SEC Proposes Amendments to Offering Communication Rule

The SEC has proposed amendments to 1933 Act Rule 163(c) to permit well-known seasoned issuers, known as WKSIs, to authorize an underwriter or a dealer to act as its representative in communications about the offering of securities prior to the filing of a registration statement (Rel. No. 33-9098, December 18, 2009). If adopted, the amendments will allow issuers to access the underwriters’ or dealers’ network of investors to gauge market interest about an offering, including its terms, before filing a registration statement.

WKSIs are issuers that meet the registration requirements of Forms S-3 or F-3, have at least $700 million in worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates (or have issued for cash, within the last three years, at least $1 billion aggregate principal amount of nonconvertible securities through primary offerings registered under the 1933 Act), and are not ineligible issuers.

When the SEC adopted Rule 163 in 2005, it permitted WKSIs to benefit from the liberalization of its offering and communication rules because of their reporting history under the 1934 Act and because they are presumed to be the most widely-followed issuers in the marketplace. Rule 163 allows WKSIs to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions of the 1933 Act.

The rule exempts an offer made “by or on behalf of” a WKSI from the prohibition on offers to sell or to buy an issuer’s securities before filing a registration statement as long as certain conditions are met. Under the current rule, a communication is deemed to be by or on behalf of a WKSI if the issuer or agent or a representative of the issuer, other than an offering participant who is an underwriter or a dealer, authorizes or approves the communication before it is made.

The SEC believed the rule would encourage more issuers to register their securities offerings. However, the SEC has learned that many WKSIs have not filed automatic shelf registration statements as expected or, if they have, the registration statements may not have been for all of the types of securities they wish to offer.

The SEC recognizes that WKSIs may wish to assess the level of interest in their securities before filing a registration statement or a post-effective amendment to an already filed automatic shelf registration statement for their offered securities. The SEC has found that many issuers do not have enough information about their potential investors to contact them directly or prefer not to contact them directly out of concern that the contact could constitute material, nonpublic information about their capital-raising plans before obtaining confidentiality agreements.

A WSKI without a registration statement on file or without the particular class of securities included in its registration statement cannot engage underwriters or dealers to have discussions with potential investors on its behalf. This impediment reduces the intended benefits of the 2005 reform initiative and may result in unregistered offerings.

The proposed amendments would enable underwriters or dealers to serve as agents or representatives for WKSIs. The underwriter or dealer would have to receive written authorization from the WKSI to act as its agent or representative before making any communication on its behalf. The issuer must authorize or approve any written or oral communication before it is made and the authorized underwriter or dealer must be identified in any prospectus contained in the registration statement to which the communication relates.

All other provisions of Rule 163 would continue to apply. The communications would continue to be subject to Regulation FD. The written communications must be filed with the SEC as a free writing prospectus when the registration statement or the amendment is filed.

An underwriter or dealer may not rely on Rule 163 without prior authorization from the issuer. It may not gauge market interest and then present the issuer with an unsolicited proposal for an offering of securities. The proposed amendments require that the issuer be involved with any communications made by the underwriters or dealers in reliance on Rule 163.

The SEC noted that the proposed amendments would not prevent the existing ability of an underwriter or dealer that is not acting on behalf of the issuer from making a reverse inquiry in a registered offering. A reverse inquiry is often used in medium-term note programs, according to the release. Investors may be allowed to purchase securities from an issuer through an underwriter or dealer that is not designated in the prospectus as the issuer’s agent by having the underwriter approach the issuer with an interest from the investor.

Comments on the proposed amendments should be submitted by January 27, 2010.