Basic Structure and Prohibitions of the Securities Act (’33 Act)
Pre-filing period ½ Waiting period ½ Post-effective period
§5(a)(1) ½ ½
§5(a)(2) ½ ½
§5(b)(1) ½ ½
§5(b)(2) ½ ½
§5(c) ½ ½
Rule 134 ½ ½
Rule 430 ½ ½
§5(a)(1): no sales of securities prior to effective registration statement
§5(b)(1): prospectus must meet requirements of §10
§5(b)(2): sales must be accompanied by a prospectus
§5(c): no offers can be made before you file a registration statement
Rule 134: written offers that meet the requirements are not considered a prospectus
Rule 430: preliminary prospectuses must conform to this rule
Rule 431: summary prospectus may be used at anytime – must meet requirements of rule
I. Pre-Filing Period
a. Preliminary Negotiations Between Issuer and Underwriter
i. § 5(c) makes it unlawful for any person to offer to sell or to offer to buy any security, before a registration statement has been filed with the SEC.
1. “Sale” is a contract or disposition of security or interest in a security for value.
2. “Offer” shall include every attempt or offer to sell a security
a. Oral offers are prohibited.
b. Includes conduct intended to form an opinion of the value of the company or solicit securities.
ii. § 5(c) violation results in right of rescission for purchasers of the security.
1. § 2(a)(3) excludes “preliminary negotiations and agreements” between an issuer or any controlling person and any underwriter.
a. This only applies to underwriters who sign the underwriting agreement; i.e. have to be in privity of contract with the issuer.
iv. Pre-Filing Period Initial Steps
1. Issuer and underwriter negotiate and will issue a “memorandum of understanding” or “letter of intent.”
2. Registrant chooses the filing date but the SEC determines the effective date of the registration statement.
3. Some large issues, known as “Well-Known Seasoned Issuers,” are exempt from the “quiet period’s” prohibition
Continue to advertise products and services; send out periodic reports to stockholders; publish proxy statements; make factual releases to the press; answer any unsolicited factual requests; hold stockholder meetings.
4. Issuers should avoid:
a. Issuing forecasts, projections, or predictions related but not limited to revenues, income, or EPS.
b. Publish opinions concerning values.
c. Quiet Period
i. Rule 163A
1. Exempts communications more than 30 days prior to filing § 5(c), so long as the future public offering is not discussed.
2. Rule 163A only applies to issuers and agents, not to statements released by a prospective underwriter.
ii. Rule 163
1. WKSI (well known seasoned issuers) can engage in unrestricted and written selling activity before a registration statement is filed; in effect, the issuers are exempt from § 5(c).
2. However, a mandatory legend must be attached to offers under Rule 163(b)(1). And under Rule 163(b)(2), every written communication made in reliance on this rule must be filed with the SEC upon the filing of the registration statement.
3. Any writings will be considered a “free writing prospectus,” subjecting issuer to civil liability for fraud.