This is an extract of our The Public Offering Gun Jumping Concerns For The Ipo Section 5 document, which we sell as part of our Securities Regulation Outlines collection written by the top tier of Georgetown University Law Center students.
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Gun Jumping Concerns for the IPO - SS 5 i. In General a) SS 5(c) prohibits any offer to sell or offer to buy prior to the filing of a registration statement. b) Under SS 5(a), no sale or deliveries of registered securities can occur until the registration statement is effective. c) After the registration statement is filed and even after it is effective,
SS 5(b)(1) requires that all written offers to sell be in connection with a prospectus that complies with SS 10 of the '33 Act. d) Per SS 5(b)(2), a final prospectus must accompany any transportation of the securities to investors. e) The jurisdictional reach of SS 5 is the use of any means or instruments of transportation or communication in interstate commerce or the mails.
? SS 2(a)(7) provides that the term "interstate commerce" means "trade or commerce in securities or any transportation or communication relating thereto among the several States or between the District of Columbia or any Territory of the United States and any State or other Territory, or between any foreign country and any State, Territory, or the District of Columbia, or within the District of Columbia." (Stat. Supp. pg. 3)
? THEREFORE, none of the provisions of SS 5 apply if all activities are conducted on a face-to-face basis with no use of the mail, phone, or other commercial medium to arrange or carry out the sale. f) If either the security is exempt or the transaction qualifies for an exemption, the regulatory demands of SS 5 do not apply.
? The most important exemption is that from SS 4(1), which exempts from SS 5 transactions by everyone other than "an issuer, underwriter, or dealer."
? SS 2(a)(4) provides that "issuer" means "every person who issues or proposes to issue any security; except that with respect to certificates of deposit, voting-trust certificates, or collateraltrust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors (or persons performing similar functions) or of the fixed, restricted management, or unit type, the term 'issuer' means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; except that in the case of an unincorporated association which provides by its articles for limited liability of any or all of its members, or in the case of a trust, committee, or other legal entity, the trustees or members thereof shall not be individually liable as issuers of any security issued by the association, trust, committee, or other legal entity; except that with respect to equipment-trust certificates or like securities, the term 'issuer' means the person by whom the equipment or property is or is to be used; and except that with
respect to fractional undivided interests in oil, gas, or other mineral rights, the term 'issuer' means the owner of any such right or of any interest in such right (whether whole or fractional) who creates fractional interests therein for the purpose of public offering."
? SS 2(a)(11) provides that "underwriter" means "any person who has purchased from an issuer with a view to, or offers to sell for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. As used in this paragraph the term 'issuer' shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer."
? SS 2(a)(12) provides that "dealer" means "any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principle, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person." g) Certain communications are permissible during the offering process
? There may be a safe harbor OR
? Each safe harbor has very technical requirements
? If there is no safe harbor, the communication needs to be examined in accordance with the general principles that define "offer" or "offer to sell" and a "prospectus"
? SS 2(a)(3) provides that
? The term "sale" or "sell" shall include every contract of sale or disposition of a security or interest in a security, for value. The term "offer to sell", "offer for sale", or "offer" shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. The terms defined in this paragraph and the term "offer to buy" as used in subsection (c) of section 5 of this title shall not include preliminary negotiations or agreements between an issuer (or any person directly or indirectly controlling or controlled by an issuer, or under direct or indirect common control with an issuer) and any underwriter or among underwriters who are or are to be in privity of contract with an issuer (or any person directly or indirectly controlling or controlled by an issuer, or under direct or indirect common control with an issuer). Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other
thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been offered and sold for value. The issue or transfer of a right or privilege, when originally issued or transferred with a security, giving the holder of such security the right to convert such security into another security of the same issuer or of another person, or giving a right to subscribe to another security of the same issuer or of another person, which right cannot be exercised until some future date, shall not be deemed to be an offer or sale of such other security; but the issue or transfer of such other security upon the exercise of such right of conversion or subscription shall be deemed a sale of such other security. Any offer or sale of a security futures product by or on behalf of the issuer of the securities underlying the security futures product, an affiliate of the issuer, or an underwriter, shall constitute a contract for sale of, sale of, offer for sale, or offer to sell the underlying securities. Any offer or sale of a security-based swap by or on behalf of the issuer of the securities upon which such security-based swap is based or is referenced, an affiliate of the issuer, or an underwriter, shall constitute a contract for sale of, sale of, offer for sale, or offer to sell such securities. The publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering of the common equity securities of such emerging growth company pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective shall be deemed for purposes of paragraph (10) of this subsection and section 5(c) of this title not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer. As used in this paragraph, the term "research report" means a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.
SS 2(a)(10) provides that
??? ?The term "prospectus" means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security; except that (a) a communication sent or given after the effective date of the registration statement (other than a prospectus permitted under subsection (b) of section 10
of this title) shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of section 10 of this title at the time of such communication was sent or given to the person to whom the communication was made, and (b) a notice, circular, advertisement, letter, or communication in respect of a security shall not be deemed to be a prospectus if it states from whom a written prospectus meeting the requirements of section 10 of this title may be obtained and, in addition, does no more than identify the security, state the price thereof, state by whom orders will be executed, and contain such other information as the Commission, by rules or regulations deemed necessary or appropriate in the public interest and for the protection of investors, and subject to such terms and conditions as may be prescribed therein, may permit. ii. (1) The Pre-Filing Period a) In General
? Under SS 5(c), it is unlawful "to offer to sell or offer to buy" any security unless a registration statement has been filed for that security.
? Even after a registration statement is filed, the constraints of SS
5(c) reappear if that registration statement "is the subject of a refusal order or stop order stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8."
? SS 5(c) states that "[i]t shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8." (Stat. Supp. pg. 15)
??? ?This is an extremely broad prohibition considering SS 2(a)(3)'s definitions of "offer to sell" and "offer to buy" which include "every attempt to offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value."
? FRAMEWORK FOR ANALYSIS re Pre-Filing Period for an IPO
? (1) Is there a safe harbor for the communication at issue?
? (2) If there is no safe harbor, was the communication made by someone other than an "issuer, underwriter, or dealer"?
? If so, then transaction is exempt under SS 4(1).
?(3) Is there any other applicable exemption?
(4) Was this an offer to sell or offer to buy?
? That is, on which side of the blurry line between releasing newsworthy information and conditioning the market does the communication fall?
??? ?(5) Was the communication made while the issuer was "in registration"?
b) Conditioning the Market
?????There are three main issues here:
? (1) Was the communication made by an "issuer, underwriter, or dealer"?
?????If not, the transaction is exempt under SS 4(1).
? (2) Did the communication condition the market?
?????The main issue here is whether the blurry line between releasing newsworthy information and conditioning the market has been crossed by some communication.
? Securities Act Release No. 3844
? The terms "sale," "sell," "offer to sell," and "offer to buy" are broadly defined in SS 2(a)(3) of the Securities Act and these definitions have been liberally construed by the Commission and the courts.
? An issuer, underwriter, or dealer may not legally begin a public offering or initiate a public sales campaign prior to the filing of a registration statement.
?????It is apparently not generally understood, however, that the publication of information and statements, and publicity efforts, generally, made in advance of a proposed financing, although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort.
?????Example No. 1 (pg. 161): While preparing a registration statement, the under-writer promoter distributed several thousand copies of a brochure which described in glowing generalities the future possibilities for the use of a particular mineral and the profit potential for investors who would share in the growth prospects of this new industry. The brochure made no reference to an issuer or any securities nor any particular financing. It was sent out, however, bearing the
name of the underwriting firm. The Commission determined that this was clearly a violation of SS
5 as it "was obviously designed to awaken an interest which later would be focused on the specific financing to be presented in the prospectus shortly to be sent to the same mailing list." This "clearly was the first step in a sales campaign to effect a public sale of the securities."
?????Example No. 6 (pp. 161-62): The president of a company accepted an invitation to give a speech addressing a meeting of a security analysts' society. A speech was prepared that gave a fairly comprehensive picture of the company, the industry in which it operated, and various factors affecting future growth. Projections of demand, operations, and profits for future periods were included. The speech and other supplemental information were printed out and were to be distributed to the meeting. Later, a public financing by the company was authorized, and it turned out that the scheduled speech was going to be about at the same time as the registration statement was to be filed. The Commission did not object to the giving of the speech as "[i]t seemed clear that the scheduling of the speech had not been arranged in contemplation of a public offering. However, objection was raised to the distribution of the printed copies of the speech and the supporting materials.
? Example No. 7 (pg. 162): The president of a company gave a speech, two weeks prior to filing a registration statement, before a society of security analysts. In the speech, the president discussed the company's operations and expansion program, its sale and earnings. The speech contained a forecast of sales and referred to the issuer's proposal to file a registration statement with the Commission later in the month. Copies of the speech had been widely distributed to approximately 4,000 security analysts. The Commission denied acceleration of the registration statement and requested that the registrant distribute copies of its final prospectus to each member of the group that had recieved a copy of the speech. In re Carl M. Loeb, Rhoades & Co. (pp. 162-63)
? The issue in this case was whether the blurred line had been crossed between releasing newsworthy information (in the form of two
press releases) and conditioning the market. The Commission found that the press releases crossed the line because (1) it contained descriptive material concerning the properties, business plans, and management of the company; (2) it included arresting references to "assets in excess of $100,000,000" and "over 100,000 acres, more than 155 square miles, in an area in the Gold Coast; (3)reporters were furnished with price data; and (4) the name of the managing underwriters was mentioned.
?????The Commission stated that "[s]ection 5(c) is equally applicable whether or not the issuer or the surrounding circumstances have . . . news value."
? (3) Was the communication made when the issuer was "in registration"?
??? ?The SEC has stated that being "in registration" "mean[s]
the entire process of registration, at least from the time the issuer reaches an understanding with the brokerdealer, which is to act as a managing underwriter until the completion of the offering and the period of 40 to 90 days during which dealers must deliver a prospectus." Securities Act Release No. 5009 (pg. 164) c) Safe Harbors for Permissible Communications
? Rule 163A (Bright-Line Exclusion) (pg. 165/Stat. Supp. pp. 99-100)
? Rule 163A provides all issuers a bright-line time period, ending thirty days prior to the filing of a registration statement, during which the issuer or those acting on its behalf can communicate without the communication being considered an offer to sell, an offer for sale, or an offer to buy such that there would be no violation of SS 5.
? To qualify for this exclusion: (1) the communication must be made "by or on behalf of the issuer," (2) the communication cannot make any reference to the securities offering, and (3) the issuer must take reasonable steps to prevent further distribution or publication of the communication during the 30-day period immediately before the filing of the registration statement. Rule 163A(a).
? "[A] communication is made by or on behalf of an issuer if the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves the communication before it was made." Rule 163A(c)
? BUT This exclusion does not apply to certain types of offerings:
? Communications relating to business combination transactions (Rule 163A(b)(1));
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