Yesterday, the SEC issued a proposal that would amend Rule 163 of the Securities Act to allow underwriters or dealers, acting on behalf of well-known seasoned issuers (WKSIs), to offer securities before a registration statement has been filed, subject to certain conditions. This proposal is consistent with statements by SEC staff members at the last two annual PLI Securities Regulation conferences, and is a welcome extension of existing rules that will help WKSIs that are anxious to gauge investor interest in their securities without the need to publicly disclose an intent to offer securities.
Pre-filing Communications or “Testing-the-Waters.” In the last few years, offerings that utilize a short, pre-offering, confidential marketing period to “test-the-waters” or gauge investor interest have become increasingly popular. In these offerings, institutional investors are approached after market close and asked if they would be interested in learning more about a potential securities transaction. Once interested investors have signed a confidentiality agreement and agreed to refrain from trading in the issuer’s securities until the public offering is complete, they are brought “over-the-wall” or told the identity of the issuer and the details of the offering. If sufficient interest exists, the offering is priced before the market reopens the next day. If there is not sufficient interest, then the issuer chooses not to proceed with the offering and, unless it has disclosed material nonpublic information to investors (which may include the fact that it attempted and failed to raise capital), the issuer need not disclose anything to the market.
One of the impediments to these types of transactions is that under federal securities laws, an issuer must have an effective registration statement on file before approaching investors unless it can avail itself of the Securities Act Rule 163 exemption for pre-filing communications. Rule 163 currently allows WKSIs, but not underwriters or dealers, to communicate directly with potential investors to determine their interest prior to filing a registration statement. Rule 163’s current utility is therefore somewhat limited since issuers are often unwilling or unable to approach potential investors without the help of an underwriter or dealer.
Proposed Amendments. The proposed amendments would expand the Rule 163 exemption to allow underwriters and dealers to communicate with investors about a WKSI’s potential securities offering, provided each of the following conditions is met:
- Written Authorization to Act as Agent. The WKSI issuer must have authorized the underwriter or dealer in writing to act as its agent
- Underwriter Identification in Prospectus. The underwriter or dealer must be identified in any prospectus filed in connection with the offer to which the communication relates
- WKSI Authorization of Communication. The WKSI must authorize or approve any written or oral communication made by the underwriter or dealer as an agent or representative of the WKSI
The proposing release does not elaborate on the degree of authorization or approval that would be required in order to meet this last condition, aside from noting in a footnote that “[o]ne way that an issuer could satisfy this condition is to approve the contents of the information that will be conveyed by the authorized underwriter or dealer to potential investors through oral communications.” We are hopeful that the SEC will provide additional clarity in the final adopting release as to how detailed such approval would need to be.
In addition, as is currently the case with issuer pre-filing communications under Rule 163, all written underwriter pre-filing communications would be required to:
- Contain a legend. The legend would indicate that the issuer may file a registration statement for the offering and the investor should read the offering prospectus, along with instructions about how to obtain a copy of the prospectus
- Be filed as free writing prospectuses. Written pre-filing communications would be required to be filed as free writing prospectuses at the time the related registration statement or amendment was filed, subject to a cure period
Regulation FD. Like issuer pre-filing communications, underwriter pre-filing communications of material, nonpublic information would be subject to Regulation FD’s restrictions on selective disclosure. Therefore, recipients would need to agree to keep nonpublic material information confidential. Perhaps in light of the Mark Cuban insider trading case, the SEC took the opportunity to reiterate in the release its view that “any misuse of the [confidential] information for trading by any person subject to a confidentiality agreement would be covered under either the "temporary insider" or the misappropriation theory of insider trading.”
The release is subject to a 30-day comment period beginning upon its publication in the Federal Register.