Summary of Aircraft Carrier Release
SUMMARY OF SEC'S "AIRCRAFT CARRIER" AND "M&A" RELEASES
The Regulation of Securities Offerings, Rel. No. 33-7606A; 34-40632A; IC-23519A,
International Series Release No. 1167A, File No. S7-30-98
By Anna Chason
The SEC has proposed significant changes to the securities offering process. In five broad categories, the proposed changes include changes to not only the registration system, but also to allowable communications around the time of an offering, integration of private and public offerings, prospectus delivery requirements, and Exchange Act reporting. This summary will briefly discuss the issues that are of most importance to NAREIT members (more specifically, REIT issuers and their counsel), especially changes to the registration system, integration of private offerings, allowable communications around the time of an offering, and Exchange Act reporting.
Changes to the Registration System
The SEC plans to create a three-tiered system for the registration of offerings: Form A, Form B and Form C would replace Forms S-1, S-2, S-3, S-4 and S-11. Form B would apply to larger, seasoned, well-followed issuers and offerings made to relatively informed or sophisticated investors. Form A would apply generally to smaller or unseasoned companies, and real estate entities unless they meet Form B requirements. Form C would apply to business combinations and exchange offers.
Form B would be available only if a company:
- has 12 full months as a reporting company and has filed a 10-K (Form B seasoned) and has either:
- $75 million in unaffiliated public float and $1 million in average daily trading volume (ADTV) or
- $250 million in unaffiliated public float.
Form B seasoned issuers also can use Form B for offerings to qualified institutional buyers (QIBs), except dealers and investment advisers. Issuer-affiliated broker-dealers may also use Form B in market-making transactions. The SEC asks whether it should raise the standard for QIB qualification to $200M.
In addition, Form B-seasoned issuers, and smaller issuers that do not meet Form B's public float and ADTV threshold, can use Form B to register the following:
- rights offerings;
- offerings under dividend or interest reinvestment plans (see section on DRIPs below);
- offerings of common stock to existing stock holders (see section on DSPPs below);
- offerings of securities upon exercise of outstanding transferable options or warrants; and
- offerings of securities upon conversion of outstanding convertible securities.
However, issuers that do not meet Form B's public float and ADTV tests may only use Form B for the above offerings as long as they meet the reporting requirements of Form B and any transactional requirements specific to the type of offering registered on Form B (such as the requirements for DRIPs and DSPPs below).
Form B would not be available for secondary offerings of securities for issuers that do not meet Form B's other eligibility criteria. The SEC also proposes to eliminate special eligibility for secondary offerings on Form S-8.
An issuer would be disqualified from using Form B if it has recently defaulted on a material indebtedness, is the subject of a "going concern" opinion, was recently involved in a bankruptcy or insolvency proceeding, or if the issuer or its officers, directors or underwriters were convicted of securities fraud or business-related fraud or perjury within the five years before the date of filing. Form B is unavailable for blank check and penny stock companies. Form B is also unavailable for "issuers that fail to cooperate in good faith with the SEC's selective review system for Exchange Act reports." The SEC states that this includes any unresolved staff comments on an Exchange Act report that would be incorporated by reference into Form B.
Form B offerings would become effective at the issuer's discretion, whether immediately upon filing or at a later time. Staff would not review Form B registration statements before the offering and would not have to act to make them effective. Form B registration statements simply would be screened both to determine issuer eligibility to use Form B and to determine whether the disclosure raises any "red flags." The registration statement must be effective at the first sale of any securities.
The SEC proposes two alternatives for the content of Form B prospectuses. The first alternative would continue to require all "material" transactional disclosure but would limit the itemized requirements to focus on the information about the transaction that would be material to investors. The second alternative would continue to require all itemized transactional disclosure, including core transactional information. Under either alternative, the SEC would continue to require issuers to incorporate by reference certain information in their periodic reports.
The SEC states that the advantages of Form B (specific transactional disclosure, no staff review, lower fees, and less issuer concern about "market overhang") would eliminate the necessity for delayed shelf registrations. Transactional information now included in a prospectus supplement filed under Rule 424 would either have to be part of the effective registration statement or part of a post-effective amendment, with Section 11 liability. Forward-incorporated Exchange Act reports would also be subject to Section 11 liability. In addition, transactional information must be filed at the time of sale (not within two days later as is current practice). The SEC requests comment on whether there is still a need for a delayed shelf registration system if Form B is adopted.
The SEC also proposes repealing the line of letters regarding "Exxon Capital" exchange offers (the issuance of restricted securities followed by a registered exchange offer) because the "flexibility and certainty" of Form B would make Exxon Capital transactions unnecessary.
Form A would be the basic registration form. The contents of the From A prospectus would be similar to the current Forms S-1, F-1, S-2 and F-2. Form A issuers could make continuous offerings, although they would not be allowed to use delayed shelf registration. Issuers that have been reporting under the Exchange Act for at least 24 months and have a public float of at least $75 million, or issuers that have been reporting under the Exchange Act for at least 24 months and have filed two annual reports, would be "seasoned" Form A issuers. All other issuers would be "unseasoned" Form A issuers. All Form A issuers would be subject to the same disqualification requirements as Form B; disqualification would "downgrade" a seasoned Form A issuer to an unseasoned one. Seasoned Form A issuers may incorporate their Exchange Act reports by reference; however, they must deliver, along with the first prospectus it sends to any person, the company's latest annual report filed under the Exchange Act, and must either deliver or include in the prospectus the information from Part I of their most recent Form 10-Q. Otherwise, it could not incorporate and must set forth the full company disclosure required in a From A, just like an unseasoned Form A company. Unseasoned issuers may not incorporate by reference any Exchange Act filings.
Staff will review all IPOs and perform selective review of repeat offerings under Form A. Seasoned Form A issuers with a $75 million public float may control the timing of their offerings, as could other issuers whose Exchange Act annual report incorporated by reference into the Form A has been recently "fully" reviewed. Unseasoned issuers would be subject to the current review and acceleration system.
Form C would be used by all issuers to register transactions currently registered on Form S-4 or F-4. The Form C prospectus could serve as the required proxy or information statement. The Form C statement would be subject to staff review and would not be eligible for automatic effectiveness. The SEC solicits comment on whether Form C registration statements (except in connection with "going-private" transactions and "rollups") should become effective upon filing or on an expedited schedule, and whether this should depend on the public float or ADTV of either the acquiring or acquired company.
Real Estate Issues
Real estate entities that currently register on Form S-11 would register on Form A, unless they meet the eligibility requirements of another Form. Disclosure required under Form S-11 has been added to Regulation S-K. Real estate entities that currently provide such disclosure on Form S-11 or S-4 would provide such disclosure on Forms A and C, respectively. The SEC would modify Regulation S-K to "codify certain staff practices regarding disclosure by real estate entities." These include disclosing:
- when finite life entities intend to sell their properties;
- the rating assigned by a nationally recognized statistical rating organization to any securities in which the registrant has invested;
- any cross default or cross collateralization provisions in mortgages; and
- information about subsidiaries, including operating partnerships.
The SEC also proposes requiring real estate entities to disclose occupancy rates as a percentage of rentable square footage or units. In addition, the SEC recommends revising S-K to omit disclosure currently required in Item 35 of Form S-11, "as it appears no longer applicable to most real estate companies."
The SEC proposes amending Forms 10 and 10-K to require disclosure of the following:
- operating and financing activities;
- real estate and other investment activities; and
- a description of real estate and operating data.
The SEC also proposes to eliminate the Guide 5 recommendation that a registrant "supplementally" provide the staff, before use, sales materials it intends to furnish to investors. Staff would no longer pre-review the sales materials Form B or Form A seasoned issuers with a $75 million public float. Proposed Rule 425 generally would require issuers and offering participants to file sales materials used in an offering. The SEC requests comment on whether the Guide 5 recommendation to provide the staff with sales materials supplementally should be eliminated for all offerings because sales materials would be filed under proposed Rule 425.
The SEC would allow Form B for dividend or interest reinvestment plans (DRIPs) of a Form B-seasoned issuer (an issuer that has 12 full months as a reporting company and has filed a 10-K) that does not otherwise meet Form B's eligibility requirements (that is, does not meet the $250 million public float test or does not meet the $75 million public float/$1 million ADTV test) only if:
- the issuer has not discontinued or suspended dividend payments on the securities held by DRIP participants;
- the DRIP securities registered on Form B are offered only to existing security holders that have held the issuer's securities for at least 2 months;
- the dollar amount of the DRIP securities registered on Form B represents no more than 15% of the issuer's public float when aggregated with the dollar amount of securities previously registered by the issuer on Form B under any offering directed solely to common security holders, including a DRIP, within the 12 months before the start of , and during, the current offering; and
- the shareholder buys, in any 12-month period, no more than the smaller of 100% of the value of the issuer's securities owned by the shareholder at the start of the 12-month period, or 5% of the total offering amount. Any shareholder may buy up to $10,000 of securities in any 12-month period.
The SEC is proposing these measures to prevent an issuer from using its shareholders as "mere conduits" to distribute its securities to the public. The SEC is also concerned that "where there may be little public information about an issuer and the investor does not have a significant ownership interest in the securities of an issuer the investor may not have access to adequate issuer information or have the inclination to follow the issuer and its business." The SEC solicits comment on whether the 15% threshold should be modified, and whether the shareholder purchase limitations adequately protect against unregistered distributions to the public. The SEC also solicits comment on all other aspects of its DRIP proposal, including whether the holding period requirement would make it overly burdensome for issuers to determine DRIP eligibility.
The SEC proposes similar restrictions on offerings to existing common stock holders, including direct stock purchase plans (DSPPs), as for DRIPs. To register on Form B, the offering would have to meet the following conditions:
- the registered securities must be offered only to existing common stock holders that have held the issuer's common stock for at least 2 months;
- the dollar amount of the registered securities represent no more than 15% of the issuer's public float when aggregated with the dollar amount of securities previously registered by the issuer on Form B under any offering directly only to common security holders, including under DRIPs, within the 12 months before the start of, and during, the current offering; and
- the shareholder buys, in any 12-month period, no more than the smaller of 100% of the value of the issuer's securities owned by the shareholder at the start of the 12-month period, or 5% of the total offering amount. Any shareholder may buy up to $10,000 of securities in any 12-month period.
The SEC uses the same rationale for these restrictions as for DRIPs and requests comments on all aspects of its proposal.
The SEC imposes no such requirements for Form B registration of convertible securities, transferable warrants and rights offerings, but solicits comment on whether such requirements are appropriate.
Allowable Communications Near the Time of an Offering
Communications near the time of an offering are classified as either "offering information" or "free writing." Generally, offering information is information specific to the offering; for example, the amount of securities being offered, items found under Regulation S-K, etc. Free writing is all other information.
Form B Issuers
Form B issuers may make any communications during the pre-filing period. Any communications that constitute a prospectus and that are used within the period beginning 15 days before the first offer and ending with the filing of the registration statement must be filed with the SEC when the registration statement is filed. Issuers must file written free writing materials used after Form B filing upon first use.
All Other Issuers
All other issuers would remain subject to existing communications restrictions; however, the SEC proposes a safe harbor for pre-filing communications made more than 30 days before the filing of the registration statement if the issuer, underwriter or dealer takes reasonable steps to prevent further distribution of the communication during the 30-day period. The proposed rules would permit issuers to announce limited offering information during the 30-day period without indicating whether the offering will be registered or exempt. The SEC also proposes safe harbors for factual business communications and regularly released forward-looking information.
Integration of Registered and Unregistered Offerings
The SEC proposes revising Rule 152 to state that if a private offering is completed before the registration statement is filed, the private offering will not be integrated with the registered offering, regardless of the length of time between the offerings (eliminating the "6-month rule"). The private offering will be "completed" if the following conditions are met:
- all purchasers fully pay the purchase price for the securities; or
- if all purchases do not fully pay the purchase price:
- the transaction may not be renegotiated;
- either the buyers must be unconditionally obligated to pay for the securities, or the obligation to buy the securities must depend on a condition not within the direct or indirect control of any purchaser; and
- the purchase price must be fixed and not contingent upon market prices.
The SEC also would include within Rule 152 private offerings of convertible securities or warrants made concurrently with the registered offering; the offering of the underlying securities would be "completed" when the offering of the convertible securities or warrants is completed.
In addition, the SEC states that a "special approach" would apply to a private offering made before an IPO where the private offering "does not raise capital for the issuer but is conducted only to modify the issuer's capital structure." As long as the private offering is not a roll-up transaction under Rule 901(c) of Regulation S-K, , the private offering would not be integrated with the later registered offering.
The SEC would clarify that Rule 152 allows an issuer to register the resale of securities that the issuer originally sold in a completed bona fide private offering. The SEC would exclude from the safe harbor resales by affiliates of the issuer or a broker-dealer that has purchased directly from the issuer or an affiliate.
Private to Public
Currently, an issuer is unable to begin a private offering by making offers and then decide to make the offering public because, under Section 5 of the Securities Act, offers may not be made in registered offerings before filing a registration statement. Under the new system, Form B issuers easily can switch from private offering to public offering because they would not be required to file a Form B until the time of sale, and offers could be made before filing.
The SEC also proposes amendments to Rule 152 to allow Form A issuers to abandon an ongoing private offering and then conduct a public offering under the following conditions:
- the issuer notifies all offerees in the private offering that the private offering is abandoned;
- no securities were sold in the private offering;
- neither the issuer nor any person acting on its behalf offered the securities in the private offering by any form of general solicitation or general advertising;
- the issuer does not file the registration statement until at least 30 days after it notifies all offerees of abandonment if securities had been offered in the private offering to any person ineligible to purchase in an offering in accordance with Section 4(2), Section 4(6) or Rule 506; and
- the issuer either files any selling materials used in the private offering as part of the registration statement or it informs all private offerees that the filed prospectus replaces the prior selling materials and any indications of interest are rescinded.
Public to Private
When an issuer wishes to convert an offering started as a registered public offering into a private offering, or follow it soon after abandonment with a private offering, a private offering exemption is often unavailable because the filing of a registration statement for an offering constitutes a general solicitation for that offering. In addition, the issuer may have made public offers under the registration statement to persons who are ineligible to buy in the private offering. Issuers currently in this situation must wait a full six months to be certain that the public offering under the registration statement would not be integrated with the private offering.
The SEC proposes a safe harbor that would permit switching from a public offering (started either by the filing of a registration statement or under Form B before filing a registration statement) to an unregistered private offering if the following conditions are met:
- if a registration statement has been filed, the issuer withdraws it under Rule 477;
- if no registration statement has been filed (i.e., Form B), the issuer notifies all offerees in a public offering that it is abandoning the public offering;
- no securities were sold in the public offering;
- where the issuer first offers the securities in the private offering more than 30 days after abandonment or withdrawal of the public offering, the issuer notifies each purchaser in the private offering that the offering is not registered, the securities are restricted, and that investors do not have the protections of Section 11 of the Securities Act; and
- where the issuer first offers the securities in the private offering 30 or fewer days after abandonment or withdrawal of the public offering, the issuer and any underwriters agree to accept liability for material misstatements or omissions in the offering documents used in the private offering under the standards of Section 11 and Section 12(a)(2) of the Securities Act.
Exchange Act Reporting
The SEC proposes to extend risk-factor disclosure to all Exchange Act registration statements and periodic reports of all issuers, and proposes that such disclosures be in plain English.
The SEC would treat the financial statements and MD&A disclosure in quarterly information as "filed" for purposes of Section 18, which provides a private right of action for persons relying on such information.
The SEC proposes to require the filing of a management report to the audit committee of an issuer's board of directors; the report would be filed as an exhibit to the company's 10-K.
The SEC proposes requiring domestic reporting companies to report financial data in Item 301 of Regulation S-K on Form 8-K on the earlier of either the date the company issues a press release containing earnings information or 30 days after the end of each of the first 3 quarters or 60 days after the end of the fiscal year. In the alternative, the SEC proposes that issuers file quarterly reports within 30 days of the end of the first 3 quarters or 60 days after the end of the fiscal year.
The SEC would expand the list of items subject to disclosure on Form 8-K, and accelerate disclosure deadlines, to include the following:
- material modifications to the rights of security holders (within 5 days);
- departure of the CFO, CEO or COO (within 1 day);
- material defaults on senior securities (within 1 day);
- some auditor notifications (within 1 day); and
- company name changes (within 5 days).
Regulation of Takeovers and Security Holder Communications. Release No. 33-7607; S7-2898
In a companion release to the "Aircraft Carrier," the SEC proposed to update and streamline takeover transactions such as tender offers, mergers, acquisitions, and other similar extraordinary transactions. The proposal has four main goals: to expand communications in tender offers and mergers; to equalize stock and cash tender offers; to simplify disclosure requirements for tender offers and mergers; and to modernize the tender offer rules. This summary briefly outlines a few key provisions.
Expanded Communications in Tender Offers and Mergers
To promote more informed voting and investment decisions, and to encourage the flow of information to a broad range of market participants, the SEC proposes several amendments to the existing rules.
The SEC would provide a safe harbor to permit free communications before the filing of a registration statement in connection with either a stock tender offer or a stock merger transaction. The safe harbor would not have any content restrictions or size restrictions. The SEC solicits comments on whether free communications should be limited to transactions among large or seasoned issuers. All written communications by the parties to the transaction from the date of the first announcement of the transaction would be required to be filed with the SEC upon first use so that all security holders, not just analysts and institutional investors, would have access to the documents at the same time.
The SEC would permit free communications by management and security holders before the filing of a proxy statement, whether or not a takeover transaction is involved. A written proxy statement would still need to be delivered at the time a form of proxy is furnished.
The amendments would also permit free communications about a planned tender offer without triggering the "commencement" of the offer. "Commencement" would require the filing and dissemination of certain information. Target companies could make pre-commencement communications in response to bidder announcements without triggering any filing requirements. Written communications, however, for both parties would have to be filed with the SEC upon first use.
The SEC proposes to protect security holders against manipulative tender offer announcements by prohibiting the announcement of tender offers by bidders who do not intend to complete the offer, who intend to manipulate the price of its stock or the target's stock, or who do not have a reasonable belief that they have the means to buy the securities sought in the offer.
The SEC proposes to eliminate the confidential treatment now available for merger proxy statements in order to place them on a more equal footing with publicly available preliminary prospectuses and tender offer materials.
The proposals do not change the current requirement that security holders must receive a prospectus, proxy statement, or tender offer statement before they are asked to vote or tender their shares.
The SEC has proposed alternatives to the safe harbors for pre-filing communications.
- One alternative would allow the companies conducting the transaction to make deal-related disclosure only during a 48-hour period following the public announcement of a definitive merger agreement or takeover plan. Similar to the "free communications" proposal, there would be no content restrictions on the companies' communications during the proposed 48-hour period, other than the antifraud provisions. After the 48-hour period, the companies would be required to remain quiet regarding the transaction until a registration, proxy or tender offer statement is filed.
- Another alternative is to permit free communications for an unlimited period of time after the deal is announced; the parties must observe a 30-day quiet period before filing the registration statement, proxy statement or tender offer material.
Equalize Stock and Cash Tender Offers
The SEC proposes to permit a bidder to commence an exchange offer and request tenders upon the filing of a registration statement and related tender offer statement. The bidder must give the target's shareholders a preliminary combined prospectus/offer to purchase that contains all pricing and "other information necessary" to make an informed investment decision. In addition, the bidder could not buy shares tendered by security holders until after the registration statement takes effect, the minimum 20-business-day tender offer period has expired, and all material changes have been disseminated to security holders with adequate time for review. The proposal would only apply to third party exchange offers. The SEC may consider extending the proposal to issuer exchange offers; however, the SEC notes that going-private and roll-up transactions involving exchange offers will remain subject to the existing review process.
Simplify Disclosure Requirements for Tender Offers and Mergers
The SEC proposes new Regulation M-A, which would integrate the disclosure requirements for tender offers, going-private transactions, and other extraordinary transactions. It would also combine the current schedules for issuer and third-party tender offers into a single schedule available for all tender offers, Schedule TO. The SEC also would require a "plain English" summary term sheet in all cash tender offer, cash merger and going-private transactions.
The SEC proposes to harmonize cash merger and cash tender offer disclosure by revising Item 14 of Schedule 14A as follows:
- clarify that financial statements and other information about an acquiror in a cash merger must only be provided if material;
- require financial statements for two years (instead of three); and
- eliminate the requirement that information be provided about the target in a cash merger if the acquiror's security holders are not required to vote on the transaction.
Modernize the Tender Offer Rules
The SEC proposes, for third-party cash or stock tender offers made for all outstanding shares of a target company, a 10-day "subsequent offering period" after the expiration of the offer. During the subsequent offering period, security holders can tender their shares at the offer price. The subsequent offering period would only be available if the bidder intends to engage in a back-end merger with the target after the tender offer.
The SEC is also "considering," but not proposing, whether it should:
- impose a federally-mandated proxy solicitation period in merger transactions comparable to the current minimum tender offer period, to allow security holders at least a minimum time to consider the proxy statement disclosure;
- modify the proxy rules to permit direct delivery of proxy materials to non-objecting beneficial owners;
- create a broad safe harbor under the proxy rules that would permit "test the waters" communications with security holders without requiring the filing or delivery of a proxy statement, so long as no proxy card is delivered to security holders;
- require delivery of a disclosure document to security holders in cash tender offers, instead of permitting dissemination by summary advertisement alone, to conform the dissemination required in tender offers with that in proxy solicitations and securities offerings;
- permit proxy cards to be sent to security holders before a registration statement for a stock merger is effective; and
- expand by rule the coverage of the Private Securities Litigation Reform Act safe harbor from liability to include forward-looking statements made in connection with tender offers.