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In November, the Securities and Exchange Commission (SEC) issued a 389-page release proposing a major overhaul in the requirements for public offerings registered with the commission under the Securities Act of 1933. While comments on the proposal were due by Jan. 31, the SEC has not enforced that deadline and significant comment letters have continued to roll in. The broad theme is to modernize and streamline the procedures for registered public offerings, some of which date back to 1933, to reflect both the evolution of the securities markets and advances in information technology, such as the growth of the Internet. The changes also reflect the SEC staff’s shift in emphasis in recent years to reviewing the regular reports of public companies (10-Ks and 10-Qs) more than registration statements and prospectuses, and the improvement in those reports that the SEC has mandated in the wake of the Sarbanes-Oxley Act. The SEC has been down this road before, in 1998, when it proposed a more radical overhaul of its rules for public offerings that became known as the “Aircraft Carrier” release, due to its bulk. At the time, the SEC staff proposed both “speed bumps” that would have slowed down established “shelf” registration procedures and increased litigation exposure for issuers, their insiders and underwriters. The resulting outcry sank the Aircraft Carrier. The most dramatic benefits to issuers would be available only to a new category: “well-known seasoned issuers” (WKSI). In general, a WKSI must have a minimum “public float” (that is, market value of shares held by nonaffiliates) of $700 million of common equity-nearly 10 times higher than the existing $75 million public float requirement for issuers to qualify to use the S-3 short-form registration for “primary” cash offerings. Most of the other really significant easing of public offering burdens would be limited to S-3 issuers. Companies that do not meet that threshold, including any company doing an initial public offering (IPO), would receive only incremental benefits from the proposal. Shelf registration changes “Shelf registrations” have permitted many public companies to register in advance an aggregate dollar amount of securities, which are later sold in separate “takedowns.” WKSIs would be able to use a new “automatic shelf” procedure to register, without SEC staff review, a virtually unlimited number and variety of securities, for both primary and secondary offerings, using a “base prospectus” that would have minimal information and be effective on filing. They would pay only a small fee upon filing, with the bulk of the fees to be due only as takedowns are made under the shelf. S-3 issuers would still face possible SEC staff review of their shelf registrations, but would be permitted to omit more types of information, which instead would be included in prospectus supplements filed upon shelf takedowns, not requiring review. The proposal would loosen somewhat the “quiet period” restrictions on publicity that have forced securities lawyers to muzzle management of companies doing public offerings, especially IPOs. WKSIs and S-3 issuers, in particular, would be able to communicate more freely with investors through something called a “Free-Writing Prospectus,” as long as it contained a legend referring to the “real” prospectus and was filed with the SEC. One change that will be welcome to all issuers and underwriters is elimination of the requirement to physically deliver a copy of the final prospectus to purchasers, no later than sending purchase confirmations. The new rules would accept the premise that “access equals delivery” as long as the prospectus is filed with the SEC within the required time. As with the Aircraft Carrier, the SEC has found it necessary to offset the benefits to issuers and underwriters with other provisions that would increase their exposure to liability, in particular to class actions. In shelf registrations, directors of the issuer and auditors, in particular, would face liability for a broader array of incorporated documents, and the statute of limitations would be lengthened. It would also become harder for issuers and underwriters to avoid liability for a deficient preliminary prospectus by providing corrective disclosures. Also, the new Free-Writing Prospectuses would create a greater risk of liability than the oral statements they would be replacing, which would likely discourage their use. After a couple of years in which the SEC has been perceived as continually piling new burdens on public companies (in large part, thanks to Sarbanes-Oxley), it is probably happy to be doing something to make life a little easier for them and ease capital formation. It seems unfortunate, however, that the SEC has seen fit to offset these benefits by conferring a few boons on the plaintiffs’ bar. Moreover, as many commenters have suggested, there is a real “rich get richer” aspect to the $700 million public float threshold for WKSIs, which would receive the greatest benefits. One hopes the SEC will heed the many thoughtful comments on improving this proposal. Michael P. O’Brien is a partner in the Boston office of Bingham McCutchen. His practice focuses on securities and corporate law.

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