SULLIVAN & CROMWELL LLP August 3, 2005 M EMORANDUM Re: Executive Summary: SEC Adopts Landmark Reforms to the Registered Securities Offering Process The SEC has unanimously adopted new rules and amendments to existing rules governing the process for conducting registered securities offerings in the United States. These reforms represent the most significant development in securities offering regulation in the United States since the creation of the shelf registration and integrated disclosure systems over 20 years ago. The reforms are focused on the registered offering process, and generally do not affect the rules for Rule 144A, Regulation S and other unregistered securities offerings. The reforms also generally do not apply to business combinations covered by Regulation M-A. The effective date for these reforms is December 1, 2005. Early compliance is not permitted. implications: We expect that these reforms will have the following practical A new class of the largest Form S-3/F-3-eligible issuers, called well-known seasoned issuers, or WKSIs, have essentially unrestricted ability to conduct all types of SEC-registered capital raising transactions, even if no shelf registration statement is yet on file, without risk of potential delay due to the SEC review process. In effect, the reforms adopt a company registration model for WKSIs. Issuers and underwriters are permitted, subject to conditions, to use written communications outside of the preliminary prospectus, such as letters, memoranda, e-mails and faxes, to offer and sell securities without risk of an automatic violation of the gun-jumping provisions of the federal securities laws. For example, issuers are now permitted to send written communications to employees, shareholders, customers and other parties. Underwriters may send sales points, term sheets and other documents to their customers.
Although written communications outside the statutory prospectus are substantially less likely to result in the harshest consequences of Securities Act Section 5 such as delay, rescission rights, disclosure of rescission rights in the prospectus and a likely SEC staff requirement to include an offending writing in the prospectus these written communications are subject to filing with the SEC under many circumstances and will in all cases be subject to liability for material misstatements and misleading statements. Thus, it remains to be seen whether and to what extent issuers and underwriters will use these additional written communications and, if they are used, how offering participants might control the content of those written communications. It is possible that the response of issuers and underwriters to a new rule regarding the determination of liability at the time of sale could represent a new speed bump in some offerings. That new rule provides that, for purposes of determining whether a preliminary or base prospectus or other written or oral statement gives rise to prospectus-level Section 12(a)(2) liability for the user because it includes a materially false or misleading statement at the time of sale, only information conveyed to the investor at or prior to the time of sale (generally, the pricing date) may be considered. Information disseminated to the investor only after the time of sale (including an oral sale), such as by way of modifications or corrections to previously conveyed information, or by way of new information in a final prospectus or prospectus supplement, is not taken into account. This rule may lead to an increased emphasis on earlier due diligence and preparation of updating disclosures prior to pricing, particularly in the context of a shelf offering. has prepared a full-length memorandum, dated August 2, 2005, entitled SEC Adopts Landmark Reforms to the Registered Securities Offering Process, that discusses these reforms and examines, through case studies, ways in which three common types of SEC-registered offerings may be conducted differently after the reforms are effective. We also have included at the end of our full-length memorandum seven quick reference tables that summarize key aspects of the reforms. Instructions as to how to obtain a copy of our full-length memorandum are provided on page 8. The remainder of this Executive Summary provides an overview of the most significant aspects of the SEC reforms. -2-
The WKSI A New Category of Issuer EXECUTIVE SUMMARY The SEC s offering process reforms 1 affect all registered offerings, including initial public offerings. Some of the most liberalizing aspects of the reforms, however, are available only to those issuers that have at least a one-year Exchange Act reporting history and that the SEC believes to be the most widely followed in the marketplace because of their size and activity in the capital markets. The SEC s rules identify this new category of issuer as a well-known seasoned issuer, or WKSI. Generally, WKSIs are those issuers eligible to use Form S-3 or Form F-3 for registration of a primary offering of securities and that have a worldwide public common equity float of at least $700 million. Among other things, the S-3/F-3 eligibility requirement means that the issuer must be current and timely (other than with respect to a limited class of Form 8-K reports) in its Exchange Act reporting for the past 12 months. An issuer that does not have the requisite worldwide public common equity float may nevertheless qualify as a WKSI if it has sold for cash at least $1 billion in SEC-registered debt or other non-convertible securities within the previous three years, but only with respect to offerings of such securities (unless it also has worldwide public common equity float of at least $75 million and is otherwise Form S-3/F-3 eligible). Greater Freedom to Communicate Prior to and During Registered Offerings The offering process reforms provide offering participants with greater freedom to communicate prior to and during a registered offering. Written communications relating to the offer and sale of securities are widely permitted. Free writing prospectuses e-mails, faxes, term sheets and other written or electronic communications relating to an offering are widely permitted to be used by the issuer and other offering participants, subject to 1 See Final Rule: Securities Offering Reform, Release Nos. 33-8591 and 34-52056 (July 19, 2005), 70 Fed. Reg. 44,722 (Aug. 3, 2005) available at <www.sec.gov/rules/final/33-8591.pdf>. -3-
conditions, without violating the gun-jumping provisions of the federal securities laws. In connection with initial public offerings and offerings by issuers not eligible to use Form S-3 or Form F-3, a free writing prospectus may be used only if it is accompanied or preceded by a preliminary prospectus (which, in the IPO context, must include a price range). In the case of electronic communications, a hyperlink to the preliminary prospectus satisfies this delivery requirement. In connection with offerings by Form S-3/F-3-eligible issuers (called seasoned issuers ) and WKSIs, the preliminary prospectus or a shelf base prospectus must be on file with the SEC at the time a free writing prospectus is used, but need not be delivered. WKSIs also may use a free writing prospectus before filing the registration statement. A free writing prospectus generally must be filed with the SEC if prepared or used by the issuer, if it includes material non-public information provided by the issuer or if it will be posted on a public web site or otherwise made available by offering participants in a broad, unrestricted distribution. The free writing prospectus is subject to prospectus liability under Securities Act Section 12(a)(2) for the user, but is not deemed part of the registration statement and, accordingly, does not carry Securities Act Section 11 cross-liability for all underwriters. The rules also clarify that an underwriter is generally not liable under Section 12(a)(2) for another person s free writing prospectuses so long as the underwriter does not use or refer to that writing. Broader public notices under Rule 134. A broader category of information may be published in public notices under the Securities Act Rule 134 safe harbor after a registration statement has been filed with the SEC, including the anticipated schedule for the offering, account opening procedures, procedures for submitting initial indications of interest and the use of proceeds of the offered securities. Rule 134 notices are neither required to be filed with the SEC nor subject to Section 12(a)(2) liability, but continue to be subject to potential disclosure liability under Exchange Act Rule 10b-5. Communications by issuers 30 days before filing a registration statement. Communications of any type by all issuers more than 30 days prior to filing a registration statement are not considered prohibited gun-jumping offers so long as the communication does not reference any registered securities offering and -4-
reasonable steps are taken to prevent distribution or republication of the communication during the 30-day period prior to filing. Certain ordinary course communications. Existing practice for continuing ordinary communications before and during a registered offering has been codified as a safe harbor. All SEC-reporting issuers are permitted at any time to publish regularly released factual business information and forward-looking business information such as earnings forecasts. Non-reporting issuers are permitted to communicate only regularly released factual business information, and must intend that those communications be made to persons, such as customers or suppliers, other than in a capacity as investors or potential investors. Use of Electronic Communications, Including Electronic Road Shows Essentially all pre-recorded electronic communications are treated as written communications, rather than as oral communications. Therefore, they are subject to filing if prepared or used by the issuer or if they otherwise meet the criteria for filing of free writing prospectuses. Live, real-time communications to a live audience are considered oral, and thus not an illegal prospectus or subject to filing, even if communicated by electronic means. Television and radio broadcasts continue to be treated as written communications, however, as specifically required by the Securities Act. Electronic road shows. An electronic road show is a free writing prospectus but is not subject to filing unless it is used in connection with an IPO of common equity or convertible securities and no version of the road show is made available to the public on an unrestricted basis. To avoid the filing requirement, the unrestricted version of an electronic road show for an equity IPO must contain a presentation by issuer management and cover the same general areas regarding the issuer, its management and the securities being offered as any restricted version of the electronic road show. The unrestricted version, however, does not have to cover all of the same subjects or provide all of the same information. Electronic road shows outside of the IPO context are not subject to these filing requirements. Expanded Research Safe Harbors Prior safe harbors for publication of research reports have been expanded to permit research to continue during securities offerings subject to conditions that are somewhat less restrictive than under prior law. -5-
Improved Shelf Registration Procedures Automatically effective shelf registration for WKSIs. The reforms establish automatically effective shelf registration for offerings by WKSIs, which features automatic effectiveness upon filing (in other words, no need to wait for SEC staff review), pay-as-you-go registration fees, the ability to add securities and related issuers by automatically effective amendments and additional flexibility in the offering process, such as the ability to omit certain information from the base prospectus and provide it instead via prospectus supplement or incorporated document. Material changes by prospectus supplement. The reforms permit all Form S-3/F-3-eligible issuers, including WKSIs, to use prospectus supplements (rather than post-effective amendments) to make material changes to the plan of distribution described in the base prospectus. Identification of selling security holders. A seasoned issuer filing an open resale registration statement following the closing of a private placement may identify selling security holders through a prospectus supplement rather than a posteffective amendment to the registration statement. Updating the shelf registration statement. The limitation under prior law that seasoned issuers register only securities they intend to offer and sell within two years is eliminated. There is a new requirement that an issuer update and restate its registration statement every three years with a new registration statement. The rules permit a prior registration statement to be used for an additional 180 days after the three-year period, in order to allow the shelf of a non-wksi seasoned issuer to be declared effective by the SEC staff. Elimination of convenience shelf doctrine. The new rules eliminate the convenience shelf doctrine, which did not permit a primary offering immediately after effectiveness of a shelf registration statement unless the prospectus contained all required information other than the limited pricing-related information that may be omitted pursuant to Securities Act Rule 430A. Primary offerings on Form S-3 or F-3 may occur immediately after effectiveness of a shelf registration statement. Freedom to conduct at-the-market offerings. Restrictions on at-the-market offerings have been eliminated. Assessing Prospectus Liability at the Time of Sale An interpretation, also codified in a new rule, provides that, for purposes of determining whether a preliminary or base prospectus or other written or oral -6-
statement gives rise to prospectus-level Section 12(a)(2) liability for the user because it includes a materially false or misleading statement at the time of sale, only information conveyed to the investor at or prior to the time of sale (generally, the pricing date) may be considered. Whether or not information has been conveyed to an investor by the time of sale is determined based on the facts and circumstances. Information disseminated to the investor only after the time of sale (including an oral sale), such as by way of modifications or corrections to previously conveyed information, or by way of new information in a final prospectus or prospectus supplement, is not taken into account. One practical effect of this rule may be an increased emphasis on earlier due diligence and preparation of updating disclosures before pricing, particularly in the context of a shelf offering. The responses of issuers and underwriters to this new rule may act as a speed bump in some offerings. Registration Statement Liability for Shelf Offerings Final prospectuses and prospectus supplements used in shelf offerings will become part of the registration statement retroactively as of the date of first sale for Securities Act Section 11 registration statement liability purposes (but not for Section 12(a)(2) purposes, as described in the previous section). Liability under Section 11 is established at the date of sale (or, if earlier, the date of first use) for issuers and underwriters. The timing of the liability determination for directors, signing officers, auditors and other experts remains as under prior law: the most recent of the effective date of the registration statement or the filing of the annual report on Form 10-K or 20-F. Prospectus Access Equals Prospectus Delivery The reforms eliminate the requirement that a final prospectus be delivered to purchasers prior to or with confirmations of sales, and instead create an access equals delivery model for final prospectuses. Delivery requirements are satisfied by electronically filing the final prospectus with the SEC, although investors must be -7-
notified that they have purchased securities in a registered offering and have the right to request physical delivery of a final prospectus. New Exchange Act Reporting Requirements Risk factors in periodic reports. Risk factors must be included in annual reports on Form 10-K where appropriate, and updates must be included in quarterly reports on Form 10-Q. Form 20-F, used for annual reports by non-u.s. issuers, already requires risk factor disclosure where appropriate. Disclosure of outstanding SEC staff comments. Forms 10-K and 20-F have been amended to require Form S-3/F-3-eligible issuers or other issuers that are treated as accelerated filers under the SEC s rules to disclose material unresolved written comments of the SEC staff that were issued more than 180 days before the end of the fiscal year and remain outstanding as of the date the annual report is filed. Voluntary filers. Forms 10-K and 20-F have been amended to add a cover page check box for voluntary filers of Exchange Act reports to disclose their status as such. Voluntary filers are treated as non-reporting issuers under the reforms and are not eligible for the registration process benefits provided to WKSIs and other Form S-3/F-3-eligible issuers. * * * If you have any questions regarding the SEC s offering process reforms, please contact any of our lawyers listed at the end of this memorandum, or any other lawyer of whom you have consulted in the past on securities law matters. The adopting release containing the full text of the new rules and amendments included in the reforms is available in the Federal Register and on the SEC s web site at <www.sec.gov/rules/final/33-8591.pdf>. You may obtain a copy of the adopting release, additional copies of this memorandum or copies of our full-length memorandum discussing the offering process reforms by contacting Melissa Caprio (+1-212-558-3864; capriom@sullcrom.com) in our New York office. SULLIVAN & CROMWELL LLP Copyright 2005 by -8-
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