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SEC Liberalizes the Capital Raising Process
Kevin M. Robertson
410-347-7302
kmrobertson@ober.com
Co-authored with Sanjay M. Shirodkar
Appeared in The Daily Record
July 22, 2005
On June 29, 2005, the Securities and Exchange Commission adopted extensive amendments to its rules governing public securities offerings under the Securities Act of 1933. The SEC has created several categories of public companies and not all public companies will be able to take advantage of the new rules. In fact, large public companies are expected to realize the greatest benefit from these rules.
The final rules are not currently available. We expect the SEC to publish the final rules in the next few weeks. The final rules should provide a greater insight and detail into the manner in which the amendments change the capital raising process. We expect the new rules to become effective immediately, even though the SEC should provide for a period of transition.
The bulk of the amendments involve three principal areas:
- Communications related to registered securities offering.
Public companies communicate with their shareholders and the capital markets in a variety of ways, including through electronic means. The new rules liberalize the restrictions imposed upon a public company and its underwriters and provide guidance on the manner in which these entities can avoid violating the Securities Act. For example:
- Communications made by companies more than 30 days before filing a registration statement will be permitted so long as the communications do not reference a securities offering;
- Certain large public companies may engage in unrestricted oral and written offers at any time prior to filing a registration statement;
- Reporting companies will be able to release historical and forward-looking information around the time of a public offering; and
- Limitations on electronic road shows for public offerings will be greatly reduced.
- The offering and capital formation processes.
The final rules will change the timing of liability in the offering process. Specifically, the rules are expected to impose disclosure liability based on disclosure made prior to or at the time when the investment decision is made. This means that misstatements in or omissions from a preliminary prospectus or other offering material may not be cured by corrections in the final prospectus. We expect the SEC to provide additional guidance and clarity in the adopting release on this issue.
- Delivery of information to investors.
The new rules make a fundamental change to the manner in which public companies have traditionally satisfied their obligations to deliver a final prospectus under the Securities Act. Under current law, an issuer is required to deliver a copy of the final prospectus either with or preceding the delivery of the confirmation of sale. In contrast, the new rules adopt an “access equals delivery” model for the delivery of a final prospectus. Under this model, an issuer may be able to satisfy its delivery obligations merely by filing the final prospectus with the SEC. There are some instances where the new rules do not apply — like offerings to employees and in a business combination.
Other Changes
In addition to liberalizing the communication rules, the new rules include certain other provisions. For example, the new rules require all issuers to include business related risk factor disclosure in annual reports on Form 10-K and registration statements on Form 10. Updates to any such risk factors should be included in the issuer’s Form 10-Q. The SEC did not adopt similar risk factor disclosure for small business issuers. However, best practices would suggest (and prior to the new rules we have generally recommended) that small business issuers include a risk factor discussion in their 10-KSBs and 10-QSBs.
Contact Information
If you have any questions or would like assistance regarding the matters discussed in this legal alert, please call one of the following attorneys or your regular Ober|Kaler attorney.
Ober, Kaler, Grimes & Shriver
Maryland
120 East Baltimore Street, Baltimore, MD 21202
Telephone 410-685-1120, Fax 410-547-0699
Washington, D.C.
1401 H Street, NW, Suite 500, Washington, DC 20005
Telephone 202-408-8400, Fax 202-408-0640
Virginia
407 North Washington Street, Suite 105, Falls Church, VA 22046
Telephone 703-237-0126, Fax 202-408-0640
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