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A quiet revolution has been taking place in the regulation of registered securities offerings. Since the 1980s, the Securities and Exchange Commission has implemented many far-reaching changes that have diminished the role of the SEC and increased the role of securities lawyers as the gatekeepers to the capital markets. In the late 1990s, the SEC, in a release nicknamed the “Aircraft Carrier” because of the breadth of its proposed changes and its size, embarked on one of the most significant proposed reforms to the offering process since 1933. These reforms would have greatly accelerated that shift in the traditional roles played by the SEC and securities lawyers. But the reforms were so momentous that the Aircraft Carrier sunk under its own weight. Last November, the SEC tried again and was able to adopt rules to liberalize the offering process this past July. These rules, contained in a 400-plus-page release titled “Securities Offering Reform,” are built on the current system and implement some of the more workable aspects of the Aircraft Carrier. Yet they still continue the quiet revolution in the regulation of registered offerings. The Securities Offering Reform streamlines the offering process by eliminating unnecessary procedural hurdles. It facilitates communications between investors, issuers, underwriters, and other participants; removes the possibility of certain issuers undergoing SEC review (and, thus, permits these issuers to access the capital markets in a more timely manner); and reduces incentives to raise capital through exempt offerings. It also clarifies how liability provisions operate in registered offerings. The reform becomes effective next week, on Dec. 1. The big question for securities lawyers is how the reform will change the way they do deals. The most significant change is that securities lawyers will have greater control over the speed at which an offering comes to the market. With the removal of the SEC from the offering process, due diligence investigations conducted by private counsel will be the only regulatory hurdle that companies and underwriters will have to clear in issuing securities. DUE DILIGENCE AFTER REFORM Current law provides for what is known as “shelf registration,” in which companies can complete the registration of a securities offering up to two years in advance and then essentially put that registration “on the shelf” until they wish to make an offering. The Securities Offering Reform creates a new “automatic” shelf registration statement for “well-known seasoned issuers.” This is a new category of seasoned issuers generally open to companies with $700 million of public common equity float. Automatic shelf registration is the closest one can get to a system of company registration, which would focus on disclosure about companies independent of particular offerings, without a substantial overhaul of the current registration process, which focuses on disclosures in connection with specific offerings. Under the automatic shelf registration process, the SEC’s review efforts will focus solely on the regularly filed annual, quarterly, and other reports of well-known seasoned issuers and not their registration statements for new securities. The removal of the SEC from the offering process will allow well-known seasoned issuers to go directly to the capital markets. No longer will they have to first undergo the time-consuming SEC review process (or the threat of it) every time they wish to issue new stock or bonds. With this new immediate access to the market, offering participants — such as underwriters and their lawyers — will face pressure to conduct their due diligence for securities offerings more rapidly. The faster lawyers work, the sooner companies can issue securities, and the sooner investors can buy them. Consequently, offering participants and their lawyers will need to re-evaluate existing due diligence practices to develop procedures compatible with automatic shelf registration. The use of anticipatory or continuous due diligence practices in connection with offerings by well-known seasoned issuers will expand and become more institutionalized. These practices may include: • Designation of underwriters’ counsel. The number of well-known seasoned issuers who select a single law firm to act as their underwriters’ counsel will likely increase. Such designation facilitates continuous due diligence by ensuring access to the issuer on the underwriters’ behalf. • Quarterly due diligence sessions. An increasing number of issuers will elect to hold sessions shortly after the release of quarterly earnings to provide designated underwriters’ counsel and potential underwriters with an opportunity to discuss with management the most recent financial results and other events of that quarter. • Participation of designated underwriters’ counsel in periodic reporting. It has long been advocated that designated underwriters’ counsel should have the opportunity to comment on periodic reports before their filing with the SEC. This practice would eliminate many of the diligence concerns of underwriters associated with the incorporation by reference of periodic reports into registration statements. But it is unclear whether issuers will wholeheartedly embrace such a practice because of its potentially disruptive effect on the filing of periodic reports. • Early coordination of contemplated offerings. Offering participants will start coordinating well in advance on offerings contemplated for a given year. Such advance coordination will allow underwriters sufficient time to conduct a reasonable due diligence investigation. Comfort letters, legal opinions, and other closing-related documents may also be negotiated in advance. Although the automatic shelf registration process will be available next month only to well-known seasoned issuers, the SEC staff has indicated that this process may be opened up to a larger group of issuers over time. In determining whether to open automatic shelf registration to more issuers, the SEC will surely look at the anticipatory or continuous due diligence procedures that securities lawyers have developed. TIMELY COMPLETIONS Due diligence concerns are also raised by another important change under the Securities Offering Reform. Lawyers will need to complete their due diligence earlier in the offering process because of the new rules relating to the liability provisions for material misstatements or omissions under the Securities Act of 1933. Specifically, these new rules provide that liability is assessed with respect to information that has been “conveyed” to a purchaser by the “time of sale” of a security (which is generally at the time of the pricing of an offering). Any disclosures after such time will not be taken into account for purposes of avoiding liability. As a result, the unearthing of material information or other developments that occur immediately before pricing may pose a significant hurdle to the successful completion of the offering. In the past, such information would have simply been included in the final prospectus or on a Form 8-K without much thought. However, such practices may no longer be desirable. The SEC has stated generally that the determination of whether information has been conveyed to a purchaser before pricing will be based on the facts and circumstances. Based on statements made by SEC staff, it appears that the correct standard to apply is what information was “reasonably available” to the purchaser as opposed to what the purchaser actually knew. Under this standard, information included in a final prospectus, which is delivered to purchasers after the time of sale, will clearly not be deemed to have been “reasonably available” to a purchaser at the time of sale. On the other hand, information included in a Form 8-K that is filed with the SEC via EDGAR may be deemed to have been reasonably available. But even availability on EDGAR may not be determinative. If the information is filed on a Form 8-K a week before the pricing of the offering, then it will likely be deemed to have been reasonably available at the time of sale. Conversely, if the information is filed on a Form 8-K several hours before the pricing of the offering, then it will not likely be deemed to have been reasonably available. Of course, the more difficult determinations will occur between these two time periods. FREE WRITING TO THE RESCUE So what should offering participants do if they realize several hours before pricing that material information was not conveyed to purchasers? The answer may well be to distribute something called a “free writing prospectus” containing such information to each potential purchaser before the time of sale. A free writing prospectus is a written communication that offers to sell securities, but that doesn’t have to meet the formal requirements of a full prospectus. Examples can include written sales literature, Web site postings, and e-mail. In the past, free writing prospectuses were permitted only if preceded or accompanied by a final prospectus. As a result, they were not commonly used. Under the reform, however, free writing prospectuses may now be used, subject to the satisfaction of certain conditions, before the availability of a final prospectus. As a result, offering participants can now use them to communicate newly unearthed information or recent developments on the eve of pricing, and thereby satisfy their obligations under the liability provisions of the Securities Act. That said, free writing prospectuses are not likely to be widely used, at least in the short term. Issuers and participants will first need procedures to ensure compliance with SEC requirements on filing, incorporating certain legends on, and retaining these documents. Underwriters also want to control information to maintain a consistent and accurate message regarding an offering. Underwriters thus are unlikely to adopt a policy of permitting liberal use of free writing prospectuses by the various offering participants. It is clear that securities lawyers will need to develop procedures to manage their greater role as gatekeepers to the capital markets. Due diligence practices will need to be augmented and underwriting agreements and legal opinions will need to be recrafted to reflect the changes implemented by the SEC’s reform. Widely accepted procedures will take time to develop. To a large extent, the effectiveness of these new procedures, customs, and practices will determine how revolutionary the Securities Offering Reform will be.
Cynthia M. Krus and Harry S. Pangas are partners and Christopher Zochowski is of counsel in the D.C. office of Sutherland Asbill & Brennan. Krus, Pangas, and Zochowski are all members of the firm’s securities and corporate governance group.

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