Securities offering reform and non-US issuers

New SEC reforms ease the burdens on non-US issuers

The SEC has spent the last two years putting together a series of reforms designed to liberalize the securities offering process in the US and respond to changing issuer needs.

The securities offering reform package came into effect on December 1, 2005. Later that month, the ‘kinder, gentler’ SEC also proposed new rules to make it easier for non-US issuers to deregister from the US markets (see Deregistration proposal.

What does the reform package mean for foreign companies trying to access the US market? The simple answer is: pretty much the same thing as for US companies. The reform package was developed with US issuers in mind and, as such, does not directly distinguish between US and non-US issuers. Any liberalization aimed at US companies equally applies to those accessing the market from overseas. However, what it should do is make it easier for certain types of non-US issuers, for example, to expand rights offerings into the US market via an improved shelf registration process. 

‘The new reforms provide clarity of definition and a level of flexibility that we expect will be welcomed by non-US issuers,’ says Nancy Lissemore, global head of Citigroup Depositary Receipt Services. ‘Particularly with provisions such as the new automatic shelf registration and the enhanced communication opportunities, these new rules will help some of the larger non-US issuers expand their depositary receipt (DR) offerings – including rights offerings – directly into the US.’
The new rules will also make the IPO process quicker and simpler for issuers that meet certain criteria. The reforms tidy up several messy loose ends that were increasingly making US offerings cumbersome relative to other international markets. 

‘They make the communication process surrounding an offering a good deal more flexible and, crucially, recognize that real-world disclosure does not always fit into neat legal boxes,’ explains Patricia Brigantic, director and counsel for Citigroup Depositary Receipt Services. ‘The SEC has long been aware that its strict offerings regime, designed to protect investors’ interests, can – ironically – prevent the sort of fluid, open, transparent disclosure that might aid those very same investors. The new reforms aim to address many of those concerns.’ 

Bruce Bennett, a partner at law firm Covington & Burling, notes that there has been ‘an important philosophical shift’ ltat the SEC that can be seen in these rule changes. ‘The SEC is moving from a transaction-based regulatory system to an issuer-based system, based on company registration,’ he says.
The new system revolves around several key reforms designed to introduce more practical elements to offerings. These include:

Issuer segmentation

Issuers are segmented into four areas depending on their past and present behavior. Crucially, the reforms create a new segment of issuer called a well-known seasoned issuer, or WKSI for short. WKSIs are the main beneficiaries of much of the reform package. The SEC defines WKSIs as: ‘A new class of issuer that is current and timely in its Exchange Act reports for at least one year and has either $700 mn of worldwide public common equity float held by non-affiliates or has issued $1 bn of non-convertible securities, other than common equity, in registered offerings for cash (excluding exchange offers) in the preceding three years. Finally, the issuer must not be an ineligible issuer.’ 

In essence, the SEC is making the offering process significantly easier for companies that have been through this sort of process before and have demonstrated an ability to abide by the rules. As long as they comply with the rules, WKSIs are not subject to all of the cumbersome checking procedures inherent in most offerings and will be able to take advantage of much quicker routes to market. Other segments introduced in the reforms include seasoned issuers, unseasoned issuers and non-reporting issuers.

Improved shelf registration

Key to this liberalized environment are new shelf registration procedures whereby WKSIs can simply preregister a range of offerings so they are ready to go as soon as the issuer and/or market is ready. The new automatic shelf registration available to WKSIs does not require SEC review. 

Les Silverman, a partner at Cleary Gottlieb in New York, notes that, as issuers and underwriters become familiar with this new tool, ‘it should become the dominant technique for large issuers to access the market.’

Liberalized communications environment

Many experts believe that communications during the offering process had become unnecessarily restricted. Richard Baumann, a partner at Dorsey & Whitney in London, notes that the US restrictions on issuers’ communications were ‘rather more demanding and restrictive than anywhere else in the world. You couldn’t engage in a number of forms of communication that most people outside of the US would think of as part and parcel of a routine offering process. These reforms change a substantial part of that.

Easing restrictions

While it would be wrong to suggest that the SEC has completely liberalized the communications environment for registered offerings, it has now gone a long way toward creating more of a ‘real-world’ situation, especially for WKSIs. The SEC has allowed them to communicate more easily with investors by easing the application of the so-called gun-jumping provisions in the Securities Act. 

These gun-jumping provisions are aimed at stopping companies from conditioning the market for an offering before registration by providing information outside of the prospectus, or by not providing all of the required information in a statutory prospectus. 

Going forward, issuers are allowed to engage in a range of oral and written communications with potential investors at any time during a registered offering, with WKSIs getting the broadest license to communicate and new IPO issuers the least (but still more than under the old rules). Standards for written communication are more flexible due to a new free-writing prospectus, to encompass any ‘written’ communication in the offer that lies outside the main prospectus. 

These reforms, combined with further liberalization of prospectus requirements, mean the securities offerings process for WKSIs and certain other issuers is now far simpler, cheaper and quicker to administer. The new environment is expected to help many non-US companies that have previously withheld follow-on or rights offerings from the US market, particularly issuers that now fall under the WKSI definition.
‘The change in the rules means non-US companies that are also WKSIs will find it much easier to make rights offerings available directly to the American depositary receipt (ADR) holders,’ observes Miguel Perez-Lafaurie, director of account management at Citigroup Depositary Receipt Services. ‘This potentially expands the opportunities for our client companies to access the US market.’ 

Despite the undoubtedly positive impact of the reforms, Baumann cautions non-US issuers to remember that they generally apply to registered offerings only. They do not usually cover offerings made under Rule 144A or Reg S exemptions. Nor would a Level I ADR program be affected by the package – it is only Level II and Level III programs, with registration of the underlying securities or a full listing in the US, which benefit. 

‘We’re all hoping the SEC will do another round of housecleaning and cover these exemptions in the future,’ says Baumann. ‘Basically, the SEC took on the harder job first.’ He points out that there is no distinction in the reforms between DRs and the underlying securities. They are, in effect, the same thing as far as these reforms are concerned.
Communications reforms

So what were the SEC’s main intentions in developing these regulations? Brigantic says the commission wanted to ensure the offering regulations took a more practical view of the world. ‘The reforms have brought the regulations up to date,’ she explains. ‘They now take into account the fact that electronic communications have changed the way issuers disseminate information to investors. That’s particularly important for
non-US issuers accessing the US market.’ 

Before the new reforms, there was a paradox: investors and the SEC were calling for more information from issuers, yet the rules and regulations surrounding securities offerings often severely limited what issuers could actually say outside of their registration statements. 

The new communication reforms introduce a new class of regulated communication – a free-writing prospectus – that will help WKSIs (and certain other types of issuers) communicate around an offering. A free-writing prospectus is simply any written offering material other than the statutory prospectus. It may take any form and does not have to meet the strict information requirements of statutory prospectuses. 

Of course, a free-writing prospectus is not allowed to conflict with information in the statutory prospectus, but it does give a company the freedom to communicate around an offering. The key lies in how the SEC defines the communications that may comprise the free-writing prospectus:

  • More than written communication is included. The SEC has made it clear that free-writing prospectuses may include printed or broadcast communication as well as graphic communication in any form of electronic media. 
  • Oral communications are excluded if they are live in real time. This covers live roadshows (including simultaneous slides), live telephone calls and live webcasts. It also, for example, covers a live presentation that has to be transmitted to an additional room for reasons of space.

The new regulations clarify the SEC’s requirements for electronic roadshows in a number of ways. For example, communications that are not delivered live in real time but are recordings of a presentation are considered to be graphic, ‘written’ communications, and therefore fall under the definition of the free-writing prospectus. 

However, a live presentation is not considered to be graphic communication – and is therefore not a free-writing prospectus. The difference here is small but important: a live webcast is not a free-writing prospectus, but a recorded webcast archived on a company’s web site would fall under the definition of a free-writing prospectus.
The thinking behind this is that it enables a company to file one copy of a roadshow presentation as a free-writing prospectus. The company can then rest relatively safe in the knowledge that any further live presentations of the same material – even with slides – are counted as an oral communication and therefore do not require further filing. 

As long as the information being communicated remains complete and accurate, this should give much greater freedom to talk off-the-cuff in a roadshow presentation. 

Specific benefits

The nature of the reforms is such that non-US issuers are not granted any special advantages. However, what they have done is put the regulations more on a par with the sort of regulatory environment that non-US companies might be used to in their own home markets. In legal terms, this means WKSIs may now communicate orally – or through a free-writing prospectus – outside of the registration statement at any time. 

Most issuers can now also rely on a new safe harbor to communicate to the market more than 30 days before filing a registration statement without fear of violating the gun-jumping provisions. 

The following are details of some of the specific benefits non-US issuers can expect within the new securities offering regulatory environment:

Expanded communications opportunities prior to an offering 
The WKSI definition combined with the new safe harbor mentioned above will make it a lot easier to talk to investors and the media in the run-up to an offering. Previously, many worldwide markets have had far more relaxed regimes than the US in this respect. The new rules mean the US environment is now more similar to other worldwide markets than before, making it a lot easier for issuers to give press and investor briefings and respond to media inquiries prior to and during the offering process. 

But, as Silverman cautions, ‘companies are, of course, still liable if the information is not accurate. The new rules allow a WKSI to talk to the press whenever it wants during an offering, but that information must still be complete and accurate. It’s worth bearing in mind that a lot of time is spent putting together a prospectus. There’s a reason for that: it ensures it is complete and accurate.’

More clarity and freedom on electronic roadshows

The reform package was designed to make it much easier for companies to brief investors during an offering using the roadshow format. The definitions described above allow companies the room they need to address investor concerns, safe in the knowledge they are not breaching registration requirements. 

The free-writing prospectus option means companies are allowed to file key roadshow materials as a base. However, the oral communication definition that applies to live events means firms are also free to speak to a live audience in a less restricted fashion than before – as long as they do not seek to misguide the audience relative to the filed information, of course. 

‘This may seem like a fine legal line but it does actually make it much easier to communicate in a roadshow environment during an offering,’ Brigantic notes. ‘The SEC has formulated the definitions in a practical fashion to take into account the nature of likely audiences and the way in which most companies want to communicate with their investor audiences.’

Relaxed definition of a quiet period

The old rules dictated that a quiet period was needed once a decision had been made to proceed with an offering but before the registration statement was filed. It basically ruled out any oral or written communication in the run-up to an offering. 

The new rules codify existing safe harbors for the release of factual business information and forward-looking information by all issuers. This in turn allows issuers to continue to release normal business information at any time before or during an offering on the basis that this information has nothing to do with the offering process. 

The reform package has also created a ‘30-day bright-line exclusion’. This, in effect, means any communication made by the issuer more than 30 days prior to filing a registration statement will be excluded from the gun-jumping restrictions. 

Silverman points out that this makes it easier for, say, a foreign private issuer in the run-up to its IPO to do an interview with a US business magazine. ‘Under the old rules that would have been very risky,’ he explains. ‘Now you can do it, though you shouldn’t mention the offering and you should also check when the interview is going to be published to ensure it will be at least 30 days prior to filing the registration statement.’ 

Greater flexibility in distributing research

Although previous safe harbors meant brokers could disseminate certain research reports during an offering, the SEC has decided to permit much greater freedom on the research distribution front. The changes follow stricter regulations on analyst conflicts of interest in, for example, the Sarbanes-Oxley Act and the global analyst research settlement. 

The reforms make it much easier for brokers participating in an offering to distribute research reports relating to an issuer as long as they can show they might reasonably have done so during their normal course of business. The result? A much less restrictive environment for the publication of research in the run-up to and during an offering.
This should benefit all types of issuers, even if they do not fall under the WKSI definition. ‘It offers an expanded ability to communicate at a time when companies want to talk to their existing and potential investors,’ says Perez-Lafaurie. 

Most market participants seem to agree that the securities offering reform package introduces a lot of practical help for issuers in terms of the potential speed of an offering as well as the communication surrounding it. ‘These new reforms should make the offering process much easier and more reflective of real-world interaction between issuers and investors in the US market,’ Lissemore points out. 

The reform package does not mean, however, that the US market is any less strict in terms of how it views inaccurate information. Nor should it be viewed
as some sort of golden ticket that allows SEC-reporting issuers to bypass the disclosure and governance requirements imposed in recent years by regulation such as Sox. 

Once you take into account the commission’s new recommendations, however (see Deregistration proposal), there is a definite trend toward the SEC making it easier and less risky for non-US companies to access the US market


Roles and responsibilities

The new securities offering reforms do not substantially change the nature of the offering process in terms of advisory roles – they merely enhance the speed associated with an offering and the communication surrounding it.
What they might do, however, is put more responsibility onto an issuing company relative to its underwriters and legal advisers. Why? Simply because there is more scope for ad hoc communication during an offering process, which would previously have been totally governed by the prospectus. 

The advent of the free-writing prospectus means offering communications become more fluid and disclosure more open. While this is to be welcomed in terms of the sharing of information, it puts extra responsibility onto the issuing company to ensure such communication is ‘complete and accurate’. Yes, underwriters and their legal teams will review free-writing prospectuses, but in order to take advantage of the nature of the reforms, such documentation is unlikely to undergo the same absolute rigorous attention to detail that accompanies the traditional statutory prospectus.
The new rules are, after all, supposed to ease the communication process, not make it more difficult. The rules have been made more explicit so it will be easier to determine which type of information falls into which category. 

Beate Melten, director – IR counsel at Citigroup Depositary Receipt Services, describes how it all affects the role of the IR officer: ‘IROs will have to ensure they are aware of the regulations and can brief their management teams on what they mean.’ 

Melten points out that companies need to understand what constitutes a free-writing prospectus and should have some form of structure in place to determine what material qualifies under the new definitions. ‘Companies need to think about how they are going to control the release of information in the run-up to and during an offer,’ she explains. ‘The reforms have made the communication process that much easier, but they will also create new responsibilities on the issuer side.’

Deregistration proposal

Some non-US issuers have been reluctant to access the US market in the past because of the difficulty of exiting the Exchange Act registration and reporting system. Companies generally can deregister from their US reporting requirements only if they have fewer than 300 US-resident shareholders – often a difficult factor to determine for a large company. That can mean an issuer has to continue with its US reporting obligations even though there is little US interest in the stock. 

In mid-December 2005 the SEC announced proposals that, if adopted as law, would make it easier for foreign issuers to deregister if they meet certain criteria. These include lack of issuer activity in the US for the previous twelve months (measured by trading volume thresholds) and having another main listing in another market for at least two years. The proposals also simplify the methodology for counting US ownership and permit good faith reliance on an independent service provider that in the regular course of business assists in the collection and determination of numbers of shareholders and related information. 

‘These proposals go a long way toward easing the concerns of foreign issuers that want to access the US market but don’t want to take on reporting obligations they have no means of terminating,’ says Patricia Brigantic, director and counsel for Citigroup Depositary Receipt Services. ‘Put these together with the securities offering reforms and I believe the US market looks more attractive for non-US issuers keen to access the immense pool of capital that we have in the US.’


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