In a new no-action letter to Morgan Stanley, Corp Fin agreed that, as outlined in the request letter, the firm’s proposed procedures for offering and selling securities in IPOs would not involve a pre-effective sale for purposes of Section 5(a) of the Securities Act. Essentially, the modified process eliminates the need for clients to affirmatively reconfirm prior indications of interest as part of the sale process.

Currently, in IPOs, the firm’s practice is to solicit indications of interest from clients after filing of the registration statement and prior to effectiveness. It then reconfirms these indications of interest after effectiveness and pricing to form contracts of sale. For some clients, the firm contended, availability for reconfirmation in a narrow window of time between pricing and commencement of trading can be problematic.

Instead, to address this issue, the firm proposed procedures that would involve soliciting from clients conditional offers to buy (“COBs”) prior to effectiveness that would not be binding on clients and could be withdrawn at any time up to and including the specified withdrawal time (at least one hour after notice to the client of effectiveness or anticipated effectiveness). After the withdrawal time had passed, the firm could accept these COBs and form contracts of sale. More details regarding the proposed process were described in the firm’s request letter.

The firm believed that the new process would be more convenient for its clients, would enhance transparency and “would be in line with how clients typically instruct their [financial advisors] to purchase securities in secondary market transactions and in shelf offerings.” In addition, the new process was expected to decrease the firm’s market risk in allocating shares in its underwritten IPOs.

Corp Fin agreed that the proposed procedures, to the extent they were followed, would not involve a pre-effective sale, noting, in particular, the firm’s representations that:

  • it will distribute a COB process summary to inform clients of their right to withdraw any COB up to and including the withdrawal time;
  • it will email clients to confirm receipt of COBs and to remind them of their ability to withdraw;
  • it will have policies and procedures providing for the responsiblity of financial advisors to ensure that clients understand their ability to withdraw;
  • it will notify clients of the effectiveness or anticipated effectiveness of the registration statement and provide them a minimum of at least one hour following that notice to withdraw pending COBs;
  • in the event of a material change to the preliminary prospectus or final offering price that is outside the COB price range, any prior COB would no longer be valid; and
  • it will not collect any payment for IPO shares until it accepts the client’s COB after effectiveness.

Happy Thanksgiving!!