SEC Proposes Rule Change to Facilitate Market Soundings in Advance of a WKSI Offering

On December 21, 2009 the Securities and Exchange Commission issued for comment proposed amendments to Rule 163(c) under the Securities Act of 1933* that would, if adopted, facilitate public offerings, especially large equity offerings, by well-known seasoned issuers, or WKSIs**.

The Commission is soliciting comments on its proposal. Comments on the proposal are due by January 27, 2010. The Commission’s full release, including the text of the proposed amendments, is available by clicking here.

Under current rules WKSIs and their authorized agents may make offers of securities before a registration statement covering these securities is filed, without violating the “gun-jumping” prohibitions of Section 5 of the Securities Act. However, dealers or underwriters that are participants in the offering are not permitted to be agents for this purpose. As a result, WKSIs may not market or pre-market an offering through them prior to filing.

One reason for the adoption of Rule 163 in its current form was that, given the ease of filing automatic shelf registration statements for WKSIs, it was anticipated that WKSIs would generally have those registration statements on file, and offers by underwriters would be permissible. However, in light of the fragile state of the equity markets and concerns about the “overhang” of registered securities on the market, many WKSIs (the Proposing Release notes about 50%) have not filed registration statements or have not included common equity securities, securities convertible into common equity securities, or similar securities, in their registration statements. The proposed amendments to Rule 163 would have the greatest beneficial impact in facilitating offerings of these types of securities, especially in large size, where it is most important to gauge investor interest prior to launching an offering.

The 2005 securities offering reforms, of which Rule 163 was a part, were intended to provide WKSIs with very substantial flexibility in their capital-raising activities and to encourage offerings that are registered under the Securities Act. Rule 163 in its current form, however, impedes capital formation where a registration statement is not already filed or does not register equity securities, by prohibiting underwriters in those circumstances from gauging investor interest for equity offerings, including large common stock and convertible securities offerings, without the filing of a “signaling” registration statement that could potentially have an adverse effect on the market for the issuer’s stock. It also potentially discourages registered offerings and encourages unregistered offerings of convertible securities, for example under Rule 144A under the Securities Act***, where underwriters can gauge investor interest before launch.

To address these concerns, the Commission has proposed amending Rule 163(c) to permit offering participants that are underwriters or dealers to make offers of WKSI securities prior to filing of a registration statement (or filing of a post-effective amendment to add classes of securities, such as equity securities, to an automatic shelf registration statement) covering the securities in question, subject to the following conditions:

• the underwriter or dealer receives written authorization from the WKSI to act as its agent or representative before making any communication on its behalf;
• the issuer authorizes or approves any written or oral communication before it is made by an authorized underwriter or dealer as agent or representative of the issuer; and
• any authorized underwriter or dealer that has made any authorized communication on behalf of the issuer in reliance on Rule 163 is identified in any prospectus contained in the registration statement that is filed for the offering to which the communication relates.

In addition, as is the case with offers under current Rule 163, written communications under amended Rule 163 would be subject to the legending and filing requirements for free writing prospectuses used prior to filing a registration statement. Oral communications are not and would not be subject to these requirements.

The Commission requested comment on, among other things, the three proposed conditions. The first seems an obvious one. However, it may be that commenters will focus on whether the second and third conditions provide meaningful protection for investors. They may also focus on potential practical issues with the second condition, depending on the specificity of approval required, particularly for the contents of oral communications.

As with pre-filing offers under existing Rule 163, the offers that would be permitted under the proposed amendments would not be considered to be communications in connection with a registered offering for purposes of the exclusion from Regulation FD****. The Proposing Release emphasizes that where an underwriter or dealer conveys material non-public information to a potential investor (including presumably information regarding a material offering that has not yet been announced), a confidentiality agreement must be put in place to satisfy Regulation FD. The Proposing Release also states that misuse of such material non-public information by the recipient would be covered by either the temporary insider or misappropriation theories of insider trading.

Communication of material non-public information in connection with securities offerings has long raised insider trading concerns, whether or not a registration statement is or will be filed, and Regulation FD applies where a registration statement is not required (e.g., an offering under Rule 144A) or is not yet filed (e.g., using existing Rule 163). Investment banks have developed carefully crafted “over-the-wall” procedures to address these concerns by subjecting investors to agreements and restrictions in cases where investors or prospective investors receive what may be considered non-public information (i.e., are “brought over the wall”).

Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Capital Markets in the Practice Area section of our website if you have any questions.

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(*) SEC Release No. 33-9098 (December 18, 2009) (the “Proposing Release”).
(**) A WKSI, as defined in Securities Act Rule 405, is an issuer that meets the registrant requirements of Form S-3 or Form F-3; has at least $700 million in worldwide market value of outstanding voting and non-voting publicly-held common equity or has issued, for cash, within the last three years at least $1 billion aggregate principal amount of non-convertible securities through registered offerings; and is not an “ineligible issuer,” as defined in Securities Act Rule 405.
(***) Offerings of listed common stock are not permitted under Rule 144A, see Securities Act Rule 144A(d)(3)(i).
(****) See Securities Act Rule 163(e) and Rule 100(b)(2)(iv) of
Regulation FD.