Registration statements under the U.S. Securities Act of 1933, as amended, generally require a signed opinion of counsel regarding the legality of the securities being offered and sold.  These opinions must be filed as an exhibit to the registration statement, typically before it becomes effective, and are commonly referred to as "Exhibit 5" opinions.  

On October 14, 2011, the SEC's Division of Corporation Finance (the "Division") published Staff Legal Bulletin No. 19 clarifying its views with respect to legality and tax opinions filed in connection with registered securities offerings (the "Bulletin").[1]  Of particular relevance to both in-house and outside counsel who prepare and deliver legality opinions, the Bulletin:

  • in departing from current practice, permits qualified "forward-looking" MTN opinions at the time of effectiveness of a registration statement, followed by an unqualified opinion either filed at the time of each takedown or included in the text of each pricing supplement related to a specific issuance of notes;
  • confirms the staff's view that the legality opinion for debt securities, guarantees, options, warrants or rights necessarily encompasses the opinion that the registrant is validly existing, has the power to create the obligation, and has taken the required steps to authorize entering into the obligation, but permits the registrant to engage local counsel, if primary counsel is not admitted in the jurisdiction of incorporation of the registrant, to opine as to the valid existence of the registrant, its power to create the obligation and required steps to enter into the obligation. Generally, local counsel's opinion must be filed with the registration statement, proper consents must be obtained, and both counsels must be named in the registration statement;
  • permits counsel to make certain broad assumptions and acknowledge uncertainties involved when opining on rights under shareholder rights plans ("poison pills");
  • requires material differences in the way the terms "legally issued," "fully paid" and "non-assessable" are used or understood under foreign and U.S. law, if any, to be disclosed in the prospectus relating to shares publicly issued by a foreign registrant, in addition to requiring filing an opinion with respect to such matters;
  • in keeping with recent SEC guidance,[2] confirms that unqualified legality opinions are required to be filed by closing of each takedown off of a shelf registration statement, if not filed at the time of effectiveness, irrespective of how many or how frequently takedowns occur.  Such opinions must form part of the registration statement (i.e., on a filed, not furnished, Form 8-K or incorporated Form 6-K, or in a post-effective amendment to the registration statement);
  • permits certain assumptions regarding (a) future sale of the registered securities (in the case of an acquisition shelf transaction); or (b) required shareholder approvals and applicable state law filings (in an exchange offer, when a registrant seeks to reincorporate before closing an offering of securities or in an offering conditioned on charter amendments), each as long as an unqualified opinion is filed on Form 8-K or Form 6-K or in a post-effective amendment;
  • cautions practitioners against making assumptions that are overly broad, or that  "assume away" the relevant issue or that assume material or readily ascertainable facts underlying the opinion;
  • disapproves of opinions given by counsel in one jurisdiction with regards to laws of another jurisdiction that inappropriately carve-out such latter jurisdiction by virtue of not being admitted to practice there (except in the case of Delaware, where counsel not admitted to practice is generally deemed capable of opining on such state's law but may state expressly in such counsel's opinion that it is not so admitted);
  • sets forth the Division’s view that opinions relating to capital stock issuances may be limited to the Delaware General Corporation Law, or the corporation and other entity statutes of an applicable jurisdiction if an entity is incorporated in such jurisdiction, and such reference is deemed to include all applicable statutory provisions of such laws and reported judicial decisions interpreting these laws; and
  • confirms that purchasers of securities in registered offerings are entitled to rely on filed opinions.

As discussed further below, the Bulletin both provides certain general guidance regarding filed opinions, and, as summarized in the tables below, sets forth the required elements of each opinion as they apply to specific types of securities and transactions.  Counsel is urged to review their opinion practice in light of this guidance and make appropriate modifications as soon as possible.

General Guidance Regarding Filed Opinions

Assumptions -- The Bulletin cautions lawyers against including assumptions in opinions that "are overly broad" or that "assume away" the relevant issue or any of the material or readily ascertainable facts underlying the opinion. For example, counsel should not assume that the registrant (1) is legally incorporated; (2) has sufficient authorized shares; (3) is not in bankruptcy; or (4) has taken all corporate actions necessary to authorize the issuance of the securities.  The Division may ask counsel to explain and support supplementally any assumption that is unusual, overly broad or otherwise inappropriate.

On the other hand, certain assumptions or qualifications may be necessary or appropriate, such as: (1) documents reviewed and relied upon in giving the opinion are true and correct copies of the original documents, and the signatures on such documents are genuine; (2) accuracy of representations of officers and employees as to questions of fact; (3) the persons identified as officers are actually serving as such and that the certificates representing the securities will be properly executed by one or more such persons; (4) the persons executing the documents examined by counsel have the legal capacity to execute such documents; (5) the registration statement has been declared effective pursuant to the Securities Act, or the trust indenture has been qualified pursuant to the Trust Indenture Act; (6) a pricing committee will have taken action necessary to set the sale price of the securities; and (7) the investors will pay in full all amounts that they have agreed to pay to purchase the securities.

Counsel's Expertise -- In addition to opining on the laws of the states in which they are admitted to practice, counsel may, in the Division's view, opine on Delaware law even if not admitted to practice in such state.  With the exception of Delaware, counsel may not, however, provide an appropriate opinion with respect to the law of a jurisdiction where it is not admitted to practice and then "carve out" such law, or indicate that he or she is not qualified to opine on that law. 

Qualifications Regarding the Scope of the Opinion -- A legality opinion with respect to capital stock may be limited to Delaware General Corporation Law (the "DGCL") or similar laws of other jurisdictions; however, it is the Division's view that such reference is understood to include all applicable statutory provisions and reported judicial decisions interpreting these laws.  It is therefore not necessary for counsel to confirm to the Division in writing that they concur with this understanding or to add the words "and reported judicial decisions" after citing the DGCL.  Counsel may not, however, explicitly exclude consideration of reported judicial interpretations of such law and limit their opinion to statutory provisions.  This requirement relates only to state law, however: counsel may exclude federal law, including the federal securities laws, from the scope of the opinion as long as counsel clearly opines on required state law matters. Counsel may also exclude state blue sky securities law matters.

Limitations on Reliance -- The Bulletin makes clear that the Division will not accept any limitation on reliance, for example only to the company, its board of directors or another counsel. Purchasers of securities are entitled to rely on the opinion.

Consents -- Subject to certain limited exceptions, all counsel providing opinions must consent to the prospectus discussion of such opinion, the reproduction of the opinion as an exhibit, and being named in the registration statement. Although counsel need not expressly admit in the consent that it is an expert within the meaning of Sections 7 and 11 of the Securities Act, it is inappropriate for counsel to deny that it is an expert within the meaning of Sections 7 and 11 of the Securities Act.

The tables below summarize further opinion practice guidance by type of security and by type of transaction.

Opinion Requirements by Security Offered in the Registered Offering

Click here to see table

Opinion Requirements by Specific Transaction

Click here to see table