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The Securities and Exchange Commission’s November 2004 proposals to reform decades-old rules restricting issuer and underwriter communications prior to and during a public offering of securities are generally expected to be adopted later this year. The proposed changes are intended to modernize the SEC’s long-standing “gun-jumping” and “quiet period” regulations. Many market participants have argued that the current regulations are anachronistic in today’s Internet age, discourage issuers from providing information to investors in the ordinary course of business and are unreasonably fluid and inconsistent in their application and enforcement. Companies that run afoul of the regulations can be subject to a delay, or “cooling off” period, in the SEC registration process which can increase pricing and market risk or, in some cases, be fatal to the capital-raising effort itself. The proposed changes signal an effort by the SEC, applauded by most practitioners, to recognize that in today’s world issuers engage in all types of communications on an ongoing basis, and information regarding an issuer can be easily accessed in real time through the Internet and other electronic media. The gun-jumping provisions of the Securities Act were enacted in 1933, when means of communication were limited. In order to protect investors from companies that excessively promote their stock by disclosing favorable information without the attendant risk factors, financial statements and less favorable information that provide a complete picture of the company, the SEC adopted the current regulatory framework that seeks to protect investors by imposing varying restrictions on the type and extent of communications an issuer can engage in depending on the period when the communications occur during the registration process. There are three distinct time periods during a registered securities offering: the “prefiling” or “quiet period,” the “waiting period” and the “post-effective period.” Prefiling or quiet period. Current securities laws and regulations do not define when the prefiling period begins, although the prevailing view is that the prefiling period begins no later than the date on which the issuer reaches an understanding with the managing underwriter to make a public offering and could begin as early as the date on which the issuer makes an internal decision to proceed with the offering if acceptable terms can be negotiated. The general rule during the prefiling period, which ends when the issuer files its registration statement for the offering, is that no offer to sell securities, either oral or in writing, may be made. Practitioners have generally advised issuers to refrain from any communications during the prefiling period that could arguably be viewed as preparing the market for an offering of their securities. Issuers are generally advised not to issue any projections, predictions, forecasts or opinions regarding their future business or financial condition and to limit public statements to factual information unrelated to the offering. If an issuer’s representatives make any public speeches or attend any public conferences during the prefiling period, the general practice is not to distribute any written handouts. Indeed, some issuers suspend all communications with the investing public during this period. The restrictive nature of the quiet period often leaves investors without timely disclosure of material information that would otherwise be disclosed to them in the ordinary course of business. Limits on written material Waiting period. The waiting period commences with the filing of the registration statement for the offering and concludes when the SEC declares the registration statement effective. While no offers to sell of any kind are permitted during the prefiling period, during the waiting period, offers to sell are permitted if they are made either orally, unaccompanied by misleading statements or omissions, or by a written prospectus that meets the requirements of the Securities Act. Written offering material other than the preliminary prospectus cannot be used. In other words, “free writing” is prohibited. The SEC has construed the prohibition against “free writing” very broadly, finding that press releases, newsletters, promotional videotapes and even business cards delivered with a preliminary prospectus were themselves a prospectus that did not satisfy statutory requirements and therefore violated the securities laws. Furthermore, interviews granted to the media or industry analysts with the understanding that they are likely to result in a writing that will be publicly disseminated can be attributed to the issuer as an illegal prospectus. Therefore, under current rules, issuers are generally advised to avoid any action which may be argued to constitute “free writing.” Road shows are intended by the underwriters to fall within the category of permissible oral offers to sell. With some exceptions, written material may not be distributed at the road shows. Statements at the road shows should be within the confines of the information set forth in the prospectus that was filed with the SEC as part of the registration statement. Post-effective period. The third period follows the effective date of the registration statement and is often referred to as the post-effective period. The post-effective period generally lasts 25 days for an initial public offering (IPO). If material information is disclosed during this period that is not contained in the final prospectus, such information may need to be delivered to the recipients of the final prospectus. Depending on the materiality of the information, the issuer may be required to file a post-effective amendment to its registration statement and thereafter recirculate a new prospectus. Trading in the issuer’s securities could be halted as the issuer is required to recirculate. During the post-effective period, an issuer may sell, deliver or confirm the sale of securities as long as the security is preceded or accompanied by a final prospectus which meets the requirements of the Securities Act. Unlike in the waiting period, when all communications could be deemed a prospectus, after the effective date of the registration statement, a communication will not be deemed a prospectus as long as a final prospectus is sent or given to the person to whom the communication is made prior to or at the time the communication is sent. As a result, supplemental selling literature or “free writing” can be used after the effective date of a registration so long as the recipient has received or simultaneously receives a current final prospectus. Last year, Google Inc. and Salesforce.com Inc. ran afoul of the SEC’s communications restrictions. Before Google priced its $1.9 billion IPO, Playboy magazine published an interview that the company’s founders had given months earlier. Because the interview occurred before Google filed its IPO registration statement, the interview could have been viewed as a gun-jumping violation of the securities laws. Although the SEC did not force a cooling-off period and delay the widely followed IPO, Google was required to amend its registration statement to include the text of the Playboy interview and to reconcile some discrepancies between the article and information in the registration statement. Salesforce.com, however, did not fare as well as Google. After a profile of its chief executive officer appeared in the New York Times before the company’s IPO, the SEC not only forced the company to refile its offering documents, but also imposed a 30-day “cooling off” period during which the company could not market its IPO. The SEC’s proposed reforms The SEC’s November 2004 securities offering reforms reflect the the commission’s belief that investors and the market will benefit from access to greater permissible communications if protection for investors in connection with these communications is retained through the appropriate liability standards under the 1933 Securities Act. The new proposals also reflect the multiple means for communication in today’s world and the increasing trend toward globalization of the securities markets. For purposes of the new communications framework, the SEC proposes to divide issuers into four categories: well-known seasoned issuers (e.g., issuers with at least $700 million of common equity held by nonaffiliates); seasoned issuers (e.g., issuers that are eligible to use Form S-3); unseasoned issuers (e.g., issuers that are ineligible to use Form S-3); and nonreporting issuers (e.g., issuers that are not required to file reports pursuant to � 13 or � 15(d) of the Exchange Act and that are not voluntary filers). The SEC believes these distinctions are appropriate because the market has more familiarity with large, more seasoned issuers and, as a result of the ongoing market following their activities, these issuers’ communications would have less potential for conditioning the market for the sale of securities. Among the major changes contemplated by the new reforms are: Well-known seasoned issuers would be permitted to engage at any time in oral and written communications, including use at any time of a free-writing prospectus, subject to certain conditions (including, in certain cases, filing with the SEC). All reporting issuers would, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information. Nonreporting issuers would, at any time, be permitted to continue to publish factual information that is regularly released to individuals other than in their capacity as investors or potential investors. Communications by issuers more than 30 days before filing a registration statement would not be considered prohibited offers so long as they did not reference a securities offering. Issuers and other offering participants would be permitted to use free-writing prospectuses after the filing of the registration statement, subject to enumerated conditions (including, in certain cases, filing with the SEC). Safe harbors The SEC has proposed two safe harbors that would allow potential issuers to continue publication of certain information during the offering period without violating the gun-jumping rules. The first safe harbor would allow a reporting issuer to continue to publish and disseminate at any time any factual business and forward-looking information that would be regularly released by or on behalf of the reporting issuer. The second safe harbor would allow nonreporting issuers to release and disseminate factual business information that is regularly released in the ordinary course of business to individuals receiving information other than in their capacity as investors or potential investors, such as customers or suppliers. Under the proposed rules, both reporting and nonreporting issuers would be permitted to disseminate certain types of factual business information, including factual information about the issuer or some aspect of its business; advertisements, and other information about, the issuer’s products or services; and factual information about the business or financial developments with respect to the issuer. Only reporting issuers would be permitted to disseminate forward-looking information, such as projections of revenues, income and earnings and other financial items; the issuer’s management plans and objectives; and the issuer’s future economic performance. The proposed rules would provide all issuers with a bright-line time period, ending 30 days before the filing of a registrations statement, during which issuers may communicate information (other than certain excluded information) without risk of violating the gun-jumping provisions. The exclusion would apply to a communication if the following conditions are satisfied: The communication does not reference a securities offering; the communication is made by or on behalf of the issuer; and the issuer takes reasonable steps to prevent further distribution or publication of the information during the 30-day period immediately prior to the filing of the registration statement. The bright-line test is intended to provide greater certainty in the offering process and avoid unnecessary limitations on issuer communications. The SEC believes the 30-day time frame adequately assures that these communications would not condition the market for an offering because a sufficient period of time would run to cool any interest in the offering that might arise from the communication. The proposed rules would permit well-known seasoned issuers to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions. The exemption would apply only for communications made by or on behalf of the issuer. Unless they come within the protections of the safe harbors or 30-day bright-line test described above, these communications would still be considered “offers” and therefore would be subject to the liability standards applicable to “offers.” These communications would continue to be subject to Regulation FD. A written offer made under this exemption would meet the SEC’s definition of a “free-writing prospectus” and would need to include a legend and be filed with the SEC. The proposed rules introduce the new concept of a “free-writing prospectus” that would allow issuers and underwriters to deliver a variety of written materials to investors earlier in the offering process. Through the free-writing prospectus, the SEC is proposing to permit written communications (including electronic communications) that otherwise would constitute impermissible offers outside a statutory prospectus. A free-writing prospectus could be used by well-known seasoned issuers at any time. Any other issuer could use a free-writing prospectus after a registration statement is filed, and in some cases, if the statutory prospectus precedes or accompanies the free-writing prospectus. A free-writing prospectus could take any form and would not be required to meet the SEC’s informational requirements for prospectuses. The proposed rules set forth several conditions for use of free-writing prospectuses, including the requirement that the free-writing prospectus be filed with the SEC and contain a cautionary legend in the form prescribed by the SEC. The filing will not be deemed part of the issuer’s registration statement unless the issuer elects to so treat them and therefore will not be subject to the strict liability standards of � 11 of the Securities Act. Free-writing prospectuses would, however, be subject to the anti-fraud provisions of the federal securities laws. The proposed rules provide that any media coverage of an issuer or its securities will constitute a free-writing prospectus if the issuer or underwriter provided information for such media coverage. Newspaper or magazine articles or other media coverage will not constitute a free-writing prospectus unless the issuer prepared or paid for the publication. Use of Web sites The proposed rules would enable issuers and market participants to make greater use of the Internet and other electronic media to communicate and provide information to investors. To provide issuer responsibility for communications on its Web site, the proposed rules would provide that an offer of an issuer’s securities contained on the issuer’s Web site or hyperlinked by the issuer from such issuer’s Web site to a third-party Web site is considered a written offer made by the issuer. As such, unless otherwise exempt, the offer would be a free-writing prospectus subject to the requirements described above. The proposed rules provide that historical information that otherwise would be considered an offer, but that is properly identified as historical information and archived and located in a separate section of the issuer’s Web site, will not be considered a free-writing prospectus. This exclusion will apply only if the historical information is not incorporated or otherwise included in a prospectus or used, identified, updated or modified in connection with the offering. Under the proposed rules, issuers would need to review information on their Web sites to determine whether information constituted an offer or was archived properly. The proposed rules would make clear that electronic road shows (including road shows transmitted over the Internet) are free-writing prospectuses. The entire transcript of an electronic road show would not be required to be filed if the issuer makes available, without restriction, one version of a “bona fide electronic roadshow” to any person including any potential investor, and files with the SEC any free-writing prospectus or material used in the electronic roadshow. In sum, the SEC’s proposed communications reforms have been long awaited by most practitioners and market participants. Given the vast advancement of technology and the trend toward a global securities market, the new proposals, if adopted as widely expected, should benefit investors and the market by increasing the flow of critical information during the capital-raising process. William P. Mills is a partner at New York’s Cadwalader, Wickersham & Taft and a member of the firm’s corporate/M&A department. Michael MacDougall, an associate at the firm, assisted in the preparation of this article.

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