A securities offering requires a tremendous amount of coordination by the utility, its treasury department, investor relations team, internal counsel and outside counsel, as well as the underwriters and their counsel. We thought it might be helpful to review some recent communications issues in the context of utility securities offerings. Planning and
coordination are key in order to comply with the myriad of regulations and standards of liability
imposed by the federal securities laws, the SEC, any applicable stock exchange and other regulatory authorities.
What is an “Offer”?
It is clear that some materials in connection with a utility’s securities offering are “offers” of securities and are regulated as such: the offer document, any term sheet or a deal roadshow assembled and presented as part of the offering
process. But often the other communications which are close in proximity to the offering give rise to thorny determinations as to whether they, too, are offers of the securities.
Section 2(a)(3) of the 1933 Act defines the term “offer” expansively; it includes “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” Any publicity that may “contribute to conditioning the public mind or arousing public interest” in an
offering can constitute an offer under the 1933 Act.1
The SEC has over the years adopted many safe harbors from the definition of “offer”. And one of the most critical of these to a utility conducting
a securities offering is Rule 168 under the 1933 Act. Rule 168 is a non-exclusive safe harbor that is available only to reporting issuers2 with a history of making similar public disclosures.
It permits a reporting issuer to make continued regular release of “factual business information” and “forward looking information,” but not information about an offering or information released as part of offering activities. Rule 168 is not available to underwriters.
The Rule 168 safe harbor is designed to permit ongoing communications with the market,
such as press releases, earnings releases, conference calls, earnings guidance and other information released in accordance with an issuer’s past practices. The issuer must have previously released factual information in the ordinary course of business, and the timing, manner and form of information must be consistent with prior practice.
One common use of Rule 168 is to exclude earnings guidance from the offering materials. If guidance is revised in proximity to an equity
offering, there is a risk that it may be deemed to be included in the offering materials, even if it
is not included in, or incorporated by reference by the prospectus. Most utilities could utilize the safe harbor of Rule 168 in an equity offering if
- the company has previously disseminated guidance in the ordinary course of business and
- the timing, manner and form in which the guidance is released is consistent with the past such releases. For the utility industry, Rule 168 is extremely helpful. There are many regularly scheduled industry conferences (e.g. EEI events) or investment banking events at which utilities regularly present and reaffirm/ update earnings guidance. These events are in addition to the other regularly scheduled occasions— such as quarterly earnings calls—where utilities announce guidance. To the extent an equity deal is launched contemporaneously or soon after one of these events which the issuer has traditionally utilized to present guidance, the guidance should meet the “timing, manner and form” test of Rule 168. For a more complete discussion, see also the January 2013 Baseload for “Offering Guidance: What to Consider Before Your Next Equity Offering.”
Another area where we commonly encounter the use of Rule 168 is in connection with non-deal road shows by utility issuers. These road shows are often designed by the investor relations team in order to update or raise the issuer’s profile
with the investment community, outside the
context of a securities offering. But care must be taken that any such presentation is not deemed part of a subsequent offering.
The Rule 168 safe harbor permits, under certain circumstances, an issuer to conduct a non-deal road show with confidence that the presentation will not be deemed an “offer” under the securities laws. The “timing, manner and form” of the
non-deal road show must be consistent with similar past presentations. Certain non-deal road shows, however, occur without the benefit of Rule 168 and with the possibility, subject to market conditions, of launching a transaction in the near future. Assuming Rule 168 is not
available, if a deal is launched on the heels of a non-deal road show, it is possible that the non- deal road show could be construed as an offer of securities (even though the slides make no reference to the upcoming offering).
A non-deal road show done in proximity to a securities offering may constitute a written offer, with the slides deemed a “free writing prospectus” or a prospectus. To avoid this
result, counsel should explore the availability of the Rule 168 safe harbor or, alternatively, include the Rule 433 legend and agree that, given the proximity of the non-deal road show to a potential offering, the road show could be deemed an offering of securities. See also the January 2014 Baseload for “Electronic Road
Shows - What to Leave In, What to Leave Out.”
Regulation FD addresses the selective disclosure of information by issuers. Regulation FD provides that when an issuer discloses material non-public information to certain individuals or entities — generally, securities market professionals such as stock analysts, or holders of the issuer’s securities who may well trade on the basis of
Regulation FD is always a concern during an offering of securities.3 The issuer needs to confirm that if material, nonpublic information is being shared, it is being shared in a manner that is compliant with the requirements of Regulation FD. While the SEC did not define what is “material,” the SEC did enumerate
in the final release for Regulation FD seven categories of information that are more likely to be considered material:
- Earnings information
- Mergers, acquisitions, tender offers, joint ventures or changes in assets
- New products of discoveries or developments regarding customers or supplies (e.g. the acquisition or loss of a contract)
- Changes in control or in management
- Changes in auditor or auditor notification that the issuer may no longer rely on an auditor’s audit report
- Events regarding the issuer’s securities (e.g. defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to rights
of security holders, public or private sales of additional securities)
- Bankruptcies and receiverships4
Note also that the list of events that the SEC requires issuers to disclose on Form 8-K is also representative of what are presumptively material events.
One issue that frequently comes up during a utility offering is whether the issuer should file the preliminary prospectus prior to distributing
the prospectus to potential investors. While most communications in connection with an offering of securities registered under the 1933 Act are exempt from the requirements of Regulation
FD,5 issuers will still want to review a preliminary prospectus in order to determine whether any information therein is both material and nonpublic. If so, despite the exception for registered offerings in Regulation FD, issuers may prefer to file such
a prospectus with the SEC prior to providing the document to potential investors.
Note that there is no equivalent exemption for private offerings under Regulation FD. As such, for utility issuers that are considering a Rule 144A transaction, deal participants must conduct a thorough review of the offering materials in order to confirm that no material, nonpublic information is being shared by the issuer by any means that is not compliant with Regulation FD.
Regulation FD enforcement actions have made headlines in the past several years. In September 2013, the SEC announced that it had brought—and settled—a cease-and- desist case under Regulation FD against a
former vice president of Investor Relations at First Solar, Inc. In this case, the executive had selectively disclosed that the company was unlikely to receive financing under a conditional loan from the Department of Energy. Even though the company had not yet issued its public announcement regarding the DOE loan,
the executive and his subordinate had phone conversations with more than 30 analysts and investors, “effectively signaling” that First Solar would not receive one of the loan guarantees.
Another focus of an issuer and the underwriters during a utility offering is the information contained on the issuer’s website and, in particular, on the Investor Relations page of the website.6 As the SEC described in 2008 in its “Commission Guidance on the Use of Company Web Sites”:7
The antifraud provisions of the federal securities laws apply to company statements made on the Internet in the same way they would apply to any other statement made by, or attributable to, a company. This includes postings on and hyperlinks from company web sites that satisfy the relevant
jurisdictional tests…..Accordingly, a company should keep in mind that applicability of the antifraud provisions of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5, to the content of its web site.
It is important to be sure that nothing on the website might unintentionally amount to a written
offer and therefore be treated as a “free writing prospectus” under the 1933 Act.8 As described above, Rule 168 can be useful in order to exclude information from the definition of “prospectus” under the 1933 Act that is regularly released factual business information or forward- looking information.
Securities Offering Reform in 20059 also promulgated Rule 433(e)(2). This rule excludes as an offer “historical issuer information that
is identified as such and located in a separate section” of a website that contains historical issuer information, provided that the issuer has not incorporated the information into an offering document and the issuer and the underwriters have not otherwise used or referred to the information in connection with the offering.
Company counsel should participate in formulating a process relating to public communications that includes periodic website (and social media) maintenance. In a perfect world, company counsel should review content before it is posted on an issuer’s website or social media accounts. And during the course of a securities offering, the various teams at the issuer need to have a heightened focus on any materials that will be posted to the website.
Further, the issuer’s investor relations department (rather than the marketing department) should
be responsible for the investor relations portion of the issuer’s website. The investor relations department may be more sensitive to securities
law matters, including compliance with Regulation FD (discussed above).
Rule 144A and General Solicitation
Effective September 2013, in accordance with the “Jumpstart Our Business Startups
- See SEC Interpretation: Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) for SEC guidance regarding an issuer’s liability for website content.
- See Securities Offering Reform, Release No. 33-8591 (Dec. 1, 2005).
Act” (the “JOBS Act”), the SEC amended Rule 144A to permit general solicitation and general advertising, provided that actual sales are only made to persons that are reasonably believed to be “qualified institutional buyers” (QIBs). As a result, issuers and underwriters now have enhanced flexibility to publicize a Rule 144A offering without loss of the exemption from registration. Prior to the revision, one of the conditions was that the securities both be offered and sold only to persons the seller and any person acting on the seller’s behalf
reasonably believe are QIBs. Note also that the SEC has clarified that, in addition to the issuer, the initial purchasers and other distribution
participants may conduct the general solicitation.10
The new rules allow issuers and their agents to communicate with prospective investors in Rule 144A deals with no limit on the method of communication or the number or type of investors reached. Issuers may now use blast emails, advertisements, articles and other communications published in newspapers or magazines, or on the Internet or television. The liberalization also allows communications about these kinds of offerings at conferences,
promotional seminars or other meetings. Despite the new flexibility, however, in our experience,
most 144A offerings that are being done in the utility space continue to prohibit general
solicitation, consistent with prior practice, by the issuer and often the initial purchasers as well, preventing the parties to the deal from utilizing the new flexibility with respect to Rule 144A.11
- Section 18 of the 1933 Act preempts state “Blue Sky” laws with respect to offerings of “covered securities.” Section 18 includes as covered securities only securities of reporting issuers offered and sold in Rule 144A transactions. The states themselves exempt offers and sales to sophisticated institutional investors by all issuers. But general solicitation could also constitute offers to non-institutional investors,and
only three states effectively exempt offers to those investors in a Rule 144A context.
Accordingly, use of broad-reaching general solicitation in Rule 144A offerings by
non-reporting issuers could require registration under certain state Blue Sky laws. It is unclear whether any such state would pursue an enforcement action in such a case.
The legal framework that applies to communications during a securities offering has become increasingly complex. Significant nuances exist in some of the most critical legal determinations. The various constituencies of a utility’s offering of securities—treasury, IR, investment banks and legal teams—are well- advised to communicate early and often during
the process in order to ensure that all parties are in agreement with respect to the treatment of the many moving parts.