice is provided. 3. Transactions Taking Place on an Exchange or Through a Registered Trading Facility – Rule 153Securities Act Rule 153 addresses delivery of final prospectuses in transactions taking place between brokers over a national securities exchange; it does not currently apply to transactions on an automated quotation system, such as the Nasdaq Stock Market. Rule 153 provides that where members of the exchange are on both sides of the transaction and the transaction is effected on that exchange, the Section 5 obligation to deliver a final prospectus before or with a security between the brokers will be satisfied if the issuer or underwriter delivers copies of the final prospectus to the exchange.580 Rule 153 has limited utility today because it may be relied on only for transactions between brokers on an exchange. The difficulty in prospectus delivery that Rule 153 was designed to address – the difficulty or inability to identify the ultimate buyer – has expanded since 1936 with the rise in transactions effected on markets other than national securities exchanges, such as the Nasdaq Stock Market and alternative trading systems, the growth of the book-entry system, and street name holdings.581 In addition, the paper-based system upon which Rule 153 is premised is outmoded and unnecessary due to electronic filings of final prospectuses on EDGAR and the technological resources of market members. There currently is no significance to the paper copies of prospectuses delivered to national securities exchanges. As we stated in the Proposing Release, we believe it is important, therefore, to amend Rule 153. Under the amendments we are adopting today, brokers or dealers effecting transactions on a registered exchange, through a trading facility of a registered national securities association, or through a registered alternative trading system will be deemed to satisfy their prospectus delivery obligations under Securities Act Section 5(b)(2) with regard to transactions in securities if:
These changes will eliminate the difficulties for prospectus delivery among brokers and dealers in registered resales and other sales into existing trading markets where securities of the same class already are trading. We are not requiring as part of the Rule that physical copies of the prospectus be sent to the exchange or a market maker. Further, the exchange and the market maker no longer will need to keep track of any prospectuses.582 As with the existing rule, the amended Rule does not affect delivery obligations to purchasers other than brokers or dealers. We have revised our proposed amendments to Rule 153 in one respect. For purposes of Rule 153 as amended, the filing of the final prospectus, regardless of whether it occurs before or after reliance on the Rule, will satisfy the conditions of the Rule.583 4. Aftermarket Prospectus Delivery – Rule 174Unless our rules provide otherwise, all dealers are required to deliver a final prospectus for a specified period after a registration statement becomes effective to persons who buy the securities in the aftermarket.584 Securities Act Rule 174 exempts from this aftermarket dealer prospectus delivery obligation any transaction relating to securities of a reporting issuer. These exemptions in Rule 174 do not apply to underwriters or dealers with regard to any unsold allotment. Otherwise, if the transaction relates to securities of a non-reporting issuer that will be listed on a national securities exchange or quoted on an electronic inter-dealer quotation system, current Rule 174 sets an aftermarket delivery period of 25 days after effectiveness. For offerings of securities of non-reporting issuers that will not be so listed or quoted and offerings by blank check companies, Rule 174 sets an aftermarket prospectus delivery period of 90 days after effectiveness or after the funds are released from the escrow or trust account, as the case may be. Where a registration statement relates to offerings to be made from time to time, Rule 174 provides that there is no aftermarket delivery requirement once the initial period expires. The underlying purpose of aftermarket prospectus delivery is to assure wide dissemination of information about the issuer in the market. For reporting issuers, the Rule assumes that the information is already disseminated and eliminates the prospectus delivery requirement for these issuers. We believe that, where information regarding all issuers is largely disseminated other than through physical delivery, including through EDGAR, physical delivery of a final prospectus in the aftermarket is of limited utility and necessity. We are, therefore, amending Rule 174 as proposed to provide that during the aftermarket period, dealers can rely on proposed Rule 172 to satisfy any aftermarket delivery obligations (other than for blank check companies). Some commenters recommended that we eliminate the conditions to “access equals delivery” contained in Rule 172 for brokers or dealers involved in only aftermarket distributions.585 Commenters also recommended elimination of all aftermarket prospectus delivery requirements for all transactions, with some suggesting that the obligation should be eliminated where the securities are listed on an exchange or quoted on the Nasdaq Stock Market.586 While we are not eliminating the prospectus delivery obligations that currently arise under Securities Act Section 4(3) and Rule 174, we are providing for reliance on Rule 172 to satisfy those delivery obligations (other than for blank check companies).587 Rule 173 applies in part where Securities Act Section 4(3) requires prospectus delivery and where there is no exemption from delivery under Rule 174. 552 Congress intended that the prospectus provide investors with “the means of understanding the intricacies of the transaction….” H.R. Rep. No. 85, 73rd Cong., 1st Sess. 8 (1933). 553 The term “prospectus,” as defined in Securities Act Section 2(a)(10), includes any written communication that “offers a security for sale or confirms the sale of any security; except that . . . a communication provided after the effective date of the registration statement . . . shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of section 10” is sent or given. 554 For non-reporting issuers who are listed, as of the offering date, on a national securities exchange or automated quotation system, we require that prospectuses be delivered for 25 days after the offering date. See Securities Act Rule 174(d) [17 CFR 230.174(d)].
555 Professor Louis Loss has noted that “[a] prospectus that comes with the security does not tell the investor whether or not he or she should buy; it tells the investor whether he has acquired a security or a lawsuit.” L. Loss & J. Seligman, Securities Regulation, §2-b-3 (3d ed. 2001). See also Cohen, Truth in Securities Revisited, 79 Harv. L. Rev.1340, note 20, at 1386 (criticizing the requirement that a final prospectus be delivered after an investment decision is made and noting that information essential to a transaction should, to the extent practicable, be required to be provided in time for use in an investment decision). The final prospectus also can be a basis for liability claims under Securities Act Section 12(a)(2).
556 As part of our actions today, we are eliminating Rule 434 because it has been used extremely infrequently and we believe that with the new rules it is no longer necessary. 557 Paper copies also remain available through our Public Reference Room, 100 F Street, N.E., Washington, DC 20549. 558 Commenters on prospectus delivery aspects of the 2000 Electronics Release indicated support for some sort of “access equals delivery” model. See comment letters in File No. S7-11-00 from ACCA; NYCBA; SIA; and TBMA. 559 Internet usage in the United States has grown considerably since 2000 when we published our most recent interpretive guidance on the use of electronic media in securities offerings, including with regard to prospectus delivery by electronic means. For example, recent data indicates that 75% of Americans have access to the Internet in their homes, and that those numbers are increasing steadily among all age groups. See, Three out of Four Americans Have Access to the Internet, Nielsen//NetRatings, March 18, 2004; Robyn Greenspan, Senior Surfing Surges, ClickZNetwork, Nov. 20, 2003 (citing statistics from Neilsen/NetRatings and Jupiter Research). In addition, there is evidence suggesting that the “digital divide” is diminishing. See, for example, Kristen Fountain, Antennas Sprout, and a Bronx Neighborhood Goes Online, The N.Y. Times, June 10, 2004 at G8; and Steve Lohr, Libraries Wired, and Reborn, The N.Y. Times, Apr. 22, 2004 at G1. 560 This prospectus delivery model is in addition to Rules 153 and 174, as we are amending those rules. See discussion in Section VI.B.3 below under “Transactions Taking Place on an Exchange or Through a Registered Trading Facility – Rule 153” and in Section VI.B.4 below under “Aftermarket Prospectus Delivery – Rule 174.” 561 A final prospectus only filed as provided in Rule 172 will not be considered to be sent or given prior to or with a written offer within the meaning of clause (a) of Securities Act Section 2(a)(10). 562 We are not amending Exchange Act Rule 15c2-8(d), which requires broker-dealers to take reasonable steps to comply promptly with written requests for copies of the final prospectus. 563 See, e.g., letters from ABA; Alston; ASF; BRT; Cleary; Davis Polk; Fried Frank; Goldman Sachs; ICI; Intel; Lindsay Kassof; Merrill Lynch; NYCBA; NYSBA; PEG; S & C; SCSGP; SIA; and TBMA. 564 See, e.g., letters from BRT and Cleary. 565 See letter from the American Association of Retired Persons (“AARP”). 566 See, e.g., letters from Citigroup; Cleary; CSFB; Fried Frank; Goldman Sachs; Merrill Lynch; Morgan Stanley; NYSBA; and PEG. 567 See, e.g., letters from ABA and SIA. Some commenters requested that we provide an interpretation of the applicability of the Electronic Signature in Global and National Commerce Act (“E-Sign”) to the Securities Act prospectus delivery requirements. See, e.g., letters from ABA and S & C. 568 We believe that the filing condition remains a central component of the access equals delivery construct. 569 Securities Act Rule 162 provides, however, a final prospectus delivery exemption in certain registered exchange offers subject to Exchange Act Rules 13e-4(e) [17 CFR 240.13e-4(e)] or 14d-4(b) [17 CFR 240.14d-4(b)]. 570 Although some commenters wanted us to expand the categories of issuers to whom Rule 172 would apply, we are not doing so at this time. See, e.g., letters from ABA; Allied; and Cleary. 571 The final prospectus also can be comprised of a set of documents which, taken together, satisfy the information requirements of Securities Act Section 10(a). See discussion in Section V.B.1 above under “Information Deemed Part of Registration Statement.” 572 In addition, as a result of the operation of Rule 172 and Rule 173, if a current final prospectus is filed with us, final prospectuses will no longer be required to be delivered in connection with market-making transactions by dealers affiliated with issuers. 573 See, e.g., letter from TBMA. 574 See, e.g., letter from Goldman Sachs. 575 See, e.g., letter from Brinson Patrick. 576 17 CFR 240.10b-10. See, e.g,, letter from CSFB. 578 The exemption is in Rule 172 and is subject to the same prospectus filing and cure condition, as we have modified it, as described above. 579 See letter from BMA-ABS. 580 Securities Act Rule 153 defines the phrase “preceded by a prospectus” as used in Securities Act Section 5(b)(2). 581 In connection with a proposed rulemaking in 1976, we solicited comment on extending the procedures available under Securities Act Rule 153 to transactions effected on the automated quotation system of a national securities association registered under Exchange Act Section 15A [15 U.S.C. 78oA], at least initially for Form S-8 transactions. See Effective Date of Amendments to Registration Statement and Possible Expansion of Definitional Rule, Release No. 33-5768 (Nov. 22, 1976) [41 FR 52701]. Two years later, these plans were deferred for further consideration due to lack of public interest and input at the time. See Effective Date of Amendments to Registration Statement and Expansion of Definition Rule, Release No. 33-5978 (Sep. 18, 1978) [43 FR 43725]. Many trading markets allow market participants to preserve their anonymity, thus making it difficult or impossible to identify the ultimate buyer. The growth in the book-entry system and the fact that most securities are held in street name exacerbates the problem. 582 Because we are adopting the proposed changes to Rule 153, on the effective date of the amendment our interpretation in Question 11 in the 1995 Electronics Release will no longer be effective. 583 We have revised the amendments to Rule 153 to address the suggestions of some commenters in this regard. See, e.g., letters from Cleary and Fried Frank. 584 See Securities Act Section 4(3). 585 See, e.g., letters from ABA; Cleary; and Davis Polk. 586 See, e.g., letters from ABA; Goldman Sachs; Morgan Stanley; and SIA. 587 We also have eliminated the filing condition as a condition to satisfaction of that delivery requirement. |
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