SEC Reforms the Public Offering Process

Client Advisory

August 15, 2005

This advisory summarizes the recently adopted SEC reforms to the registration, communications and offering processes under the Securities Act of 1933 (the "Securities Act"). 

On July 19, 2005, the SEC issued a release entitled "Securities Offering Reform" containing a set of new and revised rules adopted to "eliminate unnecessary and outmoded restrictions on offerings," in part by "addressing communications relating to registered offerings, delivery of information to investors, and procedural aspects of the offering and capital formation processes."[1]  These rules will become effective on December 1, 2005.

The Securities Act restricts the type of communications that an issuer or other offering participant (such as an underwriter) can use during a registered public offering.  Prior to the filing of a registration statement, all offers, in whatever form, are prohibited.  In the period between the filing of the registration statement and its effectiveness, written offers and offers made by radio or television are limited to a "statutory prospectus" that conforms to the requirements of Section 10 of the Securities Act.  After a registration statement is declared effective, offering participants are still limited to making written offers through a statutory prospectus, although additional written materials may be sent if a final prospectus meeting the requirements of Section 10(a) of the Securities Act is given prior to or with those materials.  Violations of these restrictions are known as "gun-jumping". 

In general, the new rules significantly loosen the restrictions on the communications issuers and other offering participants can make during the registration process.  The new rules create new categories of issuers based on their size and presence in the market: well-known seasoned issuers, seasoned issuers, unseasoned issuers and non-reporting issuers.  The new rules generally liberalize the permitted offering activity and communications allowed by issuers, especially as they apply to larger, more well-known issuers.  The SEC describes the cumulative effect of the new rules as follows:[2]

  1. Well-known seasoned issuers are permitted to engage at any time in oral and written communications, including the use of a "free-writing prospectus" (defined below), subject to certain conditions.[3]
  2. All reporting issuers are permitted, at any time, to continue to publish regularly released factual information and forward looking information.[4]
  3. Non-reporting issuers are permitted, at any time, to publish regularly released factual business information that is intended for use by persons other than as investors.[5]
  4. Communications by issuers more than 30 days before filing a registration statement are not prohibited offers so long as they do not reference a securities offering that is or will be the subject of a registration statement.[6]
  5. All issuers and offering participants are permitted to use free-writing prospectuses after the filing of the registration statement, subject to certain conditions including filing with the SEC.[7]
  6. A broader category of routine communications regarding issuers, offerings and procedural matters are excluded from the definition of "prospectus."[8]

Current "Quiet Period" Provisions

Pre-filing period
The current registration regime substantially restricts the type of communications an issuer can undertake during the registration process.  During the period prior to the filing of a registration statement with the SEC, the "pre-filing period", all offers or sales of the subject securities, in whatever form, are prohibited.[9]  The SEC has broadly defined "offer" as to include "the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or its securities..."[10]  Violating this prohibition on early offers is known as "gun-jumping" and can result in the SEC imposing a "cooling-off" period during which the issuer will be precluded from filing a Securities Act registration statement relating to the proposed offering.

The issuer can undertake only limited communications during this period.  For example, preliminary negotiations with underwriters are exempted.[11] Also, Rule 135 provides a safe harbor allowing an issuer to publish a notice stating that it proposes to make an offering.  The SEC has also stated that issuers can continue to release factual information relating to their ordinary course of business during the pre-filing period.[12]

Waiting period
Between the filing of a registration statement and its effectiveness (the "waiting period" and, together with the pre-filing period, the "quiet period") written offers are limited to a preliminary prospectus which conforms to the requirements of Section 10(b) of the Securities Act.[13]  Oral offers are permitted during this period as are road shows, in which the underwriters describe the issuer and the offering to potential investors in a number of financial centers.  The issuer can also use a Rule 134 communication published or transmitted to any person after a registration statement has been filed if it contains only the limited statements required or permitted to be included in the new communication about an offer.

New Regime

The SEC has stated that the current restrictions are outdated.  The continuing periodic disclosure regime established by the SEC under Section 13 and 15(d) of the Exchange Act has mandated more communications from issuers, and modern communications technology provides a powerful and versatile way to communicate quickly and broadly.  Given the "changes in the Exchange Act disclosure regime and the tremendous growth in communications technology...the gun-jumping provisions of the Securities Act impose substantial and increasingly unworkable restrictions on many communications that would be beneficial to investors and markets and would be consistent with investor protection."[14] The new rules significantly eliminate these outdated restrictions.  The most significant changes made by the new rules are summarized below.

New Categories of Issuers
The new rules create four new categories of issuers based on their size, presence in the marketplace and reporting history.  The degree of flexibility granted to issuers in their public communications depends on which category they fall under, with larger and more well-known companies being granted greater flexibility in communicating during the registration process.

a. Well-Known Seasoned Issuer 

The most significant flexibility in communications are granted to "well-known seasoned issuers."  These are the largest issuers that have a reporting history and are presumptively the most widely followed in the marketplace.  A "well-known seasoned issuer" is defined as an issuer which is required to file periodic reports under Section 13(a) and 15(d) of the Exchange Act (e.g., Forms 10-K and 10-Q) and which,

  1. meets the registrant requirements of Form S-3 or Form F-3, the short registration forms which incorporate by reference the issuer information already made public in the issuer's periodic Exchange Act reports;
  2. either (a) has a worldwide market value of outstanding common equity held by non-affiliates (a “public float”) of $700 million or more, or (b) has issued in the last three years at least $1 billion in non-convertible securities, other than common equity in primary offerings for cash registered under the Securities Act; and
  3. is not an ineligible issuer under the new rules.[15]  Ineligible issuers include blank check companies, shell companies, penny stock issuers, certain issuers who are delinquent in their periodic reports to the SEC, limited partnerships that are not using a firm commitment underwriting and issuers who have filed for bankruptcy in the last 3 years.[16]
b. Seasoned Issuer

A seasoned issuer is an issuer that can use Form S-3 or F-3 to register primary offerings of securities for cash, i.e., the market value of its public float is more than $75 million, or is registering securities in reliance on certain instructions to Form S-3 and F-3, e.g., primary offerings if non-convertible investment grade securities, offering of investment grade and asset-backed securities,

c. Unseasoned Issuer

An unseasoned issuer is an issuer that is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but that do not satisfy the requirements of Form S-3 or F-3 for primary offerings.

d. Non-Reporting Issuer

This category includes issuers that are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  These are essentially issuers preparing for an IPO.

The Free-Writing Prospectus
Currently, during the quiet period, no written offers can be made unless they are in the form of a statutory prospectus that meets the requirements of Section 10.  Newly adopted Rules 164 and 433 allow companies to make written offers, including certain electronic communications, during an offering outside the statutory prospectus if certain conditions are met (a "free-writing prospectus").[17]

A free-writing prospectus need not of course be in any particular form and is not required to meet the informational requirements otherwise applicable to prospectuses.  It is defined as a “written communication” that is an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration in respect of the offering is file that are or will be the subject of a registration statement and is not: (i) a Section 10(a) prospectus,[18] (ii) a prospectus satisfying the SEC’s rules permitting the use of preliminary or summary prospectuses, or prospectuses subject to completion (iii) a communication made in reliance on special rules for asset backed issuers, or (iv) a prospectus because it was preceded by a final prospectus.

a. Eligibility

A well-known seasoned issuer can use a free-writing prospectus at any time, including during the pre-filing period, provided that it meets the conditions outlined below.  Other issuers can use free-writing prospectuses only after filing a registration statement.  Furthermore, to use a free-writing prospectus, a company can't be an ineligible issuer. 

b. Conditions:

Under the new rules, a free-writing prospectus must meet the requirements of Rule 164 and the conditions of Rule 433.  Those conditions include the following:

  1. Statutory Prospectus: The use of a free-writing prospectus is generally conditioned on the filing of a prospectus that meets the requirements of Section 10.  A statutory prospectus must either be available or delivered to the recipient when a free-writing prospectus is used.  For non-reporting issuers and unseasoned issuers a statutory prospectus may have to precede or accompany the free writing prospectus.  For seasoned issuers and well-known seasoned issuers a reference to the filing is sufficient.
  2. Information: There is no particular information requirement for a free-writing prospectus.  The free-writing prospectus simply cannot conflict with the filed prospectus and cannot be misleading or fraudulent.
  3. Legend: The only required content in a free-writing prospectus is a legend.  The legend needs to include information on where the statutory prospectus is available, recommend that investors read it, advise that investors can get a registration statement online with the SEC, and explain that they may request a prospectus from the issuer, underwriter or dealer.
  4. Filing: Generally an issuer will have to file the free-writing prospectus with the SEC.
  5. Record Retention: All offering participants must retain for three years records of any free-writing prospectuses used from the date of the bona fide offering

Treatment of Electronic Road Shows

Under the new rules, a live, in real-time road show presentation transmitted graphically to a live audience is not considered a written communication.  This means that they are not even considered a free-writing prospectus and are simply treated like an oral offer.  Road shows that are recorded are deemed to be free-writing prospectuses and hence need to fulfill the conditions outlined above.[19]

Issuer Web Sites

Under Rule 433(e) an offer of an issuer's securities contained on an issuer's website or contained on a third-party's website hyperlinked from the issuer's web site is a written offer and will be considered a free-writing prospectus.  Thus the Rule 433 conditions outlined above will apply to such a website.  Historical information on the company will not be considered an offer unless it is incorporated or referenced by the information relating to the security.

Media Publications or Broadcasts

The treatment of media broadcasts and publications under Rule 164 and Rule 433 depends on whether the broadcast or publication was prepared and paid for by the issuer or an offering participant, or whether unaffiliated media prepare and publish or broadcast the communication for no consideration or payment from an issuer or offering participant.  Where an issuer or offering participant pays for the publication of an article, radio or TV broadcast or advertisement, the communication will be treated as any other free-writing prospectus.  Non-reporting and unseasoned issuers would have to accompany or precede it with a statutory prospectus and seasoned issuers and well-known seasoned issuers would need a statutory prospectus on file.

Unaffiliated media publications would be treated differently.  Although still considered a "free-writing prospectuses," the communication would not need to be accompanied or preceded by a statutory prospectus, although a filed registration statement would still generally be necessary.  Thus, where the issuer invites the media to a road show, the article written on it will be considered a free-writing prospectus.  If the CEO of the issuer gives an interview with a magazine, the publication of the article will be a free-writing prospectus.[20]

Delivery Rules

The new rules liberalize the requirements surrounding the delivery of a prospectus.  The new rules replace a formal delivery requirement with an "access equals delivery" model.[21] Under Rule 172, a final prospectus will be deemed to precede or accompany a security for sale as long as the final prospectus meeting the requirements of Section 10(a) is filed or the issuer will make a good faith effort to file it within the time frame described by Rule 424.  This eliminates in most cases the need to print and distribute hard copies of the prospectus. 

New Safe Harbors for Ongoing Communications During an Offering
The new rules provide for two new safe harbors from the gun-jumping provisions for continued ongoing business communications during an offering.[22]

a. Regularly Released Factual Business and Forward-Looking Information - Available to Reporting Issuers

Under Rule 168, reporting issuers can continue to publish or disseminate regularly released factual business and forward-looking information at any time, including around the time of a registered offering.

b. Regularly Released Factual Business Information - Available to Non-Reporting Issuers

Under Rule 169, non-reporting issuers can continue to publish or disseminate regularly released factual business information that is intended for use by persons other than in their capacity as investors or potential investors.

Factual information is defined as information about the issuer, its business or financial developments, advertisements, information on the issuer's products or services and dividend notices.  Forward looking information includes projections of revenues, income, earnings per share, capital expenditures, dividends and capital structure, the issuer's management plans, objectives for future operations and future economic performance.

30-Day Bright Line Exclusion from Prohibition on Offers Prior to Filing a Registration Statement
Currently, there is no clear time when the quiet period begins.  The current rules simply prohibit offers made prior to the filing of a registration statement.  The prevailing view is that the period begins no later than when the issuer reaches an understanding with the lead underwriter to make a public offering.  The new rules provide a clear statement on the beginning of the quiet period. 

New Rule 163A provides all issuers a bright-line period, ending 30 days prior to the filing date of a registration statement, during which issuers may communicate without risk of gun-jumping.[23]  This bright line exclusion is subject to the following conditions

  1. the communication cannot reference a securities offering that will be the subject of a registration statement,
  2. the communication has to be made by or on behalf of the issuer, and
  3. the issuer must take reasonable steps within its control to prevent further distribution or publication of the communication during the 30 day period immediately before the issuer files the registration statement. 
This exclusion is not available to offerings by blank check companies, shell companies or offerings of penny stock.  It is also not available for communications regarding business combination transactions or offerings made by investment companies or business development companies.

Reforms to Shelf Registration
Under Rules 415, 424, and newly adopted 430B, the SEC has streamlined the “shelf registration” process and created automatic shelf registration for well-known seasoned issuers.  The new rules cut back on what information must be included in the base prospectus and codify methods by which an issuer can supplement the base prospectus.  They also replace the requirement that an issuer must register securities it intends to offer within 2 years with the requirement that an issuer simply update its shelf registration at least once every three years.  The new rules loosen restrictions for "at the market" primary offerings[24] and allow the immediate takedown of shelf registered securities.[25]

Automatic shelf registration is available to well-known seasoned issuers.  Under the new rules, registration for such companies is effective automatically on the filing a Form S-3 or F-3 and less information is required in the base prospectus.  The new rules also expand the ability to add information to the filing, reforms the mechanics of paying fees and allows for new types of securities or new eligible issuers to be filed by a post-effective amendment.

Freedom of Well-Known Seasoned Issuers
Its worth making a special note of the exceptional flexibility granted to well-known seasoned issuers under the new rules.  As the SEC states, "As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, we believe that it is appropriate to provide communications and registration flexibilities to these well-known seasoned issuers beyond that provided to other issuers, including other seasoned issuers."[26]

Taken together, the safe harbors for regularly released factual and forward-looking information, the 30-day bright line rule and the use of free-writing prospectuses let well-known seasoned issuers make most communications without significant restrictions during the offering period.  Under Rule 163 these issuers receive an exemption from the prohibition on offers made prior to the filing of a registration statement.  This exemption permits these issuers to engage in unrestricted oral and written offers before a registration statement is filed without gun-jumping.  This is not available for registered business combination transactions, registered investment companies or business development companies.  It should be noted that such communications will still be deemed "free writing prospectuses" and will have to be filed and have a legend pursuant to the conditions outlined above.[27]

Questions regarding this advisory should be addressed to Stephen V. Burger (212-238-8742,, Robert A. McTamaney (212-238-8711,, or Steven J. Glusband (212-238-8605,

[1]Securities Offering Reform, 70 Fed. Reg. 44722 (August 3, 2005) (to be codified at 17 CFR pts. 200, 228, 229, 230, 239, 240, 243, 249 and 274) [the "Release"].

[2]  Id. at 44734.

[3]  SEC Rule 163

[4]  SEC Rule 168

[5] SEC Rule 169

[6] SEC Rule 163A

[7] SEC Rule 164, SEC Rule 433

[8] SEC Rule 134

[9] See Securities Act of 1933 §5(c)(precluding the use of the mails or any instruments of transportation or communication in interstate commerce to offer to sell a security unless a registration statement has been filed on to such security), §2(a)(3) (defining "offer" broadly to “include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest on a security, for value.”

[10] SEC Securities Act Release No. 33-5180 (1971).

[11] Securities Act of 1933 §2(3).

[12] SEC Securities Act Release No. 5180 (1971).

[13] See Securities Act of 1933§10(b) (the SEC shall permit the use of a prospectus for the purposes of subsection (b)(1) of section 5 which permits in part for summarized information in the final prospectus), §5(b)(1) (prohibiting the use of any “prospectus” relating to any security with respect to which a registration statement has been filed unless such prospectus meets the requirements of Section 10), §2(a)(10)(defining "prospectus" as any written communication, TV or radio offers), SEC Rule 430.

[14] Release, supra note 1, at 44731.

[15] Id. at 44727.

[16] Id. at 44745.

[17] Id. at 44745.

[18] A Section 10(a) prospectus is the final or complete prospectus containing the information contained in an effective registration statement.

[19] Release, supra note 1, 44753-44754.

[20] Id. at 44757.

[21] Id. at 44783.

[22] Id. at 44735.

[23] Id. at 44739.

[24] "At the market" offerings are offerings of securities into an existing trading market for outstanding shares of the same class at other than a fixed price on a national securities exchange or through a market maker otherwise than on an exchange.

[25] Release, supra note 1, at 44770.

[26] Id. at 44727.

[27] Id. at 44741.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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