The Securities and Exchange Commission has proposed amendments to Rule 163 under the Securities Act of 1933. If adopted, the amended rule would facilitate the ability of large public companies to communicate with broader groups of potential investors and gauge the level of interest in the market for their securities offerings. Under current Rule 163, only large companies that meet the definition of "well-known seasoned issuers" (or "WKSIs") under Rule 405 under the Securities Act are permitted to communicate directly with potential investors before filing a registration statement with the SEC for such offerings. The proposed amendments would liberalize the rule to allow WKSIs to authorize an underwriter or dealer to communicate with potential investors on their behalf about potential securities offerings before the WKSI files the related registration statement.
A WKSI is a company that is current and timely in its periodic report filings for at least one year and has either $700 million of publicly-held shares or has issued $1 billion of non-convertible securities, other than common equity, in SEC-registered offerings for cash in the preceding three years.
Under current Rule 163, a WKSI can engage in unrestricted oral and written offers before it files a registration statement under the Securities Act without violating the registration requirements of that act. Offers made "by or on behalf of" a WKSI are exempt from Section 5(c) of the Securities Act, which otherwise prohibits offers to sell or buy a company's securities before the company files a registration statement with respect to such securities. Rule 163, which the SEC adopted in 2005 as part of its Securities Offering Reform initiative, substantially liberalized the offering process that had been in effect for the prior seventy years for companies qualifying as WKSIs. However, Rule 163 is currently not available for communications made on behalf of a WKSI by an offering participant that is an underwriter or a dealer, and this restriction has limited the benefits of the rule. To address this concern, the SEC now proposes to expand the scope of the rule to include, in certain circumstances, offers that underwriters or dealers make "by and on behalf of" a WKSI.
As proposed, the amended rule would permit an underwriter or dealer to act as an agent or representative on behalf of a WKSI if the following conditions are satisfied:
- The underwriter or dealer receives written authorization from the WKSI to act as its agent or representative before making any communication on its behalf.
- The WKSI authorizes or approves any written or oral communication before it is made by an authorized underwriter or dealer.
- Any authorized underwriter or dealer that has made any authorized communication on behalf of the issuer in reliance on Rule 163 is identified in any prospectus contained in the registration statement that is filed for the offering to which the communication relates.
All other current requirements of Rule 163 would continue to apply, including (1) the requirement to file with the SEC any communication made by or on behalf of the WKSI in reliance on the rule and (2) the requirement that offers made in reliance on the rule must comply with Regulation FD (Fair Disclosure). In order to comply with the filing requirement, when and if a corresponding registration statement is filed for the offering to which the pre-filing written communication relates, any such written communication must be filed with the SEC as a "free writing prospectus", along with the requisite legend, as the rule currently requires for communications made by the company. In order to comply with Regulation FD, as a practical matter, the issuer, or the underwriter or dealer acting on its behalf, would first need to obtain a confidentiality agreement from the person to whom the information is provided, or the issuer would need to disclose the information publicly in the manner and within the time frame set forth in Regulation FD, again as the rule currently requires for communications made by the company.
It is important to note that the third condition of the proposed amendment would require that the company identify the underwriter or dealer that made the communication in question if and when the company files a corresponding registration statement. This requirement would have the effect of imposing the full range of disclosure obligations and liabilities which apply in a public offering to any of the prefiling communications that an underwriter or a dealer makes under amended Rule 163, including, presumably, disclosure obligations under Item 508 of Regulation S-K under the Securities Act and liabilities under Section 11 of the Securities Act.
The proposed amendments to Rule 163 are available at http://www.sec.gov/rules/proposed/2009/33-9098.pdf.