The Securities and Exchange Commission has adopted new rules that will liberalize legal restrictions relating to public offerings and shelf registrations and require companies to include applicable “risk factors” in their public reports. The final rule release is not yet available, but, based on comments made by the SEC staff, we expect that the final rules will:

• Streamline the shelf registration process;
  
  
• Require additional disclosures in periodic reports;
  
  
• Liberalize company communications before and during public offerings; and
  
  
• Potentially increase exposure to private securities litigation.

We expect that the SEC will announce shortly effective dates for the new rules. Discussed below are some of the key provisions.

Streamlined Shelf Registration Process

The new rules will significantly change shelf registration. Among other things:

• The current rule limiting a shelf registration to securities a company intends to offer within two years will be eliminated for most shelf registrations. Instead, companies will be required to update shelf registration statements every three years, including shelf registrations filed on behalf of selling security holders.
  
  
• Some of the information the SEC currently requires in a base prospectus may be incorporated by reference from previously and subsequently filed periodic reports or filed in prospectus supplements.

The new rules promise even greater flexibility for "well-known seasoned issuers" (WKSIs) by creating a new automatic shelf registration available only to WKSIs. A WKSI is a company that has timely filed for at least the prior year all required annual, quarterly and current reports, and either has at least $700 million in market capitalization (considering only common stock held by nonaffiliates) or has issued $1 billion in debt securities in registered offerings for cash over the prior three years. An automatic shelf registration will:

• Become effective immediately, allowing a WKSI to offer securities immediately after filing the registration statement. Post-effective amendments also will be effective upon filing.
  
  
• Cover an unspecified amount of securities. However, a company that is a WKSI only because of the amount of debt it has issued may only use an automatic shelf registration to sell debt securities.
  
  
• Permit filing fees to be paid as securities are pulled down from the shelf, other than a $100 initial filing fee.
  
  
• Reduce even further the information required in the base prospectus. A WKSI may include in a prospectus supplement the offer price, the name of any seller other than the company, the identity of any underwriters and the plan of distribution.
  
  
• Allow post effective additions of new classes of securities and eligible subsidiaries as additional registrants. However, if a debt security or guarantee is added, the WKSI will still need to qualify the debt security or guarantee under the Trust Indenture Act.

We expect the new rules will permit a WKSI to make unrestricted oral and written offers prior to filing a registration statement or before amending or supplementing an automatic shelf registration statement. This will allow a WKSI to complete an offering before filing the particulars of the offering (subject to the caveat noted below concerning public company acquisitions made with the WKSI’s securities). The SEC anticipates that most WKSIs will file automatic shelf registration statements.

Impact on Mergers and Acquisitions

Except for post transaction resales, the new rules will have limited effect on mergers and acquisitions. Securities registered using an automatic shelf registration statement cannot be used to purchase another company’s securities. A public company using its securities to acquire another public company must still file a registration statement on Form S-4, and the Form S-4 will continue to be subject to SEC review. However, a WKSI may use an automatic shelf registration to provide immediate liquidity to persons receiving its unregistered securities in mergers or acquisitions, since selling security holders may be added to the automatic shelf registration statement after it has been filed. Under the prior rules, the unregistered securities received by a target’s shareholders might be illiquid for a substantial period of time because the registration vehicle (a resale shelf) was subject to SEC review.

New Periodic Report Disclosures

The new rules will require additional disclosures in periodic reports:

• Annual reports on Form 10-K must disclose applicable risk factors similar to those included in a registration statement (other than risk factors that would be specific to a particular offering), and quarterly reports on Form 10-Q must include any updates to those risk factors. This may result in a trend toward including comprehensive, applicable risk factors in 10-Qs as well as 10-Ks.
  
  
• The Form 10-K or 20-F for accelerated filers must disclose any unresolved material comments made by the SEC more than 180 days prior to the end of the fiscal year.

Other Changes

We expect the new rules will significantly liberalize communications that public companies may make. The rules will:

• Permit all reporting companies to publish factual business information and forward-looking statements of the type regularly released in the ordinary course of business, regardless of whether an offering is planned or in process.
  
  
• Eliminate potential liability under the Securities Act for most communications made by or on behalf of a company more than 30 days prior to filing a registration statement so long as the communications do not reference a securities offering.
  
  
• Allow the use of written materials (in addition to the prospectus) during an offering. These changes will, among other things, allow greater communication between corporate executives and the media.
  
  
• Authorize a company to provide more factual information to the public once it has filed a registration statement; for example, an appropriately legended press release may include some types of information about the issuer, its business, and the offering schedule and mechanics
  
  
• Clarify the treatment of electronic communications during the offering process and reduce the limitations on electronic road shows.

We anticipate that the new rules also will eliminate the requirement to deliver a paper copy of the final prospectus to investors in most types of securities offerings. A final prospectus will be considered to be delivered if it is timely filed with the SEC.

Viewed together, the anticipated changes will allow companies to make more normal communications in the months leading up to and during a public offering, although care must always be taken to ensure accuracy. The new rules also may reduce the cost of public offerings by eliminating the need to provide a printed final prospectus to each person offered securities in a registered offering.

For assistance or additional information on these issues, please contact Michael Sullivan (msullivan@howardrice.com), Larry Smith, or your usual Howard Rice attorney.

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