Securities Offering Reform

Federal RegisterNov 17, 2004

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 230, 239, 240, 243, and 274

[Release Nos. 33-8501; 34-50624; IC-26649; International Series Release No. 1282; File No. S7-38-04]

RIN 3235-AI11

Securities Offering Reform

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission is proposing rules that would modify and advance significantly the registration, communications, and offering processes under the Securities Act of 1933. Today's proposals would eliminate unnecessary and outmoded restrictions on offerings. In addition, the proposals would provide more timely investment information to investors without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to capital. The proposals also would continue our long-term efforts toward integrating disclosure and processes under the Securities Act and the Securities Exchange Act of 1934. The proposals would accomplish these goals by addressing communications related to registered securities offerings, delivery of information to investors, and procedural restrictions in the offering and capital formation processes.

DATES:

Comments should be received on or before January 31, 2005.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an e-mail to

rule-comments@sec.gov.

Please include File Number S7-38-04 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.

All submissions should refer to File Number S7-38-04. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/ proposed.shtml

). Comments also are available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Amy M. Starr, Consuelo Hitchcock, Andrew Thorpe, Daniel Horwood, or Anne Nguyen, at (202) 824-5300, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0402 or, with respect to questions regarding investment companies, Kieran Brown in the Division of Investment Management, at (202) 942-0721.

SUPPLEMENTARY INFORMATION:

We are proposing to amend Item 512

of Regulation S-B,

Item 512

of Regulation S-K,

and Rules 134, 137, 138, 139, 153, 158, 174, 401, 405, 408, 412, 413, 415, 418, 424, 430A, 434, 439, 456, 457, 462, 473, and 902

under the Securities Act.

We also propose to add Rules 159, 159A, 163, 163A, 164, 168, 169, 172, 173, 430B, 430C, and 433 under the Securities Act. We further propose to amend Forms S-1, S-3, S-4, F-1, F-3, and F-4 and eliminate Forms S-2 and F-2

under the Securities Act; to amend Rule 100

of Regulation FD

and Rule 14a-2

under the Securities Exchange Act of 1934;

to amend Forms 10, 10-K, 10-Q, 10-KSB, and 20-F

under the Exchange Act; and to amend Form N-2 under the Securities Act and the Investment Company Act of 1940.

17 CFR 228.512.

17 CFR 228.10

et seq.

17 CFR 229.512.

17 CFR 229.10

et seq.

17 CFR 230.134; 17 CFR 230.137; 17 CFR 230.138; 17 CFR 230.139; 17 CFR 230.153; 17 CFR 158; 17 CFR 230, 174; 17 CFR 230.401; 17 CFR 230.405; 17 CFR 230.408; 17 CFR 230.412; 17 CFR 230.413; 17 CFR 230.415; 17 CFR 230.418; 17 CFR 230.424; 17 CFR 430A; 17 CFR 230.434; 17 CFR 230.439; 17 CFR 230.456; 17 CFR 230.457; 17 CFR 230.462; 17 CFR 230.473; and 17 CFR 230.902.

15 U.S.C. 77a

et seq.

17 CFR 239.11; 17 CFR 239.13; 17 CFR 239.25; 17 CFR 239.31; 17 CFR 239.33; 17 CFR 239.34; 17 CFR 239.12; and 17 CFR 239.32.

17 CFR 243.100.

17 CFR 243.100 through 243.103.

17 CFR 240.14a-2.

15 U.S.C. 78a

et seq.

17 CFR 249.210; 17 CFR 249.308a; 17 CFR 249.310; 17 CFR 249.310b; and 17 CFR 249.220f.

17 CFR 239.14 and 17 CFR 274.11a-1.

Table of Contents

I. Introduction

A. Overview of Today's Proposals

B. Background

1. Advances in Technology

2. Exchange Act Reporting Standards

II. Well-Known Seasoned Issuers; Other Categories of Issuers

A. Well-Known Seasoned Issuers

B. Other Categories of Issuers

III. Communications Proposals

A. Current Communications Requirements

B. Need for Modernization of Communications Requirements

1. General

2. Definition of Written Communication

C. Overview of Communications Proposals

D. Proposed Rules

1. Permitted Continuation of Ongoing Communications During an Offering

a. Regularly Released Factual Business and Forward Looking Information—Reporting Issuers

i. Factual Business Information

ii. Forward-Looking Information

iii. Conditions of Safe Harbors

(A) By or on Behalf of” the Issuer

(B) Regularly Released Information

b. Regularly Released Factual Business Information—Non-Reporting Issuers

2. Other Permitted Communications Prior to Filing a Registration Statement

a. 30-Day Bright Line Exclusion From the Prohibition on Offers Prior to Filing a Registration Statement—All Issuers

b. Permitted Pre-Filing Offers for Well-Known Seasoned Issuers

3. Relaxation of Restrictions on Written Offering Related Communications

a. Rule 134

i. Expansion of Permitted Information

ii. Changes to Required Information

a. Permissible Use of Free Writing Prospectuses

i. Overview

ii. Definition of Free Writing Prospectus

(A) General

(B) Media Publications

iii. Permitted Use of a Free Writing Prospectus After the Filing of a Registration Statement Under Proposed Rule 433

(A) Conditions to Permitted Use of a Free Writing Prospectus

(1) Prospectus Delivery and/or Availability

(a) Non-Reporting Issuers and Unseasoned Issuers

(b) Seasoned Issuers and Well-Known Seasoned Issuers

(2) Ineligible Issuers

(3) Filing Conditions

(a) General Conditions

(b) Electronic Road Shows

(d) Filed Free Writing Prospectus Not Part of Registration Statement

(4) Information in a Free Writing Prospectus

(a) Legend Condition

(b) Proposed Amendment to Rule 408

(5) Record Retention Condition

(B) Treatment of Communications on Web Sites and Other Electronics Issues

(1) General

(2) Historical Information on an Issuer Web Site

c. Interaction of Communications Proposals With Regulation FD

4. Use of Research Reports

a. Current Regulatory Treatment of Research Reports

b. Proposals Amending Exemptions for Research

i. Definition of Research Report

ii. Rule 137

iii. Rule 138

iv. Rule 139

(A) Issuer Specific Reports

(B) Industry-Related Reports

v. Research Report Proposals in Connection With Regulation S and Rule 144A Offerings

vi. Research and Proxy Solicitations

IV. Liability Issues

A. Information Conveyed by the Time of Sale for Purposes of Section 12(a)(2) and Section 17(a)(2) Liability

1. Rule 412

2. Relationship of Interpretation and Proposed Rule to Section 11 Liability

B. Issuer as Seller

V. Securities Act Registration Proposals

A. Overview of Proposals

B. Procedural Proposals

1. Procedural Changes Regarding Shelf Offerings

a. Overview

b. Information in a Prospectus

i. Mechanics

(A) Proposed Rule 430B

(B) Means for Providing Information

ii. Information Deemed Part of Registration Statement

iii. Date of Inclusion of Prospectus Supplements in Registration Statements and New Effective Dates of Registration Statements

iv. Proposed Amendments to Rule 415

(A) Elimination of Limitation on Amount of Securities Registered

(B) Immediate Takedowns From a Shelf Registration Statement Filed Under Rule 415(a)(1)(x)

v. Rule 424 Amendments

vi. Issuer Undertakings

(A) Treatment of Information in Prospectus Supplements

(B) Prospectus Supplements Deemed Part of a Registration Statement and New Effective Dates

c. Changes to Form S-3 and Form F-3

2. Automatic Shelf Registration for Well-Known Seasoned Issuers

a. Overview

b. Automatic Shelf Registration Mechanics

i. Eligibility

ii. Information in a Registration Statement

(A) Information That May be Omitted From the Base Prospectus

(B) Mechanics for Including Information

(D) Pay-as-You-Go Registration Fees

(E) Registration Under Securities Act Sections 5 and 6

(F) Automatic Effectiveness

(G) Duration

3. Unseasoned Issuers and Non-Reporting Issuers

a. Overview

b. Proposed Amendments to Form S-1 and Form F-1—Expanded Use of Incorporation by Reference

i. Eligibility

ii. Proposed Procedural Requirements

c. Elimination of Form S-2 and Form F-2

VI. Prospectus Delivery Reforms

A. Current Prospectus Delivery Requirements

B. Prospectus Delivery Proposals

1. Access Equals Delivery

a. Proposals

b. Exceptions to the Proposals

c. Notification

2. Confirmations and Notices of Allocations

3. Transactions Taking Place on an Exchange or Through a Registered Trading Facility—Rule 153

4. Aftermarket Prospectus Delivery—Rule 174

VII. Additional Exchange Act Disclosure Proposals

A. Risk Factor Disclosure

B. Disclosure of Unresolved Staff Comments

C. Disclosure of Status as Voluntary Filer Under the Exchange Act

VIII. Application of Proposals to Asset-Backed Securities

IX. General Request for Comment

X. Paperwork Reduction Act

A. Background

B. Summary of Information Collections

C. Paperwork Reduction Act Burden Estimates

1. Exchange Act Periodic Reports and Registration Statements

2. Communications and Prospectus Delivery

3. Securities Act Registration Statements

D. Request for Comment

XI. Cost Benefit Analysis

A. Background

B. Summary of Proposals

1. Communications

2. Securities Act Registration Amendments

3. Prospectus Delivery

4. Exchange Act Reports

C. Benefits

1. Increased Information Flow

2. Investor Protection

3. Facilitating Capital Formation

4. Reduced Regulatory Uncertainty

5. Lower Costs

D. Costs

1. Compliance Costs

2. Potential for Increased Liability

3. Research Reports

4. Other Potential Costs

E. Request for Comment

XII. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

XIII. Initial Regulatory Flexibility Act Analysis

A. Reasons for the Proposed Action

B. Objectives

C. Legal Basis

D. Small Entities Subject to the Proposed Rules

E. Reporting, Recordkeeping and Other Compliance Requirements

F. Duplicative, Overlapping or Conflicting Federal Rules

G. Significant Alternatives

H. Solicitation of Comment

XIV. Small Business Regulatory Enforcement Fairness Act

XV. Statutory Basis—Text of the Proposed Amendments

I. Introduction

A. Overview of Today's Proposals

In 1998, the Commission proposed new rules under the Securities Act that were intended to modernize the securities offering process to recognize the evolution of the securities markets and securities products since the Securities Act's adoption and to enable market participants to capitalize on new technologies.

The underlying premise of those proposals—the need to modernize the securities offering and communications processes—was supported by commenters at the time. However, commenters indicated dissatisfaction with a number of the specifics in the 1998 proposals. We believe that the objectives of the 1998 proposals in reforming the offering process continue to be supported, and merit our attention still.

See

The Regulation of Securities Offerings,

Release No. 33-7606A (Nov. 13, 1998 [63 FR 67174] (the “1998 proposals”).

The National Securities Markets Improvement Act of 1996 (NSMIA) provided the Commission with general authority to adopt exemptive rules under the Securities Act to the extent that such exemptive action is “necessary or appropriate in the public interest and consistent with the protection of investors.” See Securities Act Section 28 [15 U.S.C. 77z-3]. This authority permitted a number of the proposals put forth in our 1998 proposals to go beyond previous modernization efforts.

The 1998 proposals were a step in an evaluation of the offering process under the Securities Act that began as far back as 1966, when Milton Cohen noted the anomaly of the structure of the disclosure rules under the Securities Act and the Exchange Act and suggested the integration of the requirements under the two statutes.

Mr. Cohen's

article was followed by a 1969 study led by Commissioner Francis Wheat

and the Commission's Advisory Committee on Corporate Disclosure in 1977.

These studies eventually led to the Commission's adoption of the integrated disclosure system, short-form registration under the Securities Act, and Securities Act Rule 415 permitting shelf registration of continuous offerings and delayed offerings.

Milton H. Cohen,

Truth in Securities Revisited,

79 Harv. L. Rev. 1340 (1966). (“It is my thesis that the combined disclosure requirements of these statutes would have been quite different if the 1933 and 1934 Acts * * * had been enacted in opposite order, or had been enacted as a single, integrated statute—that is, if the starting point had been a statutory scheme of continuous disclosures covering issuers of actively traded securities and the question of special disclosures in connection with public offerings had then been faced in this setting. Accordingly, it is my plea that there now be created a new coordinated disclosure system having as its basis the continuous disclosure system of the 1934 Act and treating the “1933 Act” disclosure needs on this foundation.”)

See Disclosure to Investors—a Reappraisal of Federal Administrative Policies under the ’33 and ’34 Acts,

Policy Study (the “Wheat Report”), www.sechistorical.org/museum/Museum_Papers/museum_Papers_Chron.php#1960 (Mar. 27, 1969).

See Report of the Advisory Committee on Corporate Disclosure, Cmte. Print 95-29, House Cmte. On Interstate and Foreign Commerce, 95th Cong., 1st. Sess., Nov. 3, 1977 (Nov. 3, 1977). In addition, beginning in 1968, the American Law Institute (“ALI”) began its work on a Federal Securities Code, which was approved in 1978 by the ALI membership. The ALI Federal Securities Code included company registration as a central component. See American L. Inst., Federal Securities Code (1980).

See Adoption of Integrated Disclosure System,

Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380],

Delayed or Continuous Offering and Sale of Securities,

Release No. 33-6423 (Sept. 2, 1982) [47 FR 39799], and

Shelf Registration,

Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889].

The Commission's attention to the offering and communications processes under the Securities Act has continued more recently. In particular, in March 1996, members of the Commission staff delivered the Report of the Task Force on Disclosure Simplification to the Commission.

It recommended a number of areas where simplification and modernization of the registration and offering process could be accomplished. In July 1996, the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report to the Commission.

Its principal recommendation was that the Securities Act registration and disclosure processes be more directly tied to the philosophy and structure of the Exchange Act through the adoption of a system of “company registration.” Under company registration, the focus of Securities Act and Exchange Act registration and disclosure would move from transactions to issuers and corollary steps would be taken to provide for disclosure and registration of individual offerings within the company registration framework.

Report of the Task Force on Disclosure Simplification,

available at

www.sec.gov/news/studies/smpl.htm

(Mar. 5, 1996).

Report of the Advisory Committee on the Capital Formation and Regulatory Process,

(the “Advisory Committee Report”)

www.sec.gov/news/studies/

capform.htm (July 24, 1996).

Promptly after the Advisory Committee on the Capital Formation and Regulatory Processes delivered its report, the Commission issued a concept release regarding regulation of the securities offering process.

The release sought input on a number of significant issues, including:

Securities Act Concepts and Their Effects on Capital Formation,

Release No. 33-7314 (July 25, 1996) [61 FR 40044] (the “1996 Concept Release”).

• Whether the concept of company registration should be pursued;

• Whether other methods of increasing the integration of Securities Act and Exchange Act disclosure and other processes should be considered;

• Whether existing or further reliance on Exchange Act filings should be accompanied by enhancements to Exchange Act reporting;

• Whether companies make information about their public securities offerings available to investors in an appropriate and timely manner, including:

○ At what point in the offering process delivery of, or access to, information should be assured in connection with registered offerings under the Securities Act and whether current requirements ensure timely delivery of information to the secondary market in connection with such offerings;

○ Whether prospectus supplements in shelf offerings should be made part of the registration statement;

○ Whether and, if so, in what circumstances electronic access should replace actual delivery of information in connection with offerings registered under the Securities Act; and

○ Whether restrictions on written offers under the Securities Act should be liberalized and the liability standards that should attach to such communications;

• Whether adjustments to the roles and responsibilities of traditional “gatekeepers” in the Securities Act offering process, such as underwriters and accountants, should be made in light of increases in the speed of and other evolutions in the offering process;

• Whether changes should be made to address evolution in the relationships between the public and private offering processes, including:

○ Whether changes in Rules 144A

and 144

under the Securities Act should be considered; and

17 CFR 230.144A.

17 CFR 230.144.

○ Whether there should be any relaxation in our prohibition against general solicitations of interest or offers in unregistered private offerings; and

• Whether the review process of issuer filings under the Securities Act and the Exchange Act by the staff of the Division of Corporation Finance should be modified to limit the impact of the process on access to capital markets, at least for some category of large seasoned issuers.

In addition, the 1996 Concept Release sought input on a number of items suggested for consideration by the Task Force on Disclosure Simplification, including the following: Allowing smaller issuers that have been reporting for a year to make delayed offerings (without altering the disclosure requirements for permitting forward incorporation by reference); eliminating “at-the-market” offering restrictions; allowing universal shelf registration for secondary offerings; allowing issuers and majority-owned subsidiaries to be named as possible issuers on a shelf registration (without designating the issuer until takedown); allowing reallocation of securities on a shelf registration statement by post-effective amendment; allowing registration by seasoned issuers without any specification of the classes registered; and allowing seasoned issuers to pay registration fees at the time of the takedown.

While many of the issues cited above remain valid matters for consideration, much of the comment in response to our 1998 proposals suggested that the existing system of regulating capital formation in the registered offering market provides a number of advantages that should be carefully considered and retained if we are to make other changes. In putting forward proposed rules today, we have focused primarily on constructive, incremental changes in our regulatory structure and the offering process rather than the introduction of a far-reaching new system, as we believe that we can best achieve further integration of Securities Act and Exchange Act disclosure and processes by making adjustments in the current integrated disclosure and shelf registration systems. Further, consistent with our belief that investors and the securities markets will benefit from greater permissible communications by issuers while retaining appropriate liability for these communications, we have sought to address the need for timeliness of information for investors by building on current rules and processes without mandating delays in the offering process that we believe would be inconsistent with the needs of issuers for timely access to the securities markets and capital.

We are proposing revisions to the registration, communications, and offering processes under the Securities Act that we believe, while limited in scope, properly address the areas that are in need of modernization. Our proposals involve three main areas:

• Communications related to registered securities offerings;

• Registration and other procedures in the offering and capital formation processes; and

• Delivery of information to investors, including delivery through access and notice, and timeliness of that delivery.

While we continue to consider possible modifications to our regulatory framework regarding private offerings and the relationship between the public and private offering processes, we do not address these areas in today's proposals.

Today's proposals reflect our view that revisions to the Securities Act registration and offering processes are appropriate in light of significant developments in the offering and capital formation processes and can provide enhanced protection of investors under the statute. This view is based on our belief that today's proposals would:

• Facilitate greater availability of information to investors and the market with regard to all issuers;

• Eliminate barriers to open communications that have been made increasingly outmoded by technological advances;

• Reflect the increased importance of electronic dissemination of information, including the use of the Internet;

• Make the capital formation process more efficient; and

• Define more clearly both the information and the timeliness of the availability of information against which a seller's statements are evaluated for liability purposes.

B. Background

1. Advances in Technology

Significant technological advances over the last three decades have increased both the market's demand for more timely corporate disclosure and the ability of issuers to capture, process, and disseminate this information. Computers, sophisticated financial software, electronic mail, teleconferencing, videoconferencing, webcasting, and other technologies available today have replaced, to a large extent, paper, pencils, typewriters, adding machines, carbon paper, paper mail, travel, and face-to-face meetings relied on previously. Our evaluation of the securities offering process and procedural enhancements seeks to recognize the integral role that technology plays in timely informing the markets and investors about important corporate information and developments.

2. Exchange Act Reporting Standards

A necessary starting point in considering reforms to the securities offering process is the role that a public issuer's Exchange Act reports play in investment decision making. Congress recognized that the ongoing dissemination of accurate information by issuers about themselves and their securities is essential to the effective operation of the trading markets. The Exchange Act and underlying rules have established a system of continuing disclosure about issuers that have offered securities to the public, or that have securities that are listed on a national securities exchange or are broadly held by the public. The Exchange Act rules require public issuers to make periodic disclosures at annual and quarterly intervals, with other important information reported on a more current basis. The Exchange Act specifically provides for current disclosure to maintain the timeliness and adequacy of information disclosed by issuers, and we have significantly expanded our current disclosure requirement consistent with the mandate in the Sarbanes-Oxley Act of 2002

that “[e]ach issuer reporting under Section 13(a) or 15(d) * * * disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer * * * as the Commission determines * * * is necessary or useful for the protection of investors and in the public interest.”

Pub. L. 107-204, 116 Stat. 745 (2002).

See Section 409 of the Sarbanes-Oxley Act which added Section 13(l) to the Exchange Act (15 U.S.C. 78m(l). See also

Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date,

Release No. 33-8400 (Mar. 16, 2004) [69 FR 15594] and

Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date; Correction,

Release No. 33-8400A (Aug. 4, 2004) [69 FR 48370] (“Form 8-K Releases”).

A public issuer's Exchange Act record provides the basic source of information to the market and to potential purchasers regarding the issuer, its management, its business, its financial condition, and its prospects. Because an issuer's Exchange Act reports and other publicly available information form the basis for the market's evaluation of the issuer and the pricing of its securities, investors in the secondary market use that information in making their investment decisions. Similarly, during a securities offering in which an issuer uses a short-form registration statement, an issuer's Exchange Act record often is the largest part of the information about the issuer in the registration statement.

With the enactment of the Sarbanes-Oxley Act and our recent rulemaking and interpretive actions, we have enhanced significantly the amount of disclosure included in issuers' Exchange Act filings and accelerated the filing deadlines for many issuers. The following are examples of recent regulatory actions that have improved the delivery of timely, high-quality information to the securities markets by issuers under the Exchange Act:

• Requiring the establishment of disclosure controls and procedures;

See

Certification of Disclosure in Companies” Quarterly and Annual Reports,

Release No. 33-8124 (Aug. 28, 2002) [67 FR 57276] (“Certification Release”).

• Requiring a public issuer's top management to certify the content of periodic reports and highlight their responsibilities for and evaluation of the issuer's disclosure controls and procedures and internal control over financial reporting;

See

Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports,

Release No. 33-8238 (June 5, 2003) [68 FR 36636]; Certification Release note 28.

• Modifying the approach to current disclosure by increasing significantly the types of events that must be reported on a current basis and shortening the time for filing current reports;

See Form 8-K Releases note 27.

• Shortening the timeframe for filing annual reports and quarterly reports by accelerated filers;

See

Acceleration of Periodic Report Filing Dates and Disclosure Concerning Web Site Access to Reports,

Release No. 33-8128 (Sept. 5, 2002) [67 FR 58480].

• Approving listing standard changes intended to improve corporate governance and enhance the role of the audit committee of the issuer's board of directors with regard to financial reporting and auditor independence;

and

See

Standards Relating to Listed Company Audit Committees,

Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788].

• Providing further interpretive guidance regarding the content and understandability of Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) “ a disclosure item we believe is at the core of a reporting issuer's periodic reports.

See

Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations,

Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056] (the “2003 MD&A Release”).

Many of the recent changes to the Exchange Act reporting framework provide greater structure and rigor to the process that issuers must follow in preparing their financial statements and Exchange Act reports. Senior management must now certify the material adequacy of the content of periodic Exchange Act reports. Moreover, issuers, with the involvement of senior management, now must implement and evaluate disclosure controls and procedures and internal controls over financial reporting.

Further, we believe the heightened role of an issuer's board of directors and its audit committee will instill greater confidence in the integrity of the contents of an issuer's Exchange Act reports.

The 1996 Concept Release and the 1998 proposals considered the role of enhanced Exchange Act reporting as an important corollary to reform of the offering process under the Securities Act.

We believe that the enhancements to Exchange Act reporting described above enable us to rely on these reports to a greater degree as a cornerstone of our proposals to reform the securities offering process.

Enhanced Exchange Act reporting was also central to the recommendations of the Advisory Committee. See note 20.

II. Well-Known Seasoned Issuers; Other Categories of Issuers

A. Well-Known Seasoned Issuers

Our proposals today modify the framework for communications in connection with public offerings for all issuers and the framework of the registration process for most issuers that report under the Exchange Act. However, we believe that the most far-reaching revisions of our communications rules and registration processes should be considered for issuers that have a reporting history under the Exchange Act and are presumptively the most widely followed in the marketplace.

We believe that these issuers have an Exchange Act record, a broad following of their Exchange Act filings, and the contemplated attention directed to their Exchange Act reports by the staff of the Division of Corporation Finance that will produce the greatest likelihood of Exchange Act reports that not only are reliable but also are broadly scrutinized by investors and the markets.

Our proposals would provide a class of well-known seasoned issuers greater flexibility in registering their securities offerings under a more streamlined registration process known as automatic shelf registration. Under the automatic shelf registration process, eligible well-known seasoned issuers could register, on a more flexible basis than is currently the case, offerings of different types of securities using Form S-3 or Form F-3 registration statements that are effective upon filing. See discussion in Section V.B.2. below under “Automatic Shelf Registration for Well-Known Seasoned Issuers.”

Today, the largest issuers are followed by sophisticated institutional and retail investors, members of the financial press, and numerous sell-side and buy-side analysts that actively seek new information on a continual basis. Unlike smaller or less mature issuers, large, seasoned public issuers tend to have a more regular dialogue with investors and market participants through the press and other media. The communications of these well-known seasoned issuers are subject to scrutiny by investors, the financial press, analysts, and others who evaluate disclosure when it is made.

We therefore propose to add a new category of issuer “ a “well-known seasoned issuer” “ that has these characteristics and would be permitted to benefit to the greatest degree from proposed modifications to our rules regarding communications and the registration processes.

We are proposing to define a well-known seasoned issuer as an issuer that is required to file reports pursuant to Section 13(a) or Section 15(d) the Exchange Act and satisfies the following requirements:

Our proposals would not change the existing eligibility standards for the use of Form S-3 and Form F-3.

See proposed amendments to Securities Act Rule 405. As later discussed, an issuer that files Exchange Act reports voluntarily would not be a well-known seasoned issuer or a seasoned issuer. Rather, those voluntary filers would be considered unseasoned issuers for purposes of our proposals. In addition, asset-backed issuers would not be well-known seasoned issuers.

• The issuer must be current in its reporting obligations under the Exchange Act and timely in satisfying those obligations for the preceding 12 calendar months;

• The issuer must be eligible to register a primary offering of its securities on Form S-3 or Form F-3;

• The issuer either:

• Must have outstanding a minimum $700 million of common equity market capitalization held by non-affiliates; or

• Must have issued $1 billion aggregate amount of debt securities in registered offerings during the past three years and register only debt securities; and

• Neither the offering nor the issuer may be of a type that falls within the category of ineligible issuers or offerings.

See proposed definition of “ineligible issuers” in Securities Act Rule 405 as discussed in Section III.D.3 below under “Ineligible Issuers.”

A majority-owned subsidiary of a well-known seasoned issuer also may be considered a well-known seasoned issuer in connection with the offer and sale of its own securities if:

• The majority-owned subsidiary itself meets the conditions for eligibility;

• A parent of the majority-owned subsidiary is a well-known seasoned issuer and fully and unconditionally guarantees the subsidiary's non-convertible obligations;

Whether a guarantee is full and unconditional would be analyzed under the same principles as those used under Rule 3-10 of Regulation S-X [17 CFR 210.3-10] and Exchange Act Rule 12h-5 [17 CFR 240.12h-5]. In addition, the guarantee may only be of an obligation that has a limited duration and is not perpetual. This analysis is not different from the current analysis under Form S-3 or Form F-3.

• The majority-owned subsidiary guarantees the obligations of (1) its parent or (2) another majority-owned subsidiary where there is also a full and unconditional guarantee of the same obligation by a parent that is a well-known seasoned issuer and the obligations are non-convertible; or

• The majority-owned subsidiary's non-convertible obligations are fully and unconditionally guaranteed by another majority-owned subsidiary that itself is a well-known seasoned issuer.

See proposed amendment to Securities Act Rule 405.

Whether an issuer satisfies the requirements for current and timely filing of Exchange Act reports and the general eligibility requirements of Form S-3 or F-3 would be determined at the time of filing of its registration statement and, thereafter, at the time of the update of that registration statement required by Securities Act Section 10(a)(3).

For purposes of determining their status as well-known seasoned issuers, issuers would measure their non-affiliate equity market capitalization, or “public float”, and the aggregate amount of their debt issuances as of the last business day of their most recently completed second fiscal quarter prior to the date of filing the Form 10-K or Form 20-F.

The Section 10(a)(3) update generally occurs when the issuer files its Form 10-K containing the issuer's audited financial statements for its most recently completed fiscal year. See 15 U.S.C. 77j(a)(3).

Form 10-K and Form 20-F currently require that the aggregate market value of the voting and non-voting common equity held by non-affiliates be computed as of the last business day of the registrant's most recently completed second fiscal quarter. This is the same date as when issuers would determine their non-affiliate equity market capitalization for assessing their status as “accelerated filers” under Rule 12b-2 [17 CFR 240.12b-2]. This is different than the non-affiliate equity market capitalization used in determining eligibility to use Form S-3 and Form F-3 for primary offerings in reliance on General Instruction I.B.1 of Form S-3 or Form F-3 that is computed as of a day within 60 days of the date of filing (or the date of the Section 10(a)(3) update to the registration statement). We believe it is appropriate to use the same computation for purposes of eligibility as a well-known seasoned issuer.

We believe that the public float of a reporting issuer can be used as a proxy for whether the issuer has a demonstrated market following.

The threshold we propose is that an issuer have a public float of $700 million or

more. We have used market capitalization as a proxy for public float in evaluating this threshold and its implications.

Public float is also one of the key determinants for eligibility for current short-form registration on Forms S-3 and F-3.

To evaluate the implications of a $700 million public float threshold, staff in our Office of Economic Analysis (“OEA”) obtained data on the 9690 registered offerings that were conducted during 1997-2003 by 2784 issuers that had public equity outstanding and were listed on a major exchange or equity market.

Of these offerings, 6998 were debt offerings that raised proceeds of $1272 billion, and 2692 were equity offerings that raised proceeds of $477 billion. The average issuer conducted 3.8 debt offerings and 1.1 equity offerings per calendar year, although as many as 157 debt offerings have been conducted by a single issuer within a calendar year.

OEA compiled and analyzed the supporting data for the public float (using market capitalization) and outstanding debt thresholds.

OEA also analyzed data on the financial market conditions under which these offerings were made. High levels of analyst coverage, institutional ownership, and trading volume are useful indicators of the scrutiny that an issuer receives from the market, although no one statistic can fully capture the extent to which an issuer is well-followed by the market.

Issuers with market capitalization in excess of $700 million that conducted offerings in 1997-2003 typically have had an average of 10 analysts following them prior to the offering.

This includes only sell-side analysts and is, we believe, a conservative indicator of analyst scrutiny. Institutional investors accounted for an average of 56% of equity ownership prior to offerings by issuers with market capitalization above $700 million. Those issuers had an average daily trading volume of nearly $25 million prior to offerings in this period and accounted for the following percentages of capital raised:

See

e.g.

, Harrison Hong, Terrence Lim and Jeremy C. Stein,

Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies,

55 Journal of Finance 265 (2000); Robert C. Merton,

A Simple Model of Capital Market Equilibrium with Incomplete Information,

42 Journal of Finance 483 (1987).

Issuers with a market capitalization of between $75 million and $200 million, in most cases, have between zero to four analysts following them with approximately 50% having zero to one analysts following them. These issuers, therefore, have significantly less analyst coverage than well-known seasoned issuers.

Offering Proceeds, by Issuer Capitalization Primary Seasoned Offerings, 1997-2003*

[$Billions (%) proceeds from offerings, by issuer capitalization]

Market capitalization of issuers

>$700mm

>$0 (All issuers)

Equity

$373 (78%)

$477 (100%)

Debt

1232 (97%)

1272 (100%)

Total

1606 (92%)

1749 (100%)

* Source: Office of Economic Analysis estimates using Center for Research in Securities Prices at the University of Chicago (“CRSP”) and Securities Data Corporation (“SDC”) data. The issuers in this table do not reflect issuers meeting the well-known seasoned issuer threshold based on the $1 billion threshold discussed below.

Issuers that do not meet the public equity float test would be considered well-known seasoned issuers solely for purposes of debt offerings if they have sold more than an aggregate of $1 billion in debt through registered offerings over the prior three years. These issuers also would have to satisfy the other conditions of the well-known seasoned issuer definition, such as the reporting history requirement.

These issuers would only be eligible to register non-convertible obligations on an automatic shelf registration statement. See discussion in Section V.B.2 below under “Automatic Shelf Registration for Well-Known Seasoned Issuers.”

We have chosen the $1 billion threshold for issuers of public debt based on an evaluation of statistics on issuers that do not have public equity outstanding. The relevant statistics for these issuers are different from those for issuers that have securities traded on major equity markets.

The issuers of debt that meet the $1 billion threshold account for 23% of the issuers that issued public debt during the period 1997-2003. These issuers account for 72% of debt issued during the same period. None of these issuers' debt offerings were rated below investment grade, and 84% of their debt offerings were rated A or higher by a nationally recognized security rating organization, an NRSRO. This group of issuers also on average had 44 basis points lower yield spread for their issues relative to issuers that had not issued any debt in the past three years. We believe that this lower yield spread reflects lower default risk (higher ratings) and higher liquidity and transparency of the issuers.

See Gordon J. Alexander, William F. Sharpe, and Jeffrey V. Bailey,

Fundamentals of Investments

(2001 ed.) at 530.

Overall, the issuers that would meet our proposed thresholds for well-known seasoned issuers are thus the most active issuers in the U.S. public capital markets. In 2003, those issuers, which represented approximately 30% of listed issuers, accounted for about 95% of U.S. equity market capitalization. They have accounted for 87% of the total debt raised in registered offerings over the past seven years. These issuers accordingly represent the most significant amount of capital raised and traded in the U.S. As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, we believe that it is appropriate to provide greater communications and registration flexibilities to these well-known seasoned issuers beyond that provided to other issuers, including other seasoned issuers.

B. Other Categories of Issuers

We also would use existing categories of issuers, including seasoned issuers, unseasoned Exchange Act reporting issuers, and non-reporting issuers, in our proposals, discussed below, regarding communications and the registration process. A seasoned issuer would be an issuer that is eligible to use Form S-3 or Form F-3 to register primary offerings of securities—securities to be sold by or on its behalf, on behalf of its subsidiary, or on behalf of a person of which it is the subsidiary.

Majority-owned subsidiaries eligible to use Form S-3 or Form F-3 for offerings of their securities

also would be considered seasoned issuers.

Eligibility to register primary offerings of securities on Form S-3 or Form F-3 is based on public float or issuance of investment grade securities. See General Instruction I.B.1 and I.B.2 to Form S-3 and Form F-3.

We propose to expand the majority-owned subsidiary eligibility in Form S-3 and Form F-3 to allow majority-owned subsidiaries to use the forms under the same circumstances in which majority-owned subsidiaries would be well-known seasoned issuers. For example, see General Instruction I.C. to Form S-3.

An unseasoned issuer would be an issuer that is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities. Under the proposal, an issuer that is filing Exchange Act reports voluntarily would be treated as a reporting unseasoned issuer. A non-reporting issuer would be an issuer that is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act and is not filing such reports voluntarily.

Request for Comment

• Should we raise the proposed public float test of $700 million (

e.g.,

to $800 million)? If so, why?

• Alternatively, should we lower the public float test (

e.g.,

to $500 million, $400 million, or $300 million)? If so, why? If we were to lower the threshold, how can we ensure that the issuers meeting that threshold would be sufficiently well followed? If we were to lower the threshold, what other characteristics not present in issuers with a lower public float would need to be present to ensure that an issuer would be well followed?

• Is a public float threshold the proper standard, or should we use another standard, such as percentage of institutional ownership, average daily trading volume, asset size, or any combination of these? If so, how would the standard compare to the public float threshold and how could it be readily determined and verified?

• Should we use the same public float calculation as we use for purposes of the cover page of the Form 10-K and Form 20-F? Would another calculation date for the public float be more appropriate? Is there another readily available information source for public floats of issuers that provides the information other than annually?

• Should we have a requirement for the staff to evaluate the eligibility thresholds for well-known seasoned issuers on a periodic basis? If so, how often should we evaluate the thresholds and what factors should we consider? Alternatively, should the definition provide for automatic adjustments in the public float and aggregate debt requirement based on factors such as, for example, analyst coverage, institutional ownership, or average daily trading volume for equity, or changes in debt rating for debt issuers? If yes, how often should adjustments occur, what factors should trigger an adjustment, and why?

• Should eligibility to use the proposals available to well-known seasoned issuers be calculated on the basis of trading conducted on any national securities exchange, any particular national securities exchange, the Nasdaq Stock Market, or any particular portion of the Nasdaq Stock Market (

e.g.,

the National Market System or the SmallCap Market)? If yes, should there be any limitation on the trading location or platform?

• Besides the amount of registered debt sold by the issuer over a three-year period, are there any other bases upon which to determine that issuers eligible based on debt issuances are well-known seasoned issuers? Should investment grade debt ratings be part of the basis for eligibility?

• Is the eligibility threshold of $1 billion of registered debt over the prior three years the appropriate threshold? If not, should the threshold be higher? Should it be lower?

• Should an issuer be eligible to be a well-known seasoned issuer based on debt issuances if it has both publicly held debt and equity securities?

• Should offering participants be required to recalculate an issuer's eligibility at the time of use of a free writing prospectus or should the eligibility determination be done once a year for all purposes?

• Should we permit majority-owned subsidiaries to be considered well-known seasoned issuers under the proposed tests? Should we limit the definition only to wholly-owned subsidiaries? We are proposing conforming changes to Forms S-3 and F-3. Is this appropriate or necessary?

• Our proposed $700 million public float requirement is higher than the current $75 million public float level generally required for short-form and delayed shelf registration. The public float threshold for short-form and delayed shelf registration has not been revised since 1992.

While our proposals do not alter that public float threshold for short-form registration, should that threshold be revised upward in light of the length of time since it was last revised, the changes that have occurred in the markets since then, and the underlying rationale that the firms eligible to use short form registration should be sufficiently well-followed? If so, what threshold would be appropriate? Provide empirical data supporting any proposed threshold.

See Simplification of Registration Procedures for Primary Securities Offerings

, Release No. 33-6943 (July 16, 1992) [57 FR 32461].

• One disqualification from an issuer being considered a well-known seasoned issuers is that it is an “ineligible issuer”, as we propose to define that term. Should well-known seasoned issuers, who otherwise satisfy the eligibility conditions, be disqualified from being a well-known seasoned issuer for all purposes of our proposals if it is an ineligible issuer under the definition? If not, why not?

• Do the categories of seasoned, unseasoned, and non-reporting issuers appropriately describe the issuers that fall into these categories? If not, why not and what would be a more appropriate categorization?

III. Communications Proposals

A. Current Communications Requirements

The Securities Act restricts the types of offering communications that an issuer or other parties subject to the Act's provisions (such as underwriters) may use during a registered public offering. The nature of the restrictions depends on the period during which the communications are to occur. The restrictions do not depend on the accuracy of the information contained in the communication. Before the registration statement is filed, all offers, in whatever form, are prohibited.

Between the filing of the registration statement and its effectiveness, offers made in writing (including by e-mail or Internet), by radio, or by television are limited to a “statutory prospectus” that conforms to the information requirements of Securities Act Section 10.

As a result, the only written material that is permitted in connection with the offering of the securities during the period between filing and

effectiveness of a registration statement is a preliminary prospectus meeting the requirements of Section 10, which must be filed with the Commission. Even after the registration statement is declared effective, offering participants may still make written offers only through a statutory prospectus, except that they may use additional written offering materials if a final prospectus that meets the requirements of Securities Act Section 10(a) is sent or given prior to or with those materials.

Violations of these restrictions are often generally referred to as “gun-jumping”, and we use the term “gun-jumping provisions” to describe the statutory provisions of the Securities Act that set forth these restrictions.

See Securities Act Section 5(c) [15 U.S.C. 77e(c)]. Securities Act Section 2(a)(3) [15 U.S.C. 77b(a)(3)] defines “offer” as any attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. The term “offer” has been interpreted broadly and goes beyond the common law concept of an offer. See

Diskin

Lomasney & Co.

, 452 F.2d 871 (2d. Cir. 1971);

SEC

Cavanaugh

, 1 F. Supp. 2d 337 (S.D.N.Y. 1998). The Commission has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer * * *”

Guidelines for the Release of Information by Issuers Whose Securities are in Registration

, Release No. 33-5180 (Aug. 16, 1971) [36 FR 16506].

See Securities Act Section 5(b)(1) [15 U.S.C. 77e(b)(1)] and Securities Act Section 10 [15 U.S.C.77j].

See

Securities Act Section 2(a)(10) [15 U.S.C. 77b(a)(10)] and Section 5(b)(1).

B. Need for Modernization of Communications Requirements

1. General

The gun-jumping provisions of the Securities Act were enacted at a time when the means of communications were limited and restricting communications (without regard to accuracy) to the statutory prospectus appropriately balanced available communications and investor protection. They were designed to make the statutorily mandated prospectus the primary means for investors to obtain information regarding a registered securities offering. The capital markets, in the United States and around the world, have changed significantly since those limitations were enacted. Today, issuers engage in all types of communications on an ongoing basis, including, importantly, communications mandated or encouraged by our rules under the Exchange Act. Modern communications technology, including the Internet, provides a powerful, versatile, and cost-effective medium to communicate quickly and broadly.

The changes in the Exchange Act disclosure regime and the tremendous growth in communications technology are resulting in more information being provided to the market on a more non-discriminatory, current and ongoing basis. Thus, while the investor protection concerns remain, the gun-jumping provisions of the Securities Act impose substantial and increasingly unworkable restrictions on communications that would be beneficial to investors and markets and consistent with investor protection.

For example, the Internet provides a medium through which to deliver electronic documents, to broadcast radio and television programs, to issue press releases or print advertisements, to conduct telephone or videoconferences with investors, prospective investors, and other parties, and to send personal e-mails.

The following factors, combined with the advances in technology described above, lead us to believe that investors and the market would benefit from access to greater permissible communications where protection for investors in connection with these communications is retained through the appropriate liability standards under the Securities Act for materially deficient disclosures in prospectuses and oral communications:

• Much of our recent rulemaking is intended to encourage reporting issuers to provide additional materially accurate and complete information to the market on a more current basis.

The Securities Act's constraints on communications during an offering have, however, caused issuers to be concerned about the treatment of their ongoing communications and whether, if they are engaged, or will soon be engaged, in capital raising, their customary disclosures will be considered an impermissible offer of securities;

Other recent rulemaking initiatives addressing disclosure issues include those referenced in notes 27 through 33 and those contained in

Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors

, Release No. 33-8340 (Nov. 24, 2003) [68 FR 66992]; and

Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

, Release No. 34-47264 (Jan. 28, 2003) [68 FR 5982] (the “Off-Balance Sheet Disclosure Release”).

See,

e.g.

letter from the American Bar Association Committee on Federal Regulation of Securities to the Director of the Division of Corporation Finance, Aug. 22, 2001 (available at

www.abanet.org

); comment letters in File No. S7-30-98 from Gerald S. Backman,

et al.

; Fried Frank Harris Shriver & Jacobson (“Fried Frank”); Service Employees International Union; and Sullivan & Cromwell. See also Edward F. Greene and Linda C. Quinn, “Building on the International Convergence of the Global Markets: a Model for Securities Law Reform,” presented at

A Major Issues Conference: Securities Regulation in the Global Internet Economy

, Washington, DC, Nov. 14-15, 2001 (available at

www.law.northwestern.edu

• The multiplicity of means of communication has led us to recognize that restricting written offers to a statutory prospectus inhibits desirable methods of timely communication of information;

• There are many more offerings of increasingly complex securities where written communications, such as term sheets, would enhance significantly the offering process for the benefit of investors;

and

The staff and the Commission have recognized the usefulness of term sheets in some structured finance offerings. See,

e.g.

, Staff no-action letters to Greenwood Trust Co., Discover Master Card Trust I (Apr. 5, 1996); Public Securities Ass'n (Mar. 9, 1995); Public Securities Ass'n (Feb. 17, 1995); Public Securities Ass'n (May 27, 1994); and Kidder Peabody Acceptance Corporation I (May 20, 1994). See also,

Asset-Backed Securities

, Release No. 33-8419 (May 3, 2004) (the “Asset-Backed Securities Proposing Release”); and Securities Act Rule 434 (17 CFR 230.434).

• The continuing trends towards globalization of securities markets and multinationalization of issuers and offerings increase the need for a regulatory framework that accommodates more flexible communications.

When we first proposed a broad relaxation of the gun-jumping provisions during an offering in 1998, the majority of commenters favored the proposals.

Commenters raised concerns regarding certain other elements of those proposals, however, and we did not go forward with those proposals. In view of the many recent changes to the Exchange Act reporting system that are designed to produce more timely and extensive disclosures and greater scrutiny of, and confidence in, those reports, it is appropriate at this time to revisit the concept of communications and offering reforms.

Commenters on the 1998 proposals suggested that both investors and sellers would benefit from loosened restrictions on communications prior to and during an offering, as sellers would be able to use a variety of sales documents and investors would get more timely access to information. See,

e.g.

, comment letters in File No. S7-30-98 from the American Bar Association (“ABA”); American College of Investment Counsel (“ACIC”); American Corporate Counsel Association (“ACCA”); Business Roundtable; Merrill Lynch; and Sullivan & Cromwell.

We have been considering communications reform in other contexts for a number of years. We have recently proposed communications reforms for asset-backed offerings, as well. See the Asset-Backed Securities Proposing Release, note 58. With our adoption of the communications reforms for business combinations in 1999, we reduced the regulation of offers and brought the regulatory structure closer to the practices in those offerings while ensuring continued investor protection. See

Regulation of Takeovers and Security Holder Communications

, Release No. 33-7760 (Oct. 22, 1999) [64 FR 61408] (the “Regulation M-A Release”).

2. Definition of Written Communication

As a starting point for reform, we propose to define all methods of communication, other than oral communications, as written communications for purposes of the Securities Act. While we have addressed the issue of electronic communications in a number of different contexts, at this time we are proposing a rule making it clear that all electronic communications (other than telephone as noted below) are graphic and, therefore, written communications for purposes of the Securities Act. In this manner, we intend to encompass new technologies without needing to revisit our rules in the future.

Accordingly, we are proposing new definitions of “written communication” and “graphic communication” to ensure consistent understanding of what constitutes such a communication in view of the technological developments since the enactment of the Securities Act and to eliminate any remaining uncertainty regarding the permitted means for delivery of information under the Securities Act.

Under the proposals, “written communication” would mean any communication that is written, printed, broadcast, or a graphic communication. The definition would not cover oral communications, such as live telephone calls (whatever the medium by which they are carried, including the Internet)

and other direct oral communications.

Written communications would not include individual telephone voice mail messages but would include broadly disseminated or “blast” voice mail messages. The latter would be included in the definition because we believe they are more like broadcasts than oral communications.

We are proposing to amend the definition of “graphic communication” contained in Securities Act Rule 405 to provide that it includes any form of electronic media, such as audiotapes, videotapes, facsimiles, CD-ROM, electronic mail, Internet web sites, and computers, computer networks and other forms of computer data compilation.

Because written communications would, therefore, include Internet communications, e-mails and other electronic and web-based communications, electronic postings on web sites—including electronic road shows—would be written communications within the scope of the definition.

The forms of media that would be described in the proposed definition encompass the forms of media that are addressed in our interpretive guidance on the use of electronic media. In recognition of continuing developments in technology, the forms of electronic media described in the proposed definition are intended to be illustrative rather than exhaustive. See

e.g.

Use of Electronic Media

, Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843] (the“2000 Electronics Release”).

All electronic road shows in registered offerings would be considered written communications, regardless of the audience, but under our proposals would be permissible, subject to conditions. See discussion in Section III.D.3 below under “Electronic Road Shows''.

Request for Comment

• Does the proposed definition of graphic communication provide a workable framework within which to analyze electronic communications?

• Are there communications not covered by the proposed definitions that should be considered written or graphic? Should we provide that only interactive communications, such as those allowing face-to-face or telephonic interactions, would still be considered oral?

• Although the analysis required for any particular communication would be fact-specific, should we provide further guidance or examples regarding the use of specific technologies? If so, which technologies should we address at this time?

C. Overview of Communications Proposals

In this section of the release, we will discuss proposals that relate to the following:

• Regularly released factual business information;

• Regularly released forward-looking information;

• Communications made more than 30 days before filing a registration statement;

• Communications by well-known seasoned issuers during the 30 days before filing a registration statement;

• Written communications made in accordance with the safe harbor in Securities Act Rule 134; and

• Written communications by any issuer (other than the statutory prospectus) after filing a registration statement.

The following table provides a brief overview of the operation of these proposals. While the table clearly does not include the level of detail necessary to explain the proposals, we have included it to help readers in commenting on the proposals.

Could it be an “offer” as defined in Section 2(a)(3)?

Is it a “prospectus” as defined in Section 2(a)(10)?

Is it a in prohibited pre-filing offer for purposes of Section 5(c)?

Is it a prohibited prospectus for purposes of Section 5(b)(1)?

Regularly Released Factual Business Information

Yes

Rule would define it as not an offer for Section 5(c) purposes

Section 5(b)(1) relates only to “prospectuses”—it would not be applicable.

Regularly Released Forward-Looking Information

Yes

Rule would define it as not an offer for Section 5(c) purposes

Section 5(b)(1) relates only to “prospectuses”—it would not be applicable.

Communications Made More Than 30 Days Before Filing of Registration Statement

Yes

Rule would define it as not an offer for Section 5(c) purposes

Section 5(b)(1) does not apply in the pre-filing period—it would not be applicable.

Well-Known Seasoned Issuers—Oral Offers Made Within 30 Days of Filing of Registration Statement

Yes

Would be exempted from prohibition of Section 5(c)

Section 5(b)(1) would not be applicable.

Well-Known Seasoned Issuers—Free Writing Prospectuses Used Before Filing of Registration Statement

Yes

Would be exempted from prohibition of Section 5(c)

Section 5(b)(1) does not apply in the pre-filing period—it would not be applicable.

Identifying Statements in Accordance with Rule 134

Yes

Section 5(c) is not applicable, as Rule 134 relates only to the period after the filing of a registration statement

Section 5(b)(1) relates only to “prospectuses”—it would not be applicable.

All Eligible Issuers—Free Writing Prospectuses Used After Filing of Registration Statement

Yes

Section 5(c) would not be applicable, as it does not apply in the post-filing period

Section 5(b)(1) would be satisfied, as the free writing prospectus would be a permitted Section 10(b) prospectus.

We are proposing communications rules that recognize the value of ongoing communications as well as the importance of avoiding unnecessary restrictions on offers during a registered offering. In particular, the proposals would eliminate requirements that can interrupt unnecessarily an issuer's normal and routine communications into the market while an issuer is engaging in a securities offering, and would enhance the ability of issuers and other offering participants to make written offers outside the statutory prospectus.

Our proposals contemplate a communications framework that, in some cases, would operate along a spectrum based on the type of issuer, its reporting history, and its equity market capitalization or historical debt issuance. Thus, eligible well-known seasoned issuers would have freedom generally from the gun-jumping provisions to communicate around the time of a registered offering, including by means of a written offer other than a statutory prospectus. Varying levels of restrictions would apply to other categories of issuers. We believe these distinctions are appropriate because the market has more familiarity with large, more seasoned issuers and, as a result of the ongoing market following of their activities, including the role of market participants and the media, these issuers' communications would have less potential for conditioning the market for the issuers' securities to be sold in a registered offering. Disclosure obligations and practices outside the offering process, including under the Exchange Act, also determine the scope of communications flexibility the proposals would give to issuers and other offering participants.

See,

e.g.

, Regulation FD [17 CFR 243.100

et seq.

], Regulation G [17 CFR 244.100

et seq.

], and Form 8-K [17 CFR 249.308].

The cumulative effect of the proposals under the gun-jumping provisions would be the following:

• Well-known seasoned issuers would be permitted to engage at any time in oral and written communications, including use at any time of a free writing prospectus,

subject to enumerated conditions (including, in specified cases, filing with the Commission).

A “free writing prospectus” is proposed to be defined in Securities Act Rule 405. This proposed definition is discussed in Section III.D.3 below under “Definition of Free Writing Prospectus.”

See

proposed Rule 163.

• All reporting issuers would, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information.

See

proposed Rule 168.

• Non-reporting issuers would, at any time, be permitted to continue to publish factual business information that is regularly released to persons other than in their capacity as investors or potential investors.

See

proposed Rule 169.

• Communications by issuers more than 30 days before filing a registration statement would not be considered prohibited offers so long as they did not reference a securities offering.

See

proposed Rule 163A.

• Issuers and other offering participants would be permitted to use free writing prospectuses after the filing of the registration statement, subject to enumerated conditions (including, in specified cases, filing with the Commission).

See

proposed Rules 164 and 433.

• A broader category of routine communications regarding issuers, offerings, and procedural matters, such as communications about the schedule for an offering or about account-opening procedures, would be excluded from the definition of “prospectus''.

See

proposed amendments to Securities Act Rule 134.

• The exemptions for research reports would be expanded.

See

proposed amendments to Securities Act Rules 137, 138, and 139.

As discussed below, a number of these new proposals would include conditions of eligibility. Most of the proposals, for example, would not be available to blank check companies, penny stock issuers, or shell companies.

We recently proposed to define shell companies.

See Use of Form S-8 and Form 8-K by Shell Companies,

Release No. 33-8407 (April 15, 2004) (the “Shell Companies Release”). For purposes of today's proposals, such as proposed Rules 163A, 164, 168, 169 and amendments to Securities Act Rule 405, we propose using the definition of shell company proposed in the Shell Companies Release.

Commenters on the 1998 proposals were concerned that increased liability would diminish the utility of the proposed communications reform. Today's proposals would address this concern by ensuring that appropriate liability is maintained for the communications. For example, all free writing prospectuses would have liability under the same provisions as apply today to oral offers and statutory prospectuses.

Written communications not constituting prospectuses would not be subject to disclosure liability applicable to prospectuses

under Securities Act Section 12(a)(2). This result would not affect their status for liability purposes under other provisions of the federal securities laws, including the anti-fraud provisions.

These liability provisions include Securities Act Section 12(a)(2) and 17(a) [15 U.S.C. 77

(a)(2) and 77q(a)], Exchange Act Section 10(b) [15 U.S.C. 78j(b)], and Exchange Act Rule 10b-5 [17 CFR 240.10b-5].

See

Securities Act Section 2(a)(10).

See, e.g.,

Securities Act Section 17(a), Exchange Act Section 10(b) and Exchange Act Rule 10b-5.

D. Proposed Rules

1. Permitted Continuation of Ongoing Communications During an Offering

We are proposing two separate safe harbors from the gun-jumping provisions for continuing ongoing business communications.

The first safe harbor would permit a reporting issuer's continued publication or dissemination of regularly released factual business and forward-looking information at any time, including around the time of a registered offering.

The second safe harbor would permit a non-reporting issuer's publication or dissemination of factual business information that had been regularly released to persons other than

in their capacity as investors or potential investors.

These safe harbor provisions would operate by excluding such communications from the definition of offer for purposes of Securities Act Sections 2(a)(10) and 5 (c).

See

proposed Rules 168 and 169.

See

proposed Rule 168.

See

proposed Rule 169.

Investment companies registered under the Investment Company Act of 1940 and business development companies would be ineligible to use the proposed safe harbors for factual business information and forward-looking information.

These issuers are subject to a separate framework governing communications with investors.

Business development companies are a category of closed-end investment companies that are not required to register under the Investment Company Act.

See

Section 2(a)(48) of the Investment Company Act of 1940 [15 U.S.C. 80a-2(a)(48)] defining “business development company”).

See, e.g.,

Securities Act Rules 156, 482, and 498 [17 CFR 230.156; 17 CFR 230.482; 17 CFR 230.498]; Investment Company Act Rule 34b-1 [17 CFR 270.34b-1].

a. Regularly Released Factual Business and Forward Looking Information—Reporting Issuers

Our proposals applicable to reporting issuers would provide a safe harbor from the gun-jumping provisions for continued publication or dissemination of regularly released factual business and forward-looking information. Our proposed safe harbor would apply to factual business and forward-looking information that has been regularly released in the ordinary course by or on behalf of a reporting issuer.

See

proposed Rule 168.

i. Factual Business Information

We believe it is important to provide certainty regarding when the gun-jumping provisions would be inapplicable to the continuing ongoing communication of factual business information. We are proposing Securities Act Rule 168, which would provide for such a communication a safe harbor from being an impermissible prospectus and from violating the prohibition on pre-filing offers.

We want to encourage reporting issuers to continue to provide this information. For purposes of these proposals, factual business information would be defined as:

Our proposed Rule 168 would be a safe harbor from the definition of “prospectus” in Securities Act Section 2(a)(10) and would, therefore, prevent the application of the prohibition in Securities Act Section 5(b)(1) on the use of a prospectus that is not a statutory prospectus. The proposed Rule would also be a safe harbor from the prohibitions on pre-filing “offers” in Securities Act Section 5(c).

In general, as we recognized many years ago, ordinary factual business communications that an issuer regularly releases are not considered an offer of securities.

See, e.g.,

the guidelines contained in the 2000 Electronics Release note 62;

Guidelines for the Release of Information by Issuers Whose Securities are in Registration,

Release No. 33-5180 (Aug. 16, 1971) [36 FR 16506];

Publication of Information Prior to or After the Filing and Effective Date of a Registration Statement Under the Securities Act of 1933,

Release No. 33-5009 (Oct. 7, 1969) [34 FR 16870];

Offers and Sales by Underwriters and Dealers,

Release No. 33—After the Effective Date of a Registration Statement, Release No. 33-3844 (Oct. 8, 1957) [22 FR 8359]. The safe harbors we are proposing today, if adopted, would not affect in any way the Securities Act analysis regarding ordinary course business communications that are not within the proposed safe harbors. Such communications would not be presumed to be offers, and whether they were offers would depend on the facts and circumstances.

Regularly released factual business information would not include information about the registered offering or information released as part of the offering activities in the registered offering.

• Factual information about the issuer or some aspect of its business;

• Advertisements of, or other information about, the issuer's products or services;

• Factual information about business or financial developments with respect to the issuer;

• Dividend notices; and

• Factual information set forth in the issuer's Exchange Act reports.

Factual business information that reporting issuers release or disseminate would continue to be subject to the provisions of Regulation FD, Regulation G, Item 10 of Regulation S-K and Regulation S-B, and Item 2.02 of Form 8-K.

See

Regulation FD [17 CFR 243.100

et seq.

]; Regulation G [17 CFR 244.100

et seq.

]; Item 10 of Regulation S-K and S-B [17 CFR 229.10

et seq.

and 17 CFR 228.10

et seq.

]; and Form 8-K [17 CFR 249.308]. These are essentially the same categories of information discussed in the releases discussed in note 83.

ii. Forward-Looking Information

Our view of the value of forward-looking information in the market has evolved through the years. Through the 1970's we were most concerned with the potentially misleading effect that forward-looking information could have on investors.

Beginning in the 1980's we have encouraged issuers to disclose forward-looking information and, in some situations (such as the disclosures in MD&A),

required them to do so.

The existing safe harbors for the content of forward-looking statements are designed to encourage the provision of forward-looking information.

Until the 1970s, the Commission prohibited disclosure of forward-looking information in any disclosure document. In 1979, the Commission adopted a safe harbor for release of forward-looking information.

See Statement by the Commission on the Disclosure of Projections of Future Economic Performance,

Release No. 33-5362 (Feb. 2, 1973) [38 FR 7220];

Safe Harbor Rule for Projections,

Release No. 33-6084 (June 25, 1979) [44 FR 38810}.

See

also, the Wheat Report, note 16 at 94.

See

Item 303 of Regulation S-K and Regulation S-B [17 CFR 229.303 and 17 CFR 228.303].

In our 2003 MD&A Release discussed at note 33, we issued interpretive guidance on management's discussion and analysis which stated:

In addressing prospective financial condition and operating performance, there are circumstances, particularly regarding known material trends and uncertainities, where forward-looking information is required to be disclosed. We also encourage companies to discuss prospective matters and include forward-looking information in circumstances where that information may not be required, but will provide useful material information for investors that promotes understanding * * * [M]aterial forward-looking information regarding known material trends and uncertainties is required to be disclosed as part of the required discussion of those matters and the analysis of their effects. In addition, forward-looking information is required in connection with the disclosure in MD&A regarding off-balance sheet arrangements.

See Securities Act Section 27A [15 U.S.C. 77z-2] and Securities Act Rule 175 [17 CFR 230.175]. Section 27A provides a safe harbor for certain forward-looking statements. See also, the Off-Balance Sheet Disclosure Release at note 56 (stating that any forward-looking information required pursuant to the off-balance sheet arrangement disclosure in Items 303(a)(4) and (a)(5) of Regulation S-K and Regulation S-B would be subject to the statutory safe harbor contained in Sections 27A of the Securities Act and 21E of the Exchange Act [15 U.S.C. 78u-5]). Rule 175 provides a limited safe harbor for the content of forward-looking statements contained in documents filed with us, including in registration statements and periodic reports.

Where an issuer regularly releases forward-looking information in the ordinary course, we believe that the purpose of such communication is to keep the market informed about the issuer and its future prospects and, thus, the continued release or dissemination of this information in the ordinary course is not for the purpose of offering securities or conditioning the market for new issuances of the issuer's securities. We understand that issuers increasingly have been disclosing earnings forecasts and other forward-looking information publicly to provide more information to the markets and to enable them to continue to have discussions to which Regulation FD applies.

We do not believe that it is beneficial to investors or the markets to force reporting issuers to suspend their ordinary course communications of this information because they are raising capital in a registered offering.

As with factual business information, Regulation FD, Regulation G, Item 10 of Regulation S-K and Regulation S-B, and Item 2.02 of Form 8-K would continue to apply to the release or dissemination of forward-looking information by reporting issuers. See note 86.

Our proposals would provide for the use of such a communication a safe harbor from being an impermissible prospectus and from violating the prohibitions on pre-filing offers. Under our proposals, the safe harbor would apply to the release or dissemination of the following forward-looking information if the release or dissemination satisfies the other conditions of the Rule:

Our proposed Rule 168 would be a safe harbor from the definition of “prospectus” in Securities

Act Section 2(a)(10) and would therefore disapply the prohibition in Securities Act Section 5(b)(1) on the use of a prospectus that is not a statutory prospectus. The proposed Rule would also be a safe harbor from the prohibitions on pre-filing “offers” in Securities Act Section 5(c).

These are essentially the same categories of statements that are defined as forward-looking statements under the safe harbor in Securities Act Section 27A(i)(1) [15 U.S.C. 77z-2(i)(1)]. The proposed safe harbor covering the release or dissemination would be available for the regular release of earnings expectations and guidance information. At least one commenter on the 1998 proposals requested clarification of this point.

See, e.g.

, comment letter in File No. S7-30-98 from the Association for Investment Management and Research. Proposed Rule 168 would provide a safe harbor for the use of such information, not the content of the communication. An issuer's communications of forward-looking information made in reliance on the proposed safe harbor would still have to satisfy the conditions of Securities Act Section 27A if the issuer wished to rely on the statutory safe harbor for the content of the information.

• Projections of the issuer's revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items;

• Statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;

• Statements about the issuer's future economic performance, including statements of the type contemplated by MD&A described in Item 303 of Regulation S-K and Regulation S-B, or Item 5 of Form 20-F; and

• Assumptions underlying or relating to any of the foregoing information.

Given our expressed intention through Item 2.02 of Form 8-K to make such earnings expectations and guidance information public,

we believe it is appropriate to include these communications within the scope of the proposed safe harbor if the issuer satisfies the safe harbor's other conditions.

See

Exchange Act Form 8-K. In addition, through the operation of Regulation FD, forward-looking information, such as company earnings guidance, provided to persons enumerated in that Regulation must be made public.

iii. Conditions of Safe Harbors

(A) “By or on Behalf of” the Issuer

As proposed, factual business and forward-looking information would be considered released or disseminated by or on behalf of an issuer if the issuer, an agent of the issuer, or a representative of the issuer authorized and approved its use before its release or dissemination.

Satisfaction of this condition is separate from the “regularly released” condition. The proposed safe harbor would not be available for information released in a manner intended to circumvent either the conditions to use or the permitted manner of use of the information.

We are using the same definition as contained in Securities Act Rule 146 [17 CFR 230.146].

Request for Comment

• Is the definition of “by or on behalf of an issuer” clear? If not, why not?

• Should we provide more specificity limiting the approval or authorization to specific persons acting for the issuer, whether as an employee, agent, or representative? For example, should we specify that the approval and authorization must be made by persons who regularly provide such approval and authorization? In addressing this question, discuss whether there should be different formulations depending on the applicable contexts for determining whether information is provided or actions are taken “by or on behalf of” a person.

• The “by or on behalf of” condition is included in many of our proposed rules, should we include a general definition of “by or on behalf of” in Securities Act Rule 405?

• Is it clear when communications are made “by or on behalf” of an issuer? If not, what additional conditions should we include?

(B) Regularly Released Information

The purpose of the proposed safe harbor is to enable a reporting issuer to continue its past ordinary course practice of releasing or disseminating publicly factual business and forward-looking information. Communications of both factual business information and forward-looking information must satisfy the same conditions regarding regular release.

As proposed, information will be considered regularly released or disseminated if the issuer has previously released or disseminated the same type of information in the ordinary course of its business, releases or disseminated the information in the ordinary course of its business, and the release or dissemination is materially consistent in timing, manner and form with the issuer's similar past releases or disseminations of such information. The method of releasing or disseminating the information, thus, must also be consistent with prior practice. These conditions seek to ensure that the information is not being released to condition the market for the registered offering of the issuer's securities.

While the proposal does not establish any minimum time period to satisfy the regularly released element, the safe harbor would require the issuer to have a track record of releasing the particular type of information. Issuers should consider the frequency and regularity with which they have released the same type of information. For example, an issuer's release of new types of financial information or projections just before or during a registered offering would likely prevent a conclusion that the issuer regularly released that type of forward-looking information in the ordinary course of its business. As another example, if an issuer has consistently released certain forward-looking information on a quarterly basis through ordinary course press releases, it could not satisfy the condition if it instituted a stepped-up media campaign just before or during an offering to release that type of forward-looking information on a different basis or with different timing.

The proposed safe harbor would exclude from its operation any information about the registered offering itself. Publication of information about an offering outside the registration statement would be limited to statements allowed under Rule 134, Rule 135, or other exemptions or safe harbors, or contained in a permissible free writing prospectus, as discussed below.

Our other proposals address communications in the offering context. For example, we are proposing amendments to Rule 134 to increase the amount of communication allowed under that rule about a registered offering without it being considered a prospectus.

Because the proposed safe harbor is intended to facilitate continued release or dissemination of regularly released ordinary course factual business and forward-looking communications, it also excludes information released as part of the offering activities in the registered offering. For example, the safe harbor would be unavailable for the text of an Exchange Act report that is incorporated by reference into a registration statement, a copy of a prior release that originally had been regularly released in accordance with the safe harbor but was specifically provided to investors or potential investors as part of offering activities, or disclosure of information at a road show. As another example, as permitted by the “regularly released condition,” an issuer would be able to rely on the proposed safe harbor for the publication of an earnings release consistent with past practice, including the posting of and maintaining the release on an issuer's Web site, whether or not located in a separate section of the Web site for historical information. The use of that earnings release (or its contents), however, as part of the marketing activities to potential investors by an underwriter or dealer

participating in distribution of the issuer's securities in the registered offering would be outside the scope of the proposed safe harbor.

In those situations, the earnings release would be considered a free writing prospectus as used by the underwriter or dealer, as discussed below.

Commenters on the 1998 proposals, which contained similar provisions, were concerned about staff practice with regard to requiring disclosures of forward-looking information in an issuer's registration statements if such information was provided publicly. Public statements by issuers would not necessarily require that the disclosed information be included in registration statements.

The same is true for any public release of information pursuant to Regulation FD and Item 2.02 of Form 8-K. See Regulation S-K [17 CFR 229.10

et seq.

] and Securities Act Rule 408. See also Exchange Act Rule 12b-20 [17 CFR 240.12b-20]. The information may be required to be included in the registration statement pursuant to some other disclosure obligation.

Request for Comment

• Does the safe harbor provide sufficient certainty for issuers as to when particular types of communications can be made? If not, how could additional certainty be provided without opening the door to risks of abuse?

• Are there other categories of factual business information or forward-looking information that should be added to the list of permitted communications within the safe harbor? Should any of the proposed categories be deleted?

• Should we require a particular history, or length of time that the issuer has been regularly releasing this information as a condition to reliance on the exemption? For example, six months; one year; or a different period? What would be an appropriate period?

• Should there be any limitation on the availability of the safe harbor for issuers that have been determined to have not complied with Regulation FD, Regulation G, or any Form 8-K requirements for earnings releases?

• Would reporting issuers involved in registered offerings be reluctant to release ordinary course forward-looking information despite the proposed safe harbors? More or less reluctant than they are today? What other changes could we make to eliminate this reluctance?

• Should there be a specified history of releasing information for only certain categories of forward-looking information, such as financial projections?

• Is the proposal regarding forward-looking information appropriate? Are the risks of this information conditioning the market greater than with the release of factual business information? If so, how? Should there be additional restrictions in this safe harbor?

• Should there be a distinction between releasing such information in the pre-filing and post-filing periods?

• Should the safe harbor identify the specific conditions under which communications would constitute ordinary course communications?

• Should we consider defining what “part of the offering activities” means for purposes of the safe harbors?

• As we note above, a voluntary filer would fall into the category of unseasoned issuers because it is not required to file periodic or current reports under the Exchange Act. Should voluntary filers be permitted to rely on the safe harbor available to reporting issuers even though they are not required to file Exchange Act reports?

• Should registered investment companies and business development companies be eligible to use the proposed safe harbors for factual business information and forward-looking information?

b. Regularly Released Factual Business Information—Non-Reporting Issuers

We are proposing a narrower safe harbor from the gun-jumping provisions for a non-reporting issuer's regularly released factual business information.

The proposal would provide a safe harbor for a non-reporting issuer's release or dissemination of regularly released ordinary course factual business information to persons receiving the information other than in their capacity as investors or potential investors, such as customers and suppliers.

Because a condition of the proposed Rule involves the manner and timing of the communication, the same issuer employees who have historically been responsible for providing the information to, for example, customers and suppliers, should communicate the information provided in reliance on this safe harbor. As proposed, non-reporting issuers' release or dissemination of factual business information that satisfy the conditions of the proposed Rule would have a safe harbor from being an impermissible prospectus and from violating the prohibition on pre-filing offers.

See proposed Rule 169.

The fact that a customer also may be a potential investor in the issuer's securities would not affect the availability of the safe harbor if the conditions are otherwise satisfied.

Our proposed Rule 169 would be a safe harbor from the definition of “prospectus” in Securities Act Section 2(a)(10) and would therefore disapply the prohibition in Securities Act Section 5(b)(1) on the use of a prospectus that is not a statutory prospectus. The proposed Rule would also be a safe harbor from the prohibitions on pre-filing “offers” in Securities Act Section 5(c).

Under the proposed safe harbor, factual business communications would be defined as:

• Factual information about the issuer or some aspect of its business;

• Advertisements of, or other information about, the issuer's products or services; and

• Factual information about business or financial developments with respect to the issuer.

As with the safe harbor for reporting issuers, the safe harbor requires that the information be regularly released in the ordinary course, disseminated by or on behalf of the issuer, and not include information about the registered offering or information released as part of the offering activities in the registered offering.

Because non-reporting issuers generally are not releasing information in connection with securities market activities, we believe it is appropriate to restrict the scope of the safe harbor to limited regularly released ordinary course factual business information.

100

Further, we are not proposing a safe harbor for forward-looking information for non-reporting issuers because of the lack of such information or history for these issuers in the marketplace. In those circumstances, we believe that the potential for abuse in permitting a safe harbor for the continued release of forward-looking information as a way to condition the market for the issuer's securities outweighs the legitimate utility to the issuer of the safe harbor.

100

These issuers would still be able to rely on Securities Act Rules 134 and 135 [17 CFR 230.134 and 230.135] and proposed Rules 163A and 164.

Request for Comment

• We request comment on the same issues regarding the regularly released concept as in the safe harbor for reporting issuers.

• Should the factual business information safe harbor permit some related forward-looking information so long as the information is not projections?

• In initial public offerings by non-reporting issuers, should we consider using our authority, including our exemptive authority in Section 27A, to propose a projections and forward-looking information safe harbor from liability for the forward-looking statements that would be similar to the liability safe harbor for forward-looking statements contained in Securities Act Section 27A?

• If we determine to propose a safe harbor of this type for initial public offerings, what kinds of conditions should we consider for its use?

• As a condition for this safe harbor or one for initial public offerings, should we require the issuer to file projections or other forward-looking information as part of the registration statement? Should the projections be required to follow Item 10 of Regulation S-K or S-B as applicable? Should projections be required to be accompanied by an accountant's report on the projections or forecasts?

101

In this regard, see Sections 210 and 316 of the AICPA Guide for Prospective Financial Statements.

• Would a liability safe harbor for initial public offerings cause issuers to provide more projections publicly? Would there be concerns about the quality of these projections in light of the safe harbor?

2. Other Permitted Communications Prior To Filing a Registration Statement

Beyond the continuing ongoing release of information discussed above, there is an increased amount of information disseminated to the market about issuers, including through the Internet. We believe that information availability should be encouraged, subject to appropriate standards of liability. At times when the risk of conditioning the market for a securities offering is sufficiently remote, it is important to provide issuers with greater certainty that the release of information would not be considered impermissible offers under the Securities Act. Such an approach would avoid hindering issuer communications except where necessary for investor protection. We are, therefore, proposing rules that would be aimed at communications that might not fall within the proposed safe harbors for regularly released factual business and forward-looking information.

a. 30-Day Bright Line Exclusion From the Prohibition on Offers Prior To Filing a Registration Statement—All Issuers

The proposed rule would provide all issuers a bright-line time period, ending 30 days prior to filing a registration statement, during which issuers may communicate without risk of violating the gun-jumping provisions. Such communications would be excluded from the definition of offer for purposes of Securities Act Section 5(c).

102

A bright-line test would provide greater certainty in the offering process and avoid unnecessary limitations on issuer communications more than 30 days prior to the filing of the registration statement. Further, we believe that the 30-day timeframe adequately assures that these communications would not condition the market for a securities offering by providing a sufficient time period to cool any interest in the offering that might arise from the communication.

103

102

While communications made in reliance on the proposed rule could, depending on the particular facts, be an “offer” as defined in Securities Act Section 2(a)(3), the proposal would provide that the communication would not be an “offer” for purposes of Securities Act Section 5(c). See proposed Rule 163A. During the 30-day period immediately prior to registration, issuers would have available, in addition to the other exemptions proposed in this release, communications permitted under Securities Act Rule 135. Rule 135 permits an issuer or a selling security holder (and persons acting on behalf of either of them) to publish a notice of a proposed registered offering of securities containing limited information, without the notice being considered an offer of the securities. As we note above, the 30-day exclusion is available only to the issuer for communications made by it or on its behalf.

For all issuers, the exemption would only apply prior to the filing of a registration statement. This exclusion would thus not apply to issuers with shelf registration statements on file, whether or not effective, to whom the prohibition on all offers in the gun-jumping provisions would not apply.

See also Harold Bloomenthal and Samuel Wolff,

Emerging Trends in Securities Laws

[2003-2004 ed.], “Securities Act Reform—Déjà Vu All Over Again,” Commissioner Roel C. Campos (the “Campos Article”) at § 1:28.

103

As we discuss below, the issuer would have to take reasonable steps to avoid redissemination of such information during the 30-day period. We also chose to propose a 30-day timeframe because it is consistent with the timeframe in Securities Act Rule 155 regarding integration of abandoned offering [17 CFR 230.155] and Securities Act Rule 254 regarding pre-filing solicitations of interest in Regulation A offerings [17 CFR 230.254].

As proposed, the 30-day bright line exclusion from the gun-jumping provisions would be subject to the following conditions:

• Communications made in reliance on the proposed rule could not reference a securities offering;

104

Securities Act Rule 155, relating to integration of abandoned offerings, permits issuers to register a securities offering immediately following the abandonment of a private offering made to accredited or sophisticated persons and not involving general solicitation and general advertising. The proposed 30-day exclusion, on the other hand, applies to public communications made prior to a registered offering. Because Rule 155 treats any private offers made in the abandoned private offering as not part of the subsequent registered offering, issuers relying on Rule 155 in connection with a subsequently registered offering would continue to rely on Rule 155 and need not rely on the 30-day bright line exclusion for public communications before a registration statement is filed.

• Communications made in reliance on the proposed rule would have to be made “by or on behalf of the issuer”;

105

and

105

As with proposed Rules 168 and 169, communications could be made under this proposed rule only if the issuer authorized and approved the communication before its use. Other communications, such as those by an underwriter or prospective underwriter, would not be covered by the proposed rule. For a further discussion of the “by or on behalf of the issuer” condition, see the discussion at Section III.D.1 above under “ ‘By or on Behalf of the Issuer”.

• The issuer would have to take reasonable steps within its control to prevent further distribution or publication of the information during the 30-day period immediately before the issuer files the registration statement.

We included a similar exclusion in our 1998 proposals. Commenters generally agreed that a bright-line exclusion would be helpful, although they expressed some concerns. Some commenters were concerned that issuers might make misleading statements in connection with a proposed registered offering prior to the 30-day period and claim protection of the exclusion.

106

We believe that our proposals address those concerns in a number of ways. First, the proposals would not permit information about a securities offering so that the communications are less likely to be used to condition the market for the issuer's securities. Second, for all reporting issuers, the communications would still be subject to Regulation FD

and other disclosure requirements, as well as the anti-fraud provisions.

107

Third, the proposed safe harbor would be available only for communications made by or on behalf of the issuer so that other potential offering participants could not use the exemption to condition the market for the issuer's securities.

106

See,

e.g.

, comment letters in File No. S7-30-98 from the American Association of Retired Persons (“AARP”) and the Consumer Federation of America.

Some commenters believed the 30-day period was too short, see, comment letters in File No. S7-30-98 from the North American Securities Administrators Association, Inc. (“NASAA”), while some commenters viewed it as too long, see,

e.g.

, comment letter in File No. S7-30-98 from the American College of Investment Counsel (“ACIC”). As we note above, our proposals are consistent with the 30-day time period we adopted for Rule 155, relating to integration of abandoned offerings.

Commenters also addressed the inclusion in the 1998 proposals of the condition that the issuer take reasonable steps to prevent further distribution of information during the 30-day period immediately before the issuer files a registration statement. These commenters expressed concern that such a condition added uncertainty to the exemption. See,

e.g.

, comment letters in File No. S7-30-98 letters from the Bond Market Association (“TBMA”); American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”); Fried, Frank, Harris, Shriver & Jacobson (“Fried Frank”); Pennsylvania Securities Commission; and Service Employees International Union Master Trust. The 1998 proposals would have permitted other offering participants, in addition to the issuer, to rely on the exclusion. Our proposals would limit the exclusion to issuers. While we would not expect an issuer to be able to control the republication or accessing of previously published press releases, we would expect issuers and persons acting on their behalf to be able to control their own involvement in any subsequent redistribution or publication and, therefore, believe that it is an appropriate condition to the ability to rely on the exclusion. As another example, if an issuer or its representative gave an interview to the press prior to the 30-day period, it would not be able to rely on the exclusion if the interview was published during the 30-day period. We have proposed to address the same issues in the context of free writing prospectuses discussed below.

107

Communications made in reliance on the proposed rule would not be in connection with a registered securities offering for purposes of the exclusion in Regulation FD. See Rule 100(b)(2)(iv) of Regulation FD [17 CFR 243.100(b)(2)(iv)].

We propose to preclude reliance on the 30-day bright-line exclusion for enumerated categories of offerings and issuers that pose the greatest risk of abuse of that exclusion. Specifically, our proposed rule excluding communications made more than 30 days before filing of the registration statement from the definition of offer would not be available to communications made in connection with:

• Offerings by a blank check company;

• Offerings by a shell company; or

• Offerings of penny stock by an issuer.

108

See Securities Act Rule 419(a)(2) [17 CFR 230.419(a)(2)], Exchange Act Rule 3a51-1 [17 CFR.240.3a51-1], and proposed amendments to Rule 405 defining “shell company.” The proposed rule also would exclude issuers whose predecessors in the prior three years were blank check companies, shell companies, or issuers that issued penny stock and other issuers falling into the category of “ineligible issuers” discussed in Section III.D.3. below under “Ineligible Issuers.” The proposed rule also would exclude offerings registered on Form S-8.

We also would exclude communications regarding business combination transactions from being able to rely on the proposed exclusion, as those communications are regulated separately.

109

The proposed rule would also not be available for communications regarding offerings made by a registered investment company or a business development company.

110

109

See the Regulation M-A Release, note 60. The proposal would exclude any business combination transaction as defined in Rule 165(f)(1) [17 CFR 230.165(f)(1)]. Rule 165(f)(1) defines a business combination transaction to mean any transaction specified in Rule 145(a) [17 CFR 230.145(a)] or exchange offer.

110

Registered investment companies and business development companies are subject to separate rules regarding their communications.

Request for Comment

• Should we restrict the ability to rely on the exclusion only to the issuer or should we allow other offering participants to rely on the exclusion? If so, why?

• Is the 30-day timeframe sufficient? Should it be longer? Should it be shorter?

• Would issuers engage in communications using the exclusion prior to the 30-day period before registration?

• Would issuers be able to establish appropriate procedures to ensure compliance with the “reasonable steps” requirement?

• Does the concept of “reasonable steps” in the proposed rule provide sufficient guidance to issuers? If not, what additional restrictions or provisions should be included?

• If the issuer puts information on its web site or another web site prior to the 30-day period and the information remains on the web site, thus being available during the 30-day period prior to the registration statement being filed, should the issuer be able to rely on the proposed 30-day exclusion for such information?

• Is it clear when communications made in reliance on the 30-day exemption are made “by or on behalf” of an issuer? If not, what additional conditions should we include?

• Are the classes of ineligible issuers and offerings appropriate? Should the exclusion not be available to any other type of issuers or offerings?

• Should the exclusion apply to offerings registered on Form S-8?

• Should the exclusion be available for non-reporting issuers? Would there be greater potential for abuse with this category of issuers?

• Should there be a restriction on inclusion of securities offering-related information in view of Securities Act Rule 135?

• Should we limit the condition restricting any reference to securities offering only to references to registered securities offerings?

• Should communications in offerings relying on Rule 155 be permitted during the 30-day period without further conditions?

• Should Regulation FD continue to apply to these communications, as we propose? If not, why not?

b. Permitted Pre-Filing Offers for Well-Known Seasoned Issuers

As noted above, our proposals taken together are intended to provide exemptions generally from the applicability of the gun-jumping provisions for eligible well-known seasoned issuers. The proposed safe harbors for regularly released factual business and forward-looking information and the exemption from the definition of offer for communications more than 30 days prior to filing of a registration statement would also apply to well-known seasoned issuers. In addition, as discussed below, the proposed broadened exemption for routine offering-related communications and the proposed availability of an exemption for eligible issuers from the gun-jumping provisions for free-writing prospectuses, in both cases after filing of a registration statement, also would be available to well-known seasoned issuers. However, the gun-jumping provisions prohibit all offers—written or oral—before the filing of a registration statement.

111

To address communications made in the 30 days prior to filing a registration statement not otherwise excluded from the gun-jumping provisions and to complete the set of proposals permitting all communications by well-known seasoned issuers under the gun-jumping provisions, we are proposing an exemption from the prohibition on offers before the filing of a registration statement for offers made by or on behalf of eligible well-known seasoned issuers.

112

The proposed exemption would permit these issuers to engage in unrestricted oral and written offers before a registration statement is filed without violating the gun-jumping provisions. As proposed, these communications, while exempt from the gun-jumping provisions, would still be considered offers and subject to liability standards applicable to such offers.

113

In addition, while “offers,” all such communications would still be subject to Regulation FD.

114

The anti-fraud provisions of the federal securities laws would also continue to apply to these communications. The exemption would be available only for communications made “by or on behalf of” the issuer. We have included as a condition to

reliance on this exemption that communications cannot be used as part of a scheme to avoid or evade the requirements of the gun-jumping provisions.

111

See Securities Act Section 5(c).

112

See proposed Rule 163.

113

Any written offer would be a prospectus under Section 2(a)(10) of the Securities Act relating to a public offering of the securities to be covered by the registration statement to be filed. All oral communications and prospectuses would be subject to liability under Section 12(a)(2). The offers would also be subject to liability under other provisions relating to offers, including Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 under the Exchange Act.

The proposed rule is different from Securities Act Rule 254 [17 CFR 230.254]. Securities Act Rule 254 permits solicitations of interest in Regulation A offerings provided the conditions of the rule, including pre-use submission of the materials to the Commission, are satisfied, and does not treat the materials as prospectuses. Proposed Rule 163 would not require pre-filing of the communications and written offers would be prospectuses.

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Communications made in reliance on the proposed rule would not be considered to be in connection with a registered securities offering for purposes of the exclusion from Regulation FD. See Rule 100(b)(2)(iv) of Regulation FD [17 CFR 240.100(b)(2)(iv)].

In view of the proposed “automatic shelf” registration process we describe below, we expect that well-known seasoned issuers usually would have a registration statement on file that it could use for any of its registered offerings.

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Consequently, it would be rare for these issuers to make offers prior to the filing of a registration statement;

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however, to liberalize communications for these issuers to the appropriate extent, it is appropriate to provide this exemption from the prohibition on pre-filing offers. A written offer made under the proposed exemption would, however, meet our proposed definition of “free writing prospectus''

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and would need to include a legend and be filed promptly upon the issuer filing its registration statement.

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Any written communication used in reliance on this proposed exemption would be subject to the same cure and record retention provisions as those applicable to free writing prospectuses used after a registration statement is filed in reliance on our proposed rules governing free writing prospectuses discussed below.

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115

As with any other delayed shelf registration statement, issuers using an automatic shelf registration statement would be considered to be offering securities off the shelf registration statement at the time of each takedown of securities.

116

See the discussion in Section V.B.2 below under “Automatic Shelf Registration for Well-Known Seasoned Issuers,” with regard to the proposed availability of an “automatic shelf” registration process for these issuers.

117

See Section III.D.3 below under “Definition of Free Writing Prospectus” for a discussion of the definition and the circumstances under which media publications (in any form) would be free writing prospectuses.

118

The legend would be similar to the one we are proposing for free writing prospectuses. See the discussion in Section III.D.3 below under “Legend Condition” with regard to the requirements for use of a “free writing prospectus.” Under our proposals, all issuer free writing prospectuses would need to be filed.

119

See discussion in Section III.D.3 below under “Unintentional Failures to File” and “Record Retention Condition” regarding proposed Rules 164 and 433 with respect to the cure and record retention provisions.

Request for Comment

• Should we permit any written or oral offer to be made by a well-known seasoned issuer before a registration statement is filed?

• In addition to provisions that would allow issuers to cure an omission of the legend, should there be cure provisions in the event that the issuer failed to file the written offer when the registration statement was filed?

• Should the requirement for filing written offers made in reliance on the proposed exemption apply to written offers that only contain a description of the securities being offered?

• Should communications made in reliance on the proposed rule be subject to Regulation FD, as we propose? If not, why not? Or should there be specific exceptions? If so, what type of communications should be excluded?

• Should there be other exclusions from the filing requirement?

• Should the filing obligation apply if the issuer fails to file a registration statement covering the securities offered within a particular time period after the offer? If so, how long?

3. Relaxation of Restrictions on Written Offering Related Communications

Our proposals would expand the amount and types of permitted written offering related communications that may be made by offering participants under the gun-jumping provisions after a registration statement is filed.

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The two main elements of these proposals are expansion of information that Securities Act Rule 134 permits to be communicated and the permitted use of free writing prospectuses in connection with a registered offering.

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As noted previously, Securities Act Section 5(b)(1) limits the means by which written offers may be made following the filing of a registration statement. Section 5(b)(1) does not include a limitation on oral offers after the filing of a registration statement.

a. Rule 134

Rule 134 provides a safe harbor from the gun-jumping provisions for limited public notices about an offering made after an issuer files its registration statement.

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The Rule was intended originally to provide an “identifying statement” that could be used to locate persons that might be interested in receiving a prospectus.

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All issuers, including well-known seasoned issuers, are precluded from relying on Rule 134 until the issuer files a registration statement.

123

121

The safe harbor operates by excluding such notices from the definition of prospectus under Securities Act Section 2(a)(10). See Rule 134 [17 CFR 230.134] and

Adoption of Rules 134 and 135

, Release No. 33-3568 (Aug. 29, 1955) [20 FR 6523]. Currently, Rule 134 does not apply to notices relating to a registered investment company or business development company, and under our proposed amendments, this would continue to be the case. 17 CFR 230.134(e).

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Rule 134 is available only after the issuer files a registration statement that includes a statutory prospectus. Because a purpose of Rule 134 is to facilitate the dissemination of the full information required in the prospectus, Rule 134 would not be available until a preliminary prospectus, or in the case of shelf registration, a base prospectus, is available. As our proposal makes clear, to satisfy the requirements of Securities Act Section 10 in an initial public offering, a prospectus must include

bona fide

estimates of the offering price range and the maximum amount of securities to be offered. This would not mean, however, that a final prospectus meeting the requirements of Securities Act Section 10(a) including a price would be required as a condition to Rule 134. Further, the prospectus required for reliance on Rule 134(d) is a statutory prospectus, and it need not be a prospectus that satisfies Section 10(a).

Rule 134 requires in some cases that the notice must be accompanied or preceded by a written prospectus meeting the requirements of Section 10 of the Securities Act. The notice cannot, however, otherwise include a hyperlink or uniform resource locator (“URL”) for an address containing information beyond that permitted by Rule 134. See the 2000 Electronics Release note 62 at II.B.2.

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If a well-known seasoned issuer communicated information of the type covered by Rule 134 in writing prior to filing its registration statement, such that the communication constituted an offer, it would have to rely on proposed Rule 163 excepting pre-filing offers from the gun-jumping provisions, and the communication would be a free writing prospectus.

i. Expansion of Permitted Information

We are proposing to modify and expand the information permitted under Rule 134 to include information that issuers, underwriters, and investors would find helpful and to permit the types of written communications during an offering that we would not consider to be prospectuses. We propose a limited expansion of the information permitted in the notice about the issuer and the registered offering. The proposed amendments to Rule 134 would:

• Permit increased information about an issuer and its business, including where to contact the issuer;

• Permit more information about the terms of the securities being offered;

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For example, for fixed income securities, the proposed changes would allow greater information about final interest rates and yield information, including yield information on fixed income securities with comparable maturities and credit ratings.

• Expand the scope of permissible factual information about the offering itself, including underwriter information, more details about the mechanics of and procedures for transactions in connection with the offering process, the anticipated schedule of the offering, and a description of marketing events;

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The information on marketing events, such as road shows, could include greater detail on the date, time, location, and procedures for attending or otherwise accessing the events.

• Allow more factual information about procedures for account opening and submitting indications of interest and conditional offers to buy the offered securities;

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and

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For example, a broker or dealer could inform investors of the procedural aspects of an auction or

a directed share program. The proposed changes would not include written notices of allocations of securities, including those delivered electronically. These notices would be a type of written confirmation of sale and, thus, prospectuses. Our proposals regarding prospectus delivery reforms, as discussed later, would apply to these notices.

• Expand the disclosure permitted regarding credit ratings to include the security rating that is reasonably expected to be assigned.

While we have proposed to expand the amount of information regarding the terms of an offering that may be included in a Rule 134 notice, the proposed expansion would not permit use of a Rule 134 notice to provide a detailed term sheet for securities being offered. There is increased ability under our proposals to deliver such a term sheet as a free writing prospectus, as discussed below.

ii. Changes to Required Information

We also are proposing to modify the information that must be included in a Rule 134 notice. First, we are proposing to eliminate the reference in the legend to state securities laws, as we believe that other provisions of the Rule already address any state securities law requirements, as applicable.

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Second, we are proposing to eliminate the requirement to specify whether the financing is a new financing or refunding, as we believe that such information is no longer necessary because such information would, with regard to non-reporting or unseasoned issuers, be provided by the issuer's disclosure of the use of the proceeds of the offering in the filed preliminary prospectus.

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127

See paragraphs (a)(11) and (a)(14) of our proposed amendments to Rule 134.

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For seasoned issuers and well-known seasoned issuers, evaluation of an issuer's capital resource needs would be included in its MD&A discussion in its periodic reports.

Request for Comment

• Is there information that we propose to permit under Rule 134 that should be prohibited or limited because it will further the use of “selling” documents that are not prospectuses?

• Is there other information that we should permit under Rule 134? For example, is there information about the issuer or the offering that should be included in Rule 134 but is not part of these proposals? If so, address whether the additional information might transform the notice into a selling document.

• Should the Rule permit more information about the underwriters or the syndicate, such as information about the allocation of shares among the members of the underwriting syndicate?

• Should we permit more information about allocations and auction mechanics?

• Should we revise the information requirements of Rule 134 with regard to solicitations of offers to buy or indications of interest? If so, would it be appropriate to require a communication containing such a solicitation to describe how and when offers to buy would be accepted, including the methods and timing of notification of the registration statement's effective date, the purchase price of the securities, and how indications of interest would become offers to buy?

• Where Rule 134 requires that a notice be accompanied or preceded by a prospectus, should we permit notification of the location of the prospectus to satisfy this requirement? Should we permit this for a certain class of issuers such as well-known seasoned issuers? Other seasoned issuers?

b. Permissible Use of Free Writing Prospectuses

i. Overview

As discussed above, even after the filing of a registration statement, under the gun-jumping provisions issuers and other offering participants currently may make written offers only in the form of a statutory prospectus. After effectiveness of a registration statement, written offers other than a statutory prospectus may be made if prior to or at the same time as the written offer a final prospectus meeting the requirements of Securities Act Section 10(a) is sent or given.

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We believe that written communications during the offering process are unnecessarily restricted and that this would be the case even if the substantial relaxations in restrictions on communications that would result from the proposals that we describe above were adopted.

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See Securities Act Section 2(a)(10).

We are proposing to permit written communications that constitute offers, including electronic communications, outside the statutory prospectus beyond those currently permitted by the Securities Act, if certain conditions are met. We are proposing to define such a written offer outside of the statutory prospectus, beyond those currently permitted by the Securities Act, as a “free writing prospectus.”

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We are proposing to include this definition in Securities Act Rule 405.

Our proposals would not affect the statutory framework allowing written offers after effectiveness if prior to or at the same time as the written offer is made a final prospectus meeting the requirements of Section 10(a) is sent or given. Those written offers would not be prospectuses and therefore would not be free writing prospectuses.

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See Securities Act Section 2(a)(10).

As proposed, a free writing prospectus that satisfies specified conditions could be used by a well-known seasoned issuer at any time. Further, as proposed, a free writing prospectus that satisfies specified conditions could be used by any other issuer or offering participant after a registration statement has been filed and, in some cases, as discussed below, if a statutory prospectus precedes or accompanies the free writing prospectus or if a statutory prospectus is available.

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A free writing prospectus used after a registration statement is filed and that satisfies specified conditions could be used without violation of the gun-jumping provisions.

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A free writing prospectus could take any form and would not be required to meet the informational requirements otherwise applicable to prospectuses.

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In general, our proposals would allow offering participants to use free writing prospectuses in conjunction with most registered capital formation transactions, although we do not treat all issuers and offerings the same.

135

132

As we discuss above, a free writing prospectus used by a well-known seasoned issuer prior to filing pursuant to proposed Rule 163 would be a prospectus for purposes of Securities Act Section 2(a)(10).

133

Our proposals would provide that such a free writing prospectus is a permitted prospectus for purposes of Securities Act Section 10(b) [15 U.S.C. 77j(b)] and, as such, could be used without violating Securities Act Section 5(b)(1).

134

As we discuss in more detail below, we are proposing to permit a free writing prospectus used after a registration statement is filed meeting the conditions of proposed Rule 433 to be a Securities Act Section 10(b) prospectus without requiring that the free writing prospectus contain any particular information, including information contained in the prospectus that is part of the registration statement, other than a legend.

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Our proposals relate only to capital formation transactions and do not extend to business combination transactions, for which we have already adopted rules. See Securities Act Rule 162 [17 CFR 230.162], Rule 165 [17 CFR 230.165], Rule 166 [17 CFR 230.166], and Rule 425 [17 CFR 230.425]. Rule 162 relates to submission of tenders in registered exchange offers. Communications relating to business combinations are covered by Rule 165 and Rule 166. Rule 425 relates to the filing of certain prospectuses and communications in connection with business combination transactions.

See

also, the Regulation M-A Release note 60; and

Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings,

Release No. 33-7759 (Oct. 22, 1999) (exemptive rules for cross-border tender and exchange offers, business combinations, and rights offerings relating to the securities of foreign issuers).

The issuer and any other offering participant satisfying the conditions of our proposed rules could use a free writing prospectus after a registration

statement is filed to communicate information about a registered offering of securities.

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This would permit affiliates, underwriters, dealers, and others acting on behalf of the parties to the transaction to use a free writing prospectus without violating the gun-jumping provisions. A free writing prospectus would not be part of a registration statement subject to liability under Securities Act Section 11, unless the issuer elected to file it as a part of the registration statement. We propose to condition the use of free writing prospectuses prepared by an issuer or containing information provided by an issuer on filing, as a free writing prospectus, but not as part of the registration statement. We generally would not condition the use of free writing prospectuses prepared by other persons, such as underwriters, not containing such information on filing. Regardless of whether a free writing prospectus is filed, any person using the free writing prospectus would be subject to liability for prospectuses under Securities Act Section 12(a)(2) and liability under the anti-fraud provisions of the federal securities laws.

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136

Prior to filing a registration statement, only a well-known seasoned issuer would be able to use a free writing prospectus in reliance on proposed Rule 163.

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After effectiveness of a registration statement free writing prospectuses would not be the exclusive means by which participants could make a written offer outside of the statutory prospectus. Under current requirements which our proposals would not affect, any written offer that is accompanied or preceded by a final prospectus that meets the requirements of Securities Act Section 10(a) (such as sales literature used after effectiveness) would continue to be permitted without having to satisfy the requirements of any safe harbor or other rule permitting its use or proposed Rule 433. This is because such a written offer is excluded from the definition of “prospectus” under the Securities Act by reason of clause (a) of Securities Act Section 2(a)(10), if a final prospectus meeting the Section 10(a) information requirements is sent or given before or at the same time as the written offer. A base prospectus included in a shelf registration statement that omits information is not a final prospectus meeting the requirements of Section 10(a).

ii. Definition of Free Writing Prospectus

(A) General

We are proposing to define “free writing prospectus” to include, except as otherwise provided specifically or otherwise required by the context, any written communication that constitutes an offer to sell or a solicitation of an offer to buy securities that are or will be the subject of a registration statement that is not a prospectus satisfying the requirements of Securities Act Section 10(a) or our rules permitting the use of preliminary or summary prospectuses or prospectuses subject to completion, or that, by virtue of the exception in clause (a) of Section 2(a)(10), is not a prospectus because, at or prior to that time, a final prospectus meeting the requirements of Section 10(a) was sent or given.

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The proposed definition would make clear that, although a free writing prospectus would not be filed as part of a registration statement, regardless of the method of its use or distribution, it would still be considered to be used in connection with a public offering of securities that is or would be the subject of a registration statement.

139

138

The definition would include free writing prospectuses used pursuant to proposed Rule 433 and Rule 163 because these would not be summary prospectuses.

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Under our proposal, a free writing prospectus used after a registration statement is filed that satisfies the conditions in proposed Rule 433 would be a permitted prospectus for purposes of Securities Act Section 10(b). A free writing prospectus used other than in accordance with our proposed rules would continue to be a prospectus for Section 12(a)(2) and the anti-fraud provisions of the federal securities laws, and its use would violate Section 5.

A communication would be a free writing prospectus only where it constituted an offer of a security under the Securities Act. Whether a particular communication constituted such an offer would, as today, be determined based on the particular facts and circumstances. Communications that would not be considered offers or prospectuses for purposes of the gun-jumping provisions, such as Rule 134 notices, Rule 135 communications, regularly released factual business information and forward-looking information falling within our proposed safe harbors, and research reports falling within the safe harbors provided by our rules, would not be free writing prospectuses.

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Written communications of a well-known seasoned issuer that are exempt pursuant to proposed Rule 163 would be within the definition of free writing prospectus. A free writing prospectus used in reliance on Rule 163 would not be a Section 10(b) prospectus because it would be used prior to the filing of a registration statement.

(B) Media Publications

We believe it is important to identify the circumstances under which information released or disseminated to the media by an issuer or offering participant in connection with a registered offering would be considered the use of a free writing prospectus under our proposals. We recognize that the financial news media are a valuable source of information about issuers to the public at large. Issuers and offering participants use the media to disseminate important information about themselves, such as through the use of press releases and interviews. The media plays an integral role, therefore, in providing information about issuers to the market.

While we want to encourage the continued role of the media as an important communicator of information, we do not want issuers and offering participants to use the media to avoid our current or proposed communications rules. Under our proposals, if an issuer or any offering participant provided information about the issuer or the offering that constituted an offer, whether orally or in writing, to a member of the press or other media that was published (in any form), where dissemination in writing by the issuer or offering participant would constitute a free writing prospectus, we would consider the publication to be a free writing prospectus that would have been made by or on behalf of the issuer or offering participant. If the communication occurred after the filing of the registration statement, it would be subject to the requirements of proposed Rule 433.

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Except in the case of a well-known seasoned issuer, if the communication occurred prior to the filing of the registration statement, it would violate Section 5 unless it fell within one of the existing or proposed safe harbors or exemptions.

The treatment of a media publication that constituted a free writing prospectus under our proposed rules would depend on whether the issuer or other offering participant prepared the publication or broadcast or paid for or provided other consideration for the publication or broadcast, or whether independent media prepared and published or broadcast the communication for no consideration or payment from an issuer or offering participant. If an issuer or offering participant prepared, paid, or gave consideration for, a published article, broadcast, or advertisement, the issuer would have to satisfy the conditions to the use of a free writing prospectus at the time of the publication or broadcast. For example, in the case of a non-reporting issuer a statutory prospectus would have to precede or accompany the communication.

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As a consequence of this requirement, in offerings by non-reporting and unseasoned issuers, issuers and offering participants would not be able to

publish or broadcast written advertisements, “infomercials,” or broadcast spots about the issuer, its securities, or the offering that included information beyond that permitted by Rule 134. For seasoned issuers, the most recent statutory prospectus would have to be on file with us and the issuer or offering participant would have to file the free writing prospectus with us not later than the date of first use.

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Base prospectuses, preliminary prospectuses and prospectuses subject to completion that are permitted under our rules are statutory prospectuses that satisfy the requirements of Securities Act section 10 but are not prospectuses that satisfy the requirements of Securities Act section 10(a). Where a final prospectus satisfying the requirements of Securities Act section 10(a) is sent or delivered prior to or with written offering materials, that communication would fall within the exception from the definition of prospectus in clause (a) of Securities Act section 2(a)(10).

Where, however, the free writing prospectus is prepared by persons in the media business that are unaffiliated

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with and not paid for by the issuer or offering participants, our proposed rules would make certain accommodations that would, we believe, permit the publication by the media under the gun-jumping provisions.

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In those cases, the statutory prospectus would not be required to precede or accompany the media communication, although a filed registration statement and availability of a statutory prospectus would be conditions. Therefore, an interview or other media publication or broadcast where an issuer or offering participant participates (but does not prepare or pay for the event) could be a free writing prospectus, but because of the media intervention, we are prepared to conclude that its use should not be conditioned on prior or simultaneous delivery of the statutory prospectus. In addition, any such free writing prospectus would be subject to filing by the issuer or offering participant involved within one business day after first publication or first broadcast. Persons in the media would have no filing or other obligations under these provisions. For example, unlike today, an underwriter or issuer would be permitted to invite the press to a live road show or an electronic road show, but we would consider an article including information obtained at that road show to be a free writing prospectus of the issuer or underwriter and subject to the proposed rules.

145

As another example, if a chief executive of a non-reporting issuer gave an interview to a financial news magazine without payment to the magazine for the article, the publication of the article after the filing of the registration statement would be a free writing prospectus of the issuer that would have to be filed by the issuer after publication. In that case, there would be no requirement that a statutory prospectus precede or accompany the article at the time of the publication.

143

The term “affiliate” is defined in Securities Act Rule 405.

144

See discussion in Section III.D.3. below under “Permissible Use of Free Writing Prospectuses.”

145

Unlike an article published based on information obtained from a road show with a limited audience, an article published based on information provided at a readily accessible electronic road show open to an unrestricted audience would not be treated as a free writing prospectus of the issuer or offering participant due to the unrestricted and available nature of the electronic road show. See discussion in Section III.D.3 below under “Electronic Road Shows.”

Request for Comment

• Does the proposed definition cover all the types of communications that issuers and other persons participating in the offer and sale of the issuer's securities would use outside the statutory prospectus?

• Do our proposals regarding information provided to the media by or on behalf of the issuer or other offering participants provide enough guidance for issuers and other offering participants to determine when such a communication is a free writing prospectus?

• Should the free writing prospectus be considered part of the registration statement?

• Should the issuer have to approve every free writing prospectus before its use?

iii. Permitted Use of a Free Writing Prospectus After the Filing of a Registration Statement Under Proposed Rule 433

Proposed Rule 164 would permit the use of a free writing prospectus where an eligible issuer has filed a registration statement and the conditions of proposed Rule 433 are satisfied.

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The proposed rules permitting the use of free writing prospectuses would not be available for any communication that, while in technical compliance with the rule, was part of a plan or scheme to evade the requirements of Section 5 of the Act.

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The discussion in this section relates to the use of free writing prospectuses after the filing of a registration statement. For a discussion of the use of free writing prospectuses by well-known seasoned issuers prior to filing a registration statement, see the discussion in Section III.D.2 above under “Permitted Pre-Filing Offers for Well-Known Seasoned Issuers”.

(A) Conditions to Permitted Use of a Free Writing Prospectus

Proposed Rule 164 provides that, after the filing of a registration statement, a free writing prospectus that satisfies the conditions of proposed Rule 433 would be a permitted prospectus under Section 10(b) for purposes of Securities Act Section 5(b)(1). Proposed Rule 433 sets out eligibility, information, legend, filing, and record retention conditions for the use of free writing prospectuses after the filing of the registration statement.

(1) Prospectus Delivery and/or Availability

The ability of any person participating in the offer and sale of the securities to use free writing prospectuses under proposed Rules 164 and 433 would be conditioned on availability of the issuer's most recently filed statutory prospectus (other than a summary prospectus) satisfying the requirements of Securities Act Section 10 and, in certain cases, on prior or concurrent delivery of the issuer's most recently filed statutory prospectus.

(a) Non-Reporting Issuers and Unseasoned Issuers

In offerings of securities of an eligible non-reporting issuer, including initial public offerings, or offerings of securities of an eligible unseasoned issuer, use by offering participants of free writing prospectuses would be conditioned on filing of the registration statement for the offering. If the free writing prospectus was prepared by or on behalf of an issuer or offering participant, if consideration was or would be given by the issuer or an offering participant for the publication or broadcast (in any format) of any free writing prospectus (including any published article, publication or advertisement), or if Securities Act Section 17(b)

147

required disclosure that consideration was or would be given by the issuer or an offering participant for any activity described therein, then the use of the free writing prospectus would be conditioned on its being accompanied or preceded by the most recent statutory prospectus that satisfied the requirements of Section 10.

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If a final prospectus satisfying the requirements of Section 10(a) is sent or given with or prior to the written offer, proposed Rules 164 and 433 would not apply, but the written offer is not a prospectus under the exception in clause (a) of Section 2(a)(10) and would be permitted.

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For purposes of Rule 433, as well as for proposed Rule 163, communications for which disclosure would be required under Securities Act Section 17(b) would be deemed a free writing prospectus. In these situations, we believe that an issuer's or offering participant's payment for or other consideration given for publications covered by Section 17(b) would raise the same types of concerns as an issuer or offering participant paid interview.

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Proposed Rule 433 would provide that a prospectus would be deemed to accompany an electronic free writing prospectus if the latter contained a hyperlink to the former. In initial public offerings, a preliminary prospectus that does not contain a price range does not satisfy our rules or, therefore, the requirements of Section 10.

The result of this framework would be that these categories of issuers and offering participants would have to

assure that the most recent statutory prospectus was actually provided to people who might receive a free writing prospectus. Thus, in the following situations, for example, use of the free writing prospectus would be conditioned on the most recent statutory prospectus preceding or accompanying the free writing prospectus or the communication could not be made in reliance on proposed Rules 164 and 433:

• A direct written communication by an issuer or offering participant;

• An interview in print or broadcast given or prepared by an issuer, its officers, directors or representatives or an offering participant, the publication or broadcast (in any format) of any free writing prospectus (including any published article, publication or advertisement) for which consideration was or would be given by the issuer or an offering participant, or for which Securities Act Section 17(b) required disclosure of a payment made or consideration given by an issuer or other offering participant;

• A press release disseminated by an issuer or offering participant and rebroadcast by the media; or

• A paid advertisement, in any format, by an issuer or offering participant.

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We understand that using broadly disseminated free writing prospectuses in this category may not be feasible unless they are in electronic form and contain a hyperlink to the statutory prospectus. We believe that this is an appropriate result because additional assurance should exist that free writing prospectuses prepared by or paid for by non-reporting or unseasoned issuers or offering participants are considered by investors in the context of the statutory prospectus.

In these situations, following effectiveness of a registration statement, if a final prospectus meeting the requirements of Section 10(a) was previously or at the same time sent or given to each person to whom the written offer was made, proposed Rules 164 and 433 would not apply, but, as is currently the case, a written offer is permitted.

As we discuss above, in cases where a free writing prospectus is prepared by a person in the media business that is not affiliated with or paid by the issuer or an offering participant, the statutory prospectus would not be required to precede or accompany the media communication.

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The issuer or other offering participant would be required to file the article within one business day following publication or broadcast.

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See discussion in Section III.D.3. above under “Media Publications.”

In offerings of securities of eligible non-reporting or unseasoned issuers, where a free writing prospectus was prepared by or on behalf of, or paid for by, an issuer or offering participant, or Securities Act Section 17(b) required disclosure that a payment was made or consideration was given for distribution or publication of the free writing prospectus,

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we believe it is important to deliver the preliminary prospectus to the recipient of the free writing prospectus. Conditioning use of the free writing prospectus on the fact that a statutory prospectus precede or accompany the free writing prospectus will assure that an investor has a balanced disclosure document of an issuer with no or limited reporting history against which to evaluate the free writing prospectus and to place the statements made in context. Although unseasoned issuers are reporting issuers, we believe that there is less reason to assume that the issuer would be well followed and thoroughly scrutinized or that plentiful issuer information would exist. The existing statutory provisions of Section 2(a)(10) would produce substantially the same result after effectiveness by requiring that the final prospectus meeting Securities Act Section 10(a) be sent or given prior to or at the same time as a written offer.

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Our proposals would provide that materials for which Securities Act Section 17(b) [15 U.S.C. 77q(b)] requires disclosure would be treated as free writing prospectuses of the issuer or other offering participant on whose behalf the payment was made or consideration given.

The condition that the statutory prospectus accompany or precede the free writing prospectus would not require that it be provided through the same medium, so long as it was provided at the required time. Although the prospectus would not have to be sent by the same means (paper or electronic) as the free writing prospectus, merely referring to its availability would not satisfy this condition.

Once the required statutory prospectus was sent or given to an investor, additional free writing prospectuses could be provided without having to send or give an additional statutory prospectus, unless there were material changes in the most recent statutory prospectus from the provided prospectus.

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For example, once an investor had been sent a preliminary prospectus, absent a material change, the proposed rule would permit subsequent e-mail communications by an offering participant that constitute free writing prospectuses without the user having to hyperlink to or otherwise redeliver a statutory prospectus with each communication. After effectiveness and availability of a final prospectus meeting the requirements of Securities Act Section 10(a), no earlier statutory prospectus may be provided, and such final prospectus must precede or accompany any free writing prospectus provided after such availability, whether or not an earlier statutory prospectus had been previously provided to the recipient.

153

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If there were material changes in a preliminary prospectus, or preliminary prospectus supplement, the issuer and offering participants would generally recirculate the revised preliminary prospectus or supplement to potential purchasers.

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If a final prospectus is given or sent prior to or with a written offer, under the exception in clause (a) of Securities Act Section 2(a)(10), the written offer is not a prospectus and therefore would not be a free writing prospectus and proposed Rules 164 and 433 would not apply.

We believe that in a situation where a written communication is not prepared or paid for by an offering participant but rather by independent media, it still may be an offer and thus a free writing prospectus. There is less need in this situation, however, to have a statutory prospectus precede or accompany the free writing prospectus if a registration statement containing a statutory prospectus is on file with us and available.

(b) Seasoned Issuers and Well-Known Seasoned Issuers

In offerings of securities of eligible seasoned issuers and eligible well-known seasoned issuers, we propose that issuers and other offering participants could use a free writing prospectus after the filing of a registration statement containing a statutory prospectus. For shelf offerings, this preliminary prospectus could be a base prospectus that satisfied our requirements.

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For offerings of securities of eligible seasoned issuers, we would not propose to condition use of the free writing prospectus on actual delivery of the preliminary prospectus. Instead, we would propose that the user of the free writing prospectus notify the recipient, through a required legend, of where the recipient can access or hyperlink to the preliminary or base prospectus by providing the URL for the prospectus.

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See proposed Rule 430B, described below, which is intended, among other things, to locate within one rule the information requirements for a base prospectus in a shelf registration statement.

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Our existing rules do not require delivery of preliminary prospectuses in offerings involving reporting issuers. Thus, notification of availability of the preliminary or base prospectus on our Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system would allow recipients of the free writing prospectus the opportunity to evaluate the free writing prospectus against the filed materials.

In addition, in offerings of securities of eligible well-known seasoned issuers, we are proposing that free writing

prospectuses may be used by issuers at any time before or after the filing of a registration statement, and by any other offering participants after the filing of a registration statement containing a preliminary or base prospectus that satisfies our requirements, as detailed above.

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In the event that a well-known seasoned issuer did not have a registration statement on file, proposed Rule 163 would provide that an eligible well-known seasoned issuer's written offers would be exempt from Section 5(c). While it would be exempt from the requirements of Section 5(c), a written offer made under the exemption in proposed Rule 163 would fall within our proposed definition of “free writing prospectus.” Rule 163 would condition the Section 5(c) exemption for that free writing prospectus on the satisfaction of the conditions in the Rule including filing, legend, and record retention conditions.

Instead of relying on Rules 164 and 433, the issuer or offering participant can, as is currently the case, make a written offer in reliance on the exception to the definition of prospectus contained in clause (a) of Securities Act Section 2(a)(10) if a final prospectus meeting the requirements of Securities Act Section 10(a) is previously sent or given to the person receiving the written offer. If the provisions of Section 2(a)(10) are followed, the written offer is not a prospectus.

Requ

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