The Regulation of Securities Offerings

SUMMARY: The Commission is proposing to modernize and clarify the

regulatory structure for offerings under the Securities Act of 1933

while maintaining investor protection. The proposals cover five major

topics: Registration system reform; communications around the time of

an offering; prospectus delivery requirements; integration of private

and public offerings; and periodic reporting under the Securities

Exchange Act of 1934.

Under the proposals, larger seasoned issuers could offer securities

at any time as long as they file a registration statement before sale.

Other seasoned issuers could do the same when they make offerings to

relatively sophisticated or informed investors. The Commission staff

would not review these registration statements before effectiveness.

Those issuers and their underwriters would designate the effective

dates and have complete control over when they offer and sell in those

registered offerings. Their communications to the market and to

investors, while governed by antifraud and civil liability provisions,

would no longer be limited based on the filing or effectiveness of

their registration statements.

The proposals also would provide predictability to medium-sized

seasoned issuers that register offerings. The registration statements

they file to raise capital would become effective when they designate.

Those registration statements would not be subject to pre-effective

review by the Commission staff. Seasoned companies of any size would

benefit from the proposals as well. We would allow them to incorporate

Exchange Act disclosure in registration statements earlier than the

current rules permit. To provide greater certainty to small and medium-

sized issuers planning a registered offering, we also are proposing new

communication rules. One rule would provide that communications made by

or for such an issuer more than 30 days before the registration

statement is filed would not be treated as offers. Other proposed rules

would guide those issuers as to the types of communications that we

permit within that 30-day period.

Our proposals also would give issuers of all sizes and their

underwriters greater freedom to communicate with investors in writing

during the offering process. The proposed exemptive rules would allow

use of any document (not just the traditional prospectus) at any time

during an offering by a larger seasoned issuer or an offering to

sophisticated or informed investors by a smaller seasoned issuer. Those

``free writing'' communications would be subject to antifraud and civil

liability provisions. In all other offerings, the proposed exemptions

would allow an issuer and underwriter the same flexibility after the

issuer has filed a registration statement. The free writing proposals

would allow use of documents tailored specifically for the investors

reading them. Other proposed revisions would increase investor access

to analyst research reports. We would allow their distribution around

the time of an offering in more cases than permitted today.

The proposals affecting prospectus delivery in registered offerings

would re-focus those requirements for the benefit of investors.

Delivery of a prospectus or a term sheet would be required before

investors make their investment decisions rather than at the time a

sale is confirmed.

The proposals addressing the integration of offerings would provide

flexibility for issuers that have difficulty assessing the extent of

market interest in a planned offering. Those revisions would enable an

issuer to change an unregistered private offering into a registered

public offering, or vice versa, after it commences the offering. Small

companies that begin a registered public offering would still have the

option to make an unregistered, exempt offering to qualified buyers

even though they broadly solicited potential investors.

Finally, we are proposing various revisions to expedite and expand

some of the disclosure required in periodic reports filed under the

Exchange Act. Investors would have more timely access to company

disclosure.

DATES: You should send us your comments so that they arrive at the

Commission by April 5, 1999.

ADDRESSES: You should send 3 copies of your comments to Jonathan G.

Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth

Street, N.W., Stop 6-9, Washington, D.C., 20549. You also may submit

your comments electronically to the following electronic mail address:

[email protected]. All comment letters should refer to File No. S7-

30-98; this file number should be included in the subject line if you

use electronic mail. Comment letters will be available for public

inspection and copying at the Commission's Public Reference Room, 450

Fifth Street, N.W., Washington, D.C. 20549. We will post electronically

submitted comment letters on the Commission's Internet Web site (http:/

/www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Anita Klein at (202) 942-2980, Julie

Hoffman, Joseph Babits, Patricia Miller or Rani Doyle at (202) 942-

2900, or, with respect to small business issuer aspects, John Reynolds

at (202) 942-2950, Division of Corporation Finance, U.S. Securities and

Exchange Commission, Washington, D.C. 20549.1

---------------------------------------------------------------------------

\1\ The Commission also wishes to recognize the contributions to

this release of Jennifer Bethel.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

A. Registration System Reforms

1. Contents of Prospectuses

2. Timing of Registration

3. Underwriter Guidance

4. Small Business Issuers

B. Easing Restrictions on Communications

1. Issuer Communications

2. Safe Harbors for Research Reports

C. Prospectus Delivery Reforms

D. Public and Private Offering Flexibility

E. Periodic Reporting

II. History of Registration Under the Securities Act

A. Evolution of the Registration System

B. Review of the Capital Formation Process

III. Recent Reform Initiatives

A. Task Force Report

B. The Advisory Committee on Capital Formation

C. The Commission's Concept Release

D. The National Securities Markets Improvement Act

IV. Scope of the Proposals

V. Proposals Altering the Securities Act Registration Process

A. Form B Offerings

1. How Form B Works

a. Registration Statement Contents

i. Company Disclosure

ii. Transactional Disclosure

b. Free Writing Materials

c. Time of Filing

d. Becoming Effective

e. Delayed Shelf Offerings and Form B

2. Offerings Eligible for Registration on Form B

a. Offerings by Larger Seasoned Issuers

b. Offerings to QIBs

i. Advantages of Registered Offerings

ii. Limitations on QIB Purchases

iii. QIB Definition

iv. Other Reporting and Non-Reporting Issuers

[[Page 67175]]

c. Offerings to Certain Existing Security Holders

i. Dividend or Interest Reinvestment Plans

ii. Offerings to Existing Common Stock Holders

iii. Convertible Securities, Transferable Warrants and Rights

Offerings

iv. Exercise of Outstanding Transferable Options

d. Non-convertible Investment Grade Securities

e. Market Making Transactions by Affiliated Broker-Dealers

f. Small Business Issuers

g. Form B Disqualifications

h. Secondary Offerings

B. Form A Offerings

1. Structure of Form A

a. Part I--Information Required in the Prospectus

i. Cover Pages

ii. Transactional Information

iii. Company Information

(A) ``Seasoned'' Form A Issuers

(B) ``Unseasoned'' Issuers

b. Part II--Information Not in the Prospectus

2. Timing of Form A Offerings

a. Seasoned Issuers

b. Unseasoned Issuers

3. Solicitation of Comments on Definition of Form A Seasoned

Issuer

4. Disqualification for Seasoned Form A Companies

5. Real Estate Companies

C. Applicability of Civil Liability Provisions to Offerings

Registered on Proposed Forms A and B

1. Form A Offerings

2. Form B Offerings

a. Section 11

b. Section 12(a)(2)

c. Section 17(a) and Exchange Act Section 10(b)

D. Form C Offerings

1. Use of Form C

2. Relationship with Exchange Act Rules

3. Timing of Form C

4. Structure of Form C

a. Part I--Information Required in the Prospectus

i. Information About the Transaction

ii. Information About the Registrant

(A) Form B Eligible Registrants

(B) Seasoned Form A Registrants

(C) All Other Registrants

iii. Information About the Company Being Acquired

iv. Voting and Management Information

b. Part II--Information Not Required in the Prospectus

5. General Instruction G. of Form S-4

6. Small Business--Business Combinations

E. Small Business Issuers

1. Small Business Issuers' System

2. Re-defining ``Small Business Issuer''

3. Proposed Changes to Form SB-2

a. Conditions for Using Incorporation by Reference

b. How to Incorporate by Reference

c. Delivery of Exchange Act Reports

d. Other Changes to the Forms

4. Form SB-3

a. Use and Timing of Form SB-3

b. Structure of Form SB-3

i. Part I--Information Required in the Prospectus

(A) Information About the Transaction

(B) Information About the Registrant

(1) Transitional Small Business Issuers

(2) Seasoned Small Business Issuers

(3) All Other Small Business Issuers

(C) Information About the Company Being Acquired

(D) Voting and Management Information

ii. Part II--Information Not Required in the Prospectus

c. Request for Comments

5. Small Business Issuers that Become Reporting Companies

6. Small Business Issuer Registration Fees

F. MJDS Issuers

G. Foreign Government Issuers

H. Exxon Capital Transactions

I. The Offset of Filing Fees and Other Technical Changes to the

Calculation of Filing Fees

J. Solicitation of Comments Regarding Offerings Asset-Backed

Securities Offerings

VI. Concurrent Exchange Act Registration

VII. Communications During the Offering Process

A. Issuer Communications Relating to a Registered Offering

1. The Pre-Filing Period

a. Form B Registrants

b. Foreign Governments

c. All Other Registrants

i. Bright Line Communications Safe Harbor

ii. Communications Safe Harbor

(A) Factual Business Communications

(B) Regularly Released Forward-Looking Information

(C) Notice of Proposed Offerings

2. Communications During the Waiting Period

B. Filing Under EDGAR

C. Technology Implications of the Communications Proposals

D. Research Reports

1. Proposals in Connection With Registered Offerings

a. Rule 137

b. Rule 138

c. Rule 139

i. Form B and Schedule B Offerings

ii. All Other Offerings

iii. Focused Reports

iv. Consideration to Expand Rule 139 to IPOs and Offerings by

Unseasoned Issuers

v. Industry-Related Reports

vi. Section 17(b)

2. Proposals and Interpretation in Connection With Regulation S

and Rule 144A Offerings

3. Research and Proxy Solicitation

VIII. Prospectus Delivery

A. Congressional History

B. Commission History

C. Prospectus Delivery Proposals

1. Adequacy of Current Rules

2. Prospectus Delivery and Developments in Communications

3. Final Prospectus Delivery Exemption

a. Conditions to the Exemption

b. Business Combination and Exchange Offers

c. Rule 434 Final Prospectus Delivery Method

4. Delivery of Preliminary Prospectus Information

a. Form B Offerings

b. Offerings by Small or Unseasoned Issuers

c. Foreign Government Issuers

d. Canadian MJDS Issuers

e. Effectiveness and Prospectus Delivery

f. Secondary Offerings

5. Aftermarket Prospectus Delivery

a. Background of Aftermarket Prospectus Delivery

b. Aftermarket Underwriter Activities

c. Recent Case Law Relating to Aftermarket Delivery Obligations

d. Aftermarket Prospectus Delivery Proposals

6. Proposed Repeal of Rule 153

7. Record Keeping of Prospectus Delivery

IX. The Role of Underwriters

A. Legislative Shaping of the Underwriters' Role

B. Case Law Interpretation of the Underwriter's Role

C. Commission Interpretation of the Underwriters' Role

D. Proposed Guidance on Underwriter Due Diligence

1. Proposed Practices Reflect Current Practice

2. The Role of Analysts

3. Other Due Diligence Practices

a. Disclosure Review by an Issuer's Independent Accountants

b. Disclosure Review by an Independent Qualified Professional

E. Interpretation of the Guidance

F. Investment Grade Debt Offerings

G. Requests for Comment on the Proposed Guidance

H. Liability Safe Harbor

X. Integration of Registered and Unregistered Offerings

A. The Integration Doctrine

B. Rule 152

C. Proposed Safe Harbors for Completed and Abandoned Offerings;

Related Rule Proposals

1. Completed Offerings

a. Issuer Transactions

b. Resale Transactions

c. Lock-up Agreements

2. Abandoned Offerings

a. Private to Public

b. Public to Private

3. Definition of Private Offering

D. Proposed Changes to Rule 477

XI. Proposals Relating to Exchange Act Disclosure

A. Annual and Quarterly Reports

1. Risk Factor Disclosure

2. Due Dates for Annual Reports of Foreign Private Issuers

3. Treating Quarterly Information as ``Filed''

4. Request for Comment on Management Report to Audit Committee

B. Interim Reports on Form 8-K

1. Timely Disclosure of Annual and Quarterly Results of Domestic

Companies

a. Form 8-K Requirement for Item 301 Information

b. Solicitation of Comment on Whether Accelerate Due Dates

2. Other Reporting Events

a. Material Modifications to the Rights of Security Holders

[[Page 67176]]

b. Departure of the CEO, CFO, COO or President

c. Material Defaults on Senior Securities

d. Reliance on Prior Audit

e. Name Changes

f. Due Dates for Reporting Events

C. Signatures

1. Exchange Act Reports and Registration Statements

2. Securities Act Filings

D. Form 6-K Submissions

E. Solicitation of Comment Regarding Plain English in Exchange

Act Reports

XII. Staff Review Policy

A. Notification of Selection for Review

B. Voluntary Pre-Review of Filings

XIII. Request for Comments About Investment Company

Issuers and Market Value Adjustment Contracts

A. Investment Company Issuers

B. Market Value Adjustment Contracts

XIV. Cost-Benefit Analysis

A. Impact on Investors

B. Impact on Issuers

C. Impact on Other Parties

XV. Initial Regulatory Flexibility Analysis

A. Reasons and Objectives for Proposed Action

B. Objectives and Legal Basis

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping and Other Compliance Requests

E. Significant Alternatives

F. Overlapping or Conflicting Federal Rules

XVI. Paperwork Reduction Act

XVII. General Request for Comments

XVIII. Statutory Basis

I. Executive Summary

Through the Securities Act registration system, issuers and

underwriters reach out to the public and sell securities. The

registration system provides investors with the dual benefits of: full

and fair disclosure (or effective remedies if there is faulty

disclosure), and freely tradeable securities. Registration also

benefits the markets at large by providing everyone with access to the

most up-to-date information about the company making the offering. This

disclosure is significant both to the market, for accuracy in pricing,

and to the individual investor, for determining the suitability of the

investment. Today's proposals are based on a recognition that investors

will receive these benefits of registration only if the Commission

continues to make the registration system flexible enough to be a

viable alternative in the capital markets of today and the future.

A. Registration System Reforms

Our reforms to the registration system are designed to make

registration more attractive to issuers without compromising investor

protection. We believe that registration benefits all participants:

issuers, by lowering their cost of capital; investors, by enhancing

disclosure and providing remedies; and the marketplace, by increasing

depth and liquidity.

In 1990, the Commission adopted Rule 144A which permits

unregistered sales to and by qualified institutional buyers

(``QIBs'').2 Since then, this institutional market, which

exists virtually side-by-side with the public market, has expanded

significantly. Recent data illustrates the size of this parallel

market: in 1997, Rule 144A offerings comprised 17% of all offerings on

a dollar basis, including 21% of all equity and 16% of all

debt.3 In some types of securities, the Rule 144A market has

become predominant. In 1997, 76% of the high-yield debt, 72% of the

convertible investment grade debt, and 10% of the non-convertible

investment grade debt were issued for the Rule 144A market.4

---------------------------------------------------------------------------

\2\ ``Qualified institutional buyers'' is defined in Securities

Act Rule 144A(a)(1), 17 CFR 230.144A(a)(1). Even though some

proportion of the Rule 144A securities are eventually registered,

the investor benefits of registration are not maximized. It is not

uncommon for securities sold in Rule 144A transactions to end up in

the public market because they are registered for resale or

exchanged for registered securities in ``Exxon Capital''

transactions (named after the Commission staff interpretive letter

sanctioning the practice).

\3\ Securities Data Corp's New Issues Database. Virtually all of

that market share has moved to the Rule 144A market in the last 5

years. Rule 144A is not available for securities listed on a

national securities exchange or quoted on a U.S. automated inter-

dealer quotation system.

\4\ Non-convertible investment grade debt is eligible for short-

form registration under our current system, whereas the other two

categories are not.

---------------------------------------------------------------------------

Our proposed reforms seek to apply the issuer advantages of

offering securities in the private and Rule 144A markets--timing and

disclosure flexibility--to the public market. We believe that, as a

result, more offerings will be registered.

We propose to create a three-tiered registration system for

offerings consisting of: Form A, Form B and Form C. Form A offerings

generally would be those made by smaller or unseasoned companies. Form

B offerings would be those made by larger, seasoned, well-followed

issuers and those made to relatively informed or sophisticated

investors. Form C offerings would relate to business combinations or

exchange offers. Today the Commission also is publishing a companion

release regarding the regulation of takeovers, including tender offers,

mergers and other extraordinary transactions. You should read that

release for a detailed discussion of the regulation of business

combinations and exchange offers registered on Form C.5

---------------------------------------------------------------------------

\5\ Exchange Act Release No. 40633 (Nov. 3, 1998).

---------------------------------------------------------------------------

1. Contents of Prospectuses

Current requirements strictly mandate the content of an offering

prospectus. Because we believe that larger seasoned issuers attract a

large market following and operate in an efficient market, we are

considering providing them with a larger measure of flexibility to

craft disclosure about their offerings. We are asking for comment on

two alternative proposals for Form B offerings. The first, while

requiring all material transactional disclosure, would limit the

itemized requirements for such disclosure. The second would continue to

require all itemized transactional disclosure. Under both proposals, we

would continue to mandate that issuers incorporate by reference the

current itemized company information in their periodic reports. Thus,

we would maintain the same standards for information about the company

while we seek comment on the level of freedom to allow the issuer and

the underwriter when crafting information about the offering itself.

Where the issuer or its representative uses disclosure to promote

sales in the offering, it would have to file that disclosure, which

would be subject to civil liability provisions prohibiting material

misstatements and omissions. This ``inclusive prospectus'' approach

would reflect the reality that investment decisions in these offerings

would be based on more than the information contained in a single

disclosure document.

By shifting some itemized disclosure requirements to materiality-

based requirements, as one of our proposals would permit, we seek to

discourage drafters from just routinely providing the boilerplate

transactional disclosure that some have suggested the standardized

disclosure items have evoked. This alternative would re-focus drafters

on analyzing and including the information particular to that deal that

is material to investors. More focused disclosure could result.

On the other hand, under our alternative proposal, all current

transactional disclosure requirements specified in Regulation S-K that

are in Form S-3 and/or Form F-3 would continue to apply. This

alternative would provide investors with more certain core

transactional information.

Under either proposal, issuers and third party participants such as

underwriters and auditors would continue to ensure the quality of

disclosure due to both market pressures and their legal responsibility

to do so. We believe that analysts and the financial press, among

others, also will

[[Page 67177]]

test the accuracy of disclosure by larger, seasoned

issuers.6 By allowing issuers some more freedom to craft

their transactional disclosure and communicate with investors in Form B

offerings for which there is evidence of an efficient market, we also

hope to reduce selective disclosure by allowing access to more

information.

---------------------------------------------------------------------------

\6\ We recognize that analysts, especially so-called ``sell-

side'' analysts, have inherent conflicts of interest. There is a

risk that impartiality may be compromised when their firms seek to

participate in the issuers' distributions. We believe, nevertheless,

that analysts in general, and the expanding ``buy side'' analysts in

particular, are in a unique position to gather and analyze

information about issuers. They represent an undeniably significant

method of corporate disclosure and dissemination.

---------------------------------------------------------------------------

We are considering the same alternative approaches to disclosure in

offerings limited to sophisticated investors and in offerings to

investors with a pre-established relationship with the issuer.

Historically, we have given issuers more flexibility in these types of

offerings on the theory that these purchasers are able to fend for

themselves.

For smaller issuers or unseasoned issuers of any size, we believe

that the current strict itemization of transactional information in the

prospectus remains important to the dissemination of adequate offering

information. Some of those issuers would have little experience with

crafting offering disclosure and the same market scrutiny is not

present. We would therefore maintain all current itemized offering

disclosure requirements in Form A. We would, however, allow more

freedom for seasoned smaller issuers to rely on their periodic reports

for disclosure about their companies in an offering. In the case of

business combinations and exchange offers on Form C, we would maintain

the itemized requirements for transactional disclosure.

2. Timing of Registration

Under the revised registration system, issuers would have complete

flexibility in timing the registration of Form B offerings. By

operation of rule, those registration statements would become effective

at the issuer's discretion, either immediately upon filing or at

whatever later date and time the issuer chooses. The staff would not

review these registration statements before the offering or take action

to make the registration statement effective. Form B registration

statements would be screened by the Commission staff shortly after

receipt by the Commission to determine whether the offering was

eligible for registration on Form B and whether the disclosure raises

any ``red flags'' concerning the antifraud provisions of the federal

securities laws. Therefore, the only timing constraint for Form B

offerings would be the statutory requirement that the registration

statement must be effective before the first sale. We are not proposing

to exempt issuers from that requirement because, among other reasons,

filing of a final prospectus would ensure prompt disclosure to the

market about the offering.

We would continue to require that issuers registering offerings on

Form A file a registration statement before making their first offer.

The Commission staff would continue to review all initial public

offerings and selectively review repeat offerings by smaller,

unseasoned issuers. We would, however, allow seasoned medium-sized

issuers to control the timing of registration in their Form A

offerings. We also would allow certain other Form A issuers that

incorporate recent Exchange Act reports that have been fully reviewed

by the Commission staff to control the timing of their offerings. Those

filings, like Form B offerings, would be screened (but not reviewed) by

the staff shortly after receipt.

We believe that this increased flexibility in the timing of

registration will encourage issuers to register more offerings and thus

extend the investor protection benefits of registration to more

purchasers. Further, although offerings by these issuers that we would

not review under the proposed system are currently subject to staff

review, these reforms essentially mirror current practice with respect

to review of what would be Form B-type filings and recently examined

Form A-type filings.

3. Underwriter Guidance

In connection with the proposed registration system, we would add a

new provision to the Securities Act rule concerning due diligence. That

rule currently lists circumstances to consider in deciding whether a

person has met the ``reasonable investigation'' and ``reasonable ground

for belief'' standards that apply in defending against liability under

Section 11 of the Securities Act. The new provision would cover only

certain Form B offerings completed on an expedited basis and would

expand upon the existing guidance in the rule to reflect current

practices.

4. Small Business Issuers

For purposes of registration and reporting, we are proposing to

revise the definition of ``small business issuer'' to increase the

number of companies qualifying as small business issuers. We would

raise the annual revenues ceiling from $25 to $50 million and remove

the public float limitation. We propose to update the definition to

reflect significant economic and market changes that have occurred in

the six years since we adopted the definition. Also, our successful

experience with the small business disclosure system indicates that we

could classify companies with higher revenues as small business issuers

while at the same time maintaining investor protection. To provide

small businesses with greater flexibility in raising capital, we also

propose to delay the time at which they must pay registration fees,

allow earlier incorporation by reference of their Exchange Act reports

and allow increases in the size of their offerings in an expedited

fashion.

B. Easing Restrictions on Communications

Our proposals would loosen the strict controls that exist today on

communications to investors and the market around the time of an

offering. Our intent in proposing the communications reforms is to

ensure that investors and the market have greater access to more timely

information, which we believe is the foundation of investor protection.

We are not proposing any diminution in the remedies that would be

available to investors in the event of defective disclosure made by or

on behalf of an issuer around the time of an offering.

1. Issuer Communications

The extent to which we would ease communications by the issuer or

deal participants depends on the type of offering. For Form B

offerings, we would allow oral and written communications in any format

at any time regardless of whether the offering is imminent or ongoing.

Of course, the antifraud provisions and civil liability provisions of

the securities laws would apply to those communications and provide the

necessary investor protections.

In Form A offerings on the whole, we have less reason to assume

that plentiful, thoroughly scrutinized issuer information is available.

A barrage of sales-related communications could affect prospective

investors, especially if those communications are the only ones

publicly available. The greatest need for investor protection in that

case would occur before the investor has access to reliable, balanced

prospectus disclosure. Thus, for these offerings, we propose to

maintain the prohibition on offers prior to filing a registration

statement. Once the issuer's prospectus is on file with

[[Page 67178]]

the Commission, however, our proposals would lift existing restrictions

on written communications for Form A offerings because an investor

would be able to test the sales materials against the registration

statement. Moreover, our proposals on prospectus delivery would ensure

timely delivery, not just access, to this more balanced information.

For the period before filing the registration statement, we propose

to create greater certainty about the timing and scope of remaining

restrictions on communications. We are aware that the restrictions on

communications before a filing have been criticized as unclear. This is

especially true due to the recent increased use of the Internet.

Consequently, we are proposing a bright-line rule that would define the

30 days immediately before filing the registration statement as the

period during which communications would be limited due to the upcoming

offering. In addition, our proposed rules provide that, even during

that 30-day limited communications period, issuers could disclose

factual business information and regularly released forward-looking

information. Our proposals also would permit issuers to announce

limited offering information during the 30-day period without

indicating whether the offering will be registered or exempt.

2. Safe Harbors for Research Reports

For Form B offerings and many Schedule B offerings by foreign

governments, the proposals would allow analysts to publish research

reports without any interruption due to the registered offering. For

other offerings, we propose expanded safe harbors to make it easier for

analysts to report about foreign government issuers and smaller,

unseasoned companies. We also are proposing to expand those safe

harbors to address the distribution of research reports in connection

with Regulation S and Rule 144A offerings.

C. Prospectus Delivery Reforms

To provide investors with the maximum benefit from prospectus

disclosure, the proposals re-focus prospectus delivery requirements on

when the prospectus is needed most: before investors make an investment

decision. Where we would require that offering participants deliver

prospectus information earlier, we would allow them to decide whether

or not to deliver a final prospectus. Where they do not deliver a final

prospectus, we would require that they tell investors where they can

obtain it free of charge.

In Form B offerings, we would not require that offering

participants deliver a full prospectus. We would, however, require

earlier delivery of a ``securities term sheet'' outlining the key

features of the securities. Delivery of that securities term sheet

would precede the investment decision--when the investor gives its oral

or written commitment to purchase. We also are considering, as an

alternative for Form B offerings, requiring delivery of a prospectus

containing all mandated transactional information listed in Subpart 500

of Regulation S-K that would be contained in a short-form registration

statement today.

In Form A offerings by unseasoned issuers (issuers that have

registered their initial public offerings within the past year),

underwriters and dealers participating in the offering would have to

deliver a preliminary prospectus at least 7 days before the date of

pricing. In all other Form A offerings, issuers, underwriters and

participating dealers would have to deliver a preliminary prospectus at

least 3 days before the date of pricing. These requirements would

ensure that investors that are offered securities of smaller,

unseasoned issuers have more time in which to assess the disclosure.

Issuers and other participants in Form A offerings also would have to

inform investors no later than 24 hours before pricing about any

material change that has occurred since they delivered prospectuses.

D. Public and Private Offering Flexibility

Today's capital markets can change quickly. Companies, especially

small businesses, may find that the desirability of making a public

offering versus a private offering can change just as quickly. Current

rules prevent most companies from changing their minds in a timely

fashion once they have started an offering one way. Our proposals would

remove most of those impediments. Under the proposed safe harbor, if an

issuer started to register a public offering but then decided to

abandon it, the issuer could withdraw the registration statement and

either wait 30 days to sell privately or sell privately sooner and

accept a higher liability standard for written disclosure provided to

purchasers.

Similarly, if an issuer started a private offering but then decided

to abandon it, the issuer could file a registration statement for a

public offering immediately unless it had offered the securities to

persons that would not have been eligible to buy in a private offering

under Securities Act Section 4(2). In that event, the issuer would have

to wait for 30 days after abandoning the private offering to file its

registration statement.

This safe harbor would be particularly useful to small issuers. It

would allow a small private company to ``test the waters'' for a public

offering of its securities through this mechanism. Doing so would not

prevent the small issuer from selling privately if it finds too few

investors to make it worthwhile to become a public company. Similarly,

small issuers that find more investor interest than expected could

change from a private offering to a registered public offering.

E. Periodic Reporting

We are proposing several changes to Exchange Act disclosure

requirements, some of which the Advisory Committee on Capital Formation

and Regulatory Processes recommended. These changes would require

issuers to report annual and quarterly financial results sooner, to

make and update risk factors disclosure in their Exchange Act reports,

to accelerate the due dates for some Form 8-K reports and to expand the

events about which Form 8-K requires a report. The changes also would

require persons signing Exchange Act filings to indicate that they have

reviewed the disclosure and, to their knowledge, the registration

statement or report does not contain any untrue statement of a material

fact or omit to state a material fact necessary in order to make the

statements made, in light of the circumstances under which they were

made, not misleading. These Exchange Act disclosure reforms would

provide key investor protections in a further streamlined registration

process. Additionally, if the proposed registration system is adopted,

the Commission envisions shifting staff resources to the review of

Exchange Act filings.

II. History of Registration Under the Securities Act

The Securities Act and the regulations thereunder have long

provided the foundation for a capital-raising system of unparalleled

integrity, fairness, and liquidity. The regulatory scheme seeks to

ensure that investors receive full and fair disclosure with respect to

securities offerings by issuers and their affiliates.

The Securities Act was adopted in response to the activities

culminating in the 1929 market crash.7 President

[[Page 67179]]

Franklin D. Roosevelt articulated the underlying philosophy of

regulating securities offerings which continues today:

\7\ The Securities Act was the first of six securities statutes

to be enacted during the 1933-1940 period. The other five acts

include: the Securities Exchange Act of 1934, Pub. L. No. 73-291, 48

Stat. 881 (1934) (codified as amended at 15 U.S.C. Secs. 78a-78kk

(1994, Supplemented 1996)); the Public Utilities Holding Company Act

of 1935, Pub. L. No. 74-333, 49 Stat. 803 (1935) (codified as

amended at 15 U.S.C. Secs. 79-79z-6 (1994, Supplemented 1996)); the

Trust Indenture Act of 1939, Pub. L. No. 76-253, 53 Stat. 1149

(1939) (codified as amended at 15 U.S.C. Secs. 77aaa-77bbbb (1994,

Supplemented 1996)); the Investment Company Act of 1940, Pub. L. No.

76-768, 54 Stat. 789 (1940) (codified as amended at 15 U.S.C.

Secs. 80a-1-80a-64 (1994, Supplemented 1996)); and the Investment

Advisors Act of 1940, Pub. L. No. 76-768, 54 Stat. 847 (1940)

(codified as amended at 15 U.S.C. Secs. 80b-1-80b-21 (1994,

Supplemented 1996)).

---------------------------------------------------------------------------

[t]here is * * * an obligation upon us to insist that every

issue of new securities to be sold in interstate commerce shall be

accompanied by full publicity and information, and that no

essentially important element attending the issue shall be concealed

from the buying public.8

\8\ H.R. Rep. No. 85, 73d Cong. 1st Sess., at 1-2 (1933).

---------------------------------------------------------------------------

Congress has made relatively few broad-reaching amendments to the

Securities Act since its inception. In administering the statute, we

strive to be responsive to changing markets and capital-raising

practices. Over the years, the Commission has interpreted the statute

through rules and regulations to give continuing life to the original

statute.

A. Evolution of the Registration System

Modern efforts at reforming registration stem in part from a

commentary on Securities Act regulation published in 1966. In his

article, ``Truth in Securities,'' Milton H. Cohen theorized 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* * *.9

---------------------------------------------------------------------------

\9\ Cohen, ``Truth in Securities'' Revisited, 79 Harv. L. Rev.

1340, 1341 (1966).

Cohen argued for a coordinated disclosure system having as its basis

the continuous disclosure system of the Exchange Act with the

Securities Act disclosure requirements built upon it.\10\ The

Commission soon thereafter instituted a study, chaired by Commissioner

Francis M. Wheat, to examine disclosure to investors.11 The

Wheat Report, published in 1969, recommended expanded periodic

disclosure under the Exchange Act and the coordination of the

disclosure requirements of the Securities Act and the Exchange

Act.12

---------------------------------------------------------------------------

\10\ Id. at 1342.

\11\ Disclosure to Investors--A Reappraisal of Administrative

Policies Under the 1933 and 1934 Acts, Report and Recommendations to

the SEC from the Disclosure Policy Study (Mar. 27, 1969)

[hereinafter ``Wheat Report''].

\12\ The securities bar also acted upon the ideas in Cohen's

article. The American Law Institute commissioned several industry

experts, led by Professor Louis Loss, to combine all six federal

statutes into one comprehensive code, American Law Institute,

Federal Securities Code (1980) (the ``ALI Code''). See also Loss,

The American Law Institute's Federal Securities Code Project, 25

Bus. Law. 27 (1969). Upon its completion ten years later in 1980,

the Commission and many in the securities industry expressed support

for the ALI Code. See Securities Act Release Nos. 6242 (Sept. 18,

1980) [20 S.E.C. 1483 (1980)] and 6377 (Jan. 21, 1982) [24 S.E.C.

Docket 788 (1961)] (releases stating and reaffirming support for the

ALI Code). See also Coffee, Re-Engineering Corporate Disclosure: The

Coming Debate Over Company Registration, 52 Wash. & Lee L. Rev.

1143, 1145 (1995). The ALI Code was in turn presented to Congress.

Congress, however, took no action with respect to the ALI Code.

---------------------------------------------------------------------------

The Commission followed up on the Wheat Report by adopting a short-

form Securities Act registration statement. That registration statement

permitted incorporation by reference of Exchange Act reports by larger

issuers and in specified types of offerings.13 This approach

allowed companies to avoid reiterating in their registration statements

the company disclosure contained in annual and other periodic reports.

---------------------------------------------------------------------------

\13\ Securities Act Release No. 5117 (Dec. 23, 1970) [36 FR

777].

---------------------------------------------------------------------------

In 1977, the Commission adopted Regulation S-K, which began the

effort to establish a single set of disclosure requirements for issuers

under both the Securities Act and the Exchange Act.14 That

effort was substantially completed with the adoption of the

``Integrated Disclosure System'' in 1982.15 The Commission's

integrated disclosure system eliminated overlapping and unnecessary

disclosure required by the Securities Act and the Exchange Act.

---------------------------------------------------------------------------

\14\ Securities Act Release No. 5893 (Dec. 23, 1977) [42 FR

65554]. As originally adopted, Regulation S-K contained only two

items: ``Description of Business'' and ``Description of Property.''

\15\ Securities Act Release No. 6383 (Mar. 3, 1982) [47 FR

11380]. In that release, the Commission stated that ``in reliance on

the efficient market theory'' Form S-3 would allow for maximum use

of incorporation by reference [47 FR at 11382].

---------------------------------------------------------------------------

The Commission also adopted the modern-day ``shelf registration''

system in connection with the integrated disclosure

system.16 That permits registration of securities offerings

that are conducted on a delayed basis sometime after the effective

date.17 In 1992, the Commission extended short-form and

shelf registration to smaller issuers and new offerings, including

asset-backed securities offerings.18 The Commission also

permitted registration of shelf offerings without requiring that the

amount of securities be allocated upon registration to specific classes

of the issuer's securities. This approach permitted issuers to decide

as late as the point of sale which of its securities to use.

---------------------------------------------------------------------------

\16\ Temporary Rule 415 was adopted in March of 1982. Securities

Act Release No. 6383 (Mar. 3, 1982). In November of 1983, the

Commission announced the adoption of a revised shelf registration

rule. Securities Act Release No. 6499 (Nov. 17, 1983) [48 FR 52889].

\17\ See Securities Act Release No. 6499 (Nov. 17, 1983) and

Securities Act Rule 415, 17 CFR 230.415. Short-form registration is

used for delayed shelf offerings.

\18\ Securities Act Release No. 6964 (Oct. 22, 1992) [57 FR

32461].

---------------------------------------------------------------------------

Another significant change in the registration system occurred with

the Commission's adoption in 1990 of Rule 144A.19 Rule 144A

provides a safe harbor from registration for resales of restricted

securities to QIBs. By creating certainty about when registration is

not required in these transactions, the Commission enhanced the

attractiveness of alternatives to registration of

securities.20

---------------------------------------------------------------------------

\19\ Securities Act Release No. 6862 (Apr. 23, 1990) [55 FR

17933].

\20\ According to Securities Data Co., the deal value of Rule

144A private placements in 1997 was $254.4 billion, approximately

$83 billion of which was raised by foreign issuers. Tibbitts,

Private Placement Volume Explodes as Structured Deals Rule 144A

Market, Investment Dealers' Digest, Feb. 2, 1998. The amount of non-

convertible bonds issued in the Rule 144A market in the first

quarter of 1998 ($30 billion) is almost equal to the entire amount

(equity, preferred and debt) placed in the Rule 144A market from its

inception in 1990 to the end of 1992 ($31 billion).

---------------------------------------------------------------------------

B. Review of the Capital Formation Process

Both within and outside the Commission, debate periodically has

centered on the Securities Act and the best way to regulate the

securities offering process. Over the years, industry participants,

academics and Commission members have voiced opinions that there are

strains in the regulatory framework and have called for changes. Their

proposed solutions have ranged from minor rule changes to the abolition

of the Commission.

There also has been recent discussion about the extent to which the

regulatory system requires an overhaul in the face of the ever-changing

market and offering practices.21 Factors identified as

causing strain in the current regulatory regime include:

---------------------------------------------------------------------------

\21\ Compare Merrill Lynch comment letter (Oct. 31, 1996)

(``[W]e believe that what the registration process needs today is a

tune up, not an overhaul.'') with American Bar Ass'n comment letter

(Dec. 11, 1996) (``[T]he time has come to recognize that the current

jury-rigged system requires fundamental reforms.''). These letters

are available for inspection and copying in the Commission's public

reference room. Refer to File No. S7-19-96.

---------------------------------------------------------------------------

1. Technological developments in the field of electronic

communications; 22

---------------------------------------------------------------------------

\22\ See, e.g., Report to the Congress: The Impact of Recent

Technological Advances on the Securities Markets, (Sept. 1997). That

Report, like all Commission reports issued after 1996, is available

on the Commission's Internet web site (http://www.sec.gov).

---------------------------------------------------------------------------

[[Page 67180]]

2. The gradual erosion of traditional distinctions between public

and private offerings; 23

---------------------------------------------------------------------------

\23\ See, e.g., Keller, Securities Act Concepts: The Private/

Public Offering Dichotomy and Proposals for Reform, Mass. Continuing

Legal Educ., 15 Ann. Bus. & Sec. L. Conf. (Oct. 31, 1997).

---------------------------------------------------------------------------

3. Novel financing instruments, methods of capital-raising and risk

management initiatives; 24 and

---------------------------------------------------------------------------

\24\ Seligman, The Obsolescence of Wall Street: A Contextual

Approach to the Evolving Structure of Federal Securities Regulation

93 Mich. L. Rev. 649, 666-72 (1995). See also Securities Act Release

No. 7386 (Jan. 31, 1997) [62 FR 6044].

---------------------------------------------------------------------------

4. Regulatory initiatives that reduce other market risks, such as

the T+3 clearance and settlement system.25

---------------------------------------------------------------------------

\25\ See, e.g., Securities Act Release No. 7168 (May 11, 1995)

[60 FR 26604].

---------------------------------------------------------------------------

III. Recent Reform Initiatives

The Commission has been cognizant of the call for change in the

regulatory framework governing the capital formation process. For the

last several years, the Commission has been actively reevaluating the

current registration system. Recent Commission steps in that process

have included: the March 1996 Report of the Task Force on Disclosure

Simplification (the ``Task Force''); the July 1996 Report of the

Commission-impaneled Advisory Committee on the Capital Formation and

Regulatory Processes (the ``Advisory Committee''); and the Commission's

Securities Act Concept Release in July 1996 (the ``Concept

Release'').26

---------------------------------------------------------------------------

\26\ Securities Act Release No. 7314 (July 31, 1996) [61 FR

40044].

---------------------------------------------------------------------------

A. Task Force Report

The Commission's Task Force was organized in August 1995 to conduct

a broad-based review of existing disclosure requirements to identify

outdated or unnecessary requirements that clutter the regulatory

framework. That review encompassed the forms and rules relating to:

capital-raising transactions; periodic reporting pursuant to the

Exchange Act; proxy solicitations and tender offers; and beneficial

ownership reports under the Williams Act. The goal was to simplify the

disclosure process, consistent with investor protection, by eliminating

unnecessary requirements.27 In its March 1996 report, the

Task Force recommended that the Commission eliminate or modify a

quarter of the rules and half the forms. To this end, the Commission

has abolished 45 rules and 6 forms.28

---------------------------------------------------------------------------

\27\ The Task Force met with issuers, investor groups,

underwriters, accounting firms, lawyers, and others who participate

daily in the capital markets. The Task Force reported that none of

the participants suggested wholesale deregulation, and virtually all

emphasized the importance of the Commission's basic regulatory goals

to preserve orderly markets. See Task Force Report at pp. 1-6.

\28\ Securities Act Release No. 7300 (May 31, 1996) [61 FR

30397] and Securities Act Release No. 7431 (July 18, 1997) [62 FR

39755]. These releases are available on the Commission's Internet

web site (http://www.sec.gov).

---------------------------------------------------------------------------

B. The Advisory Committee on Capital Formation

The Advisory Committee was established in 1995 by the Commission

and chaired by then-Commissioner Steven M.H. Wallman. The Advisory

Committee's objective was to evaluate the efficiency and effectiveness

of the regulatory process relating to public offerings of securities,

secondary market trading, and corporate reporting. After 18 months of

study, the Advisory Committee published a report in 1996 calling for

reform. Its primary recommendation was that the Commission further its

integrated disclosure system by implementing a ``company registration''

concept first envisioned by the ALI's Federal Securities Code. The

report advocated refocusing the registration system on registration not

of transactions, but of companies, with greater reliance on periodic

disclosure than prospectus disclosure. The Advisory Committee suggested

that the Commission implement the concept as a pilot program for larger

companies.

C. The Commission's Concept Release

In light of diverse developments in the markets and the work of the

Advisory Committee and Task Force, the Commission published the Concept

Release on offering regulation in July 1996. In the Concept Release,

the Commission announced that it was reexamining the application of the

Securities Act and the rules thereunder to securities offerings. The

Concept Release sought comment on the best methods for eliminating

unnecessary obstacles to capital formation while improving the quality

and timing of disclosure and, therefore, investor protection. The

Commission focused its questions in the Concept Release on broad

concepts underlying Securities Act regulation. They included:

Whether investors are receiving all material information

in a timely manner in the offering process;

Whether limitations on the use of written communications

other than the statutory prospectus during the offering process ought

to be eased;

Whether the speed of takedowns of securities under the

Commission's shelf registration system results in procedures that do

not adequately inform the market;

Whether the role of independent gatekeepers in the

offering process needs to be reconfigured to work in conjunction with

issuers' quick access to capital; and

Whether the periodic disclosure under the Exchange Act

needs improvement.

The Commission also asked questions in the Concept Release about the

Advisory Committee's company registration idea and suggestions about

regulatory reform that had been made by others. The Commission received

55 comment letters in response to its requests.29

---------------------------------------------------------------------------

\29\ Those letters and a summary of them may be read and copied

at the Commission's Public Reference Room, 450 Fifth Street N.W.,

Washington, D.C. 20549. Refer to File No. S7-19-96.

---------------------------------------------------------------------------

D. The National Securities Markets Improvement Act

Following the publication of the Concept Release, the National

Securities Markets Improvements Act of 1996 (``NSMIA'') was

enacted.30 This legislation was designed to update the

securities laws to promote investment, decrease the cost of capital,

and encourage competition. To this end, Congress granted the Commission

for the first time general exemptive authority under the Securities

Act.31 In order to exercise our new exemptive authority,

NSMIA requires us to find that such action is ``necessary or

appropriate in the public interest and consistent with the protection

of investors.'' 32 That exemptive authority gives the

Commission substantial additional flexibility in administering the

Securities Act. Congress believed that this additional flexibility

would allow the Commission to adopt more easily new approaches to

registration and disclosure in order to promote efficiency, competition

and capital formation.33

---------------------------------------------------------------------------

\30\ Pub. L. No. 104-290, 104th Cong., 2d. Sess. (1996).

\31\ See Section 28 of the Securities Act, 15 U.S.C. Sec. 77z-3.

\32\ 15 U.S.C. Sec. 77z-3.

\33\ H.R. Rep. No. 104-622, 104 Cong. 2d Sess. at (1996).

---------------------------------------------------------------------------

After the enactment of NSMIA, the Commission began to study

possible reform of the regulatory structure for offerings even more

broadly. For the past two years, the Commission staff has researched

and studied the existing regulatory system and possible improvements

that could be made to it. Some of our proposals rely upon our new

exemptive authority.

[[Page 67181]]

IV. Scope of the Proposals

The Commission is proposing a variety of revisions to the current

regulatory structure for securities offerings.34 While many

revisions address problems identified by offering participants, the

overall goal of the proposed reforms is to make the registration system

more workable for issuers and underwriters and more effective for

investors in today's capital markets. In the last decade, the

Commission has seen the results of a registration structure that has

been perceived as having too much rigidity to comport with the

realities of modern global markets. Sellers have used to their fullest

extent available methods of offering without registration.

Increasingly, they have tried to create new ways around registration

strictures. They also have stretched the boundary between registered

and exempt offerings in seeking to acquire the benefits of both. Where

registration has taken place, too many offerings have been accomplished

with a divergence between the disclosure about the transaction in the

registration statement and the disclosure actually used to convince

investors to buy.

---------------------------------------------------------------------------

\34\ The proposals do not purport to affect any rules or

regulations imposed by self-regulatory organizations in connection

with securities offerings.

---------------------------------------------------------------------------

A large share of the stress on the registration structure in recent

years has stemmed from the issuers' and underwriters' need to raise

capital on a schedule that they can control. Our proposals seek to

fulfill that need through the registration system where consistent with

investor protection. In addition, the speed at which offerings are

accomplished today, and the limitations on communications imposed by

the statute, have called into question whether investors are being

informed in a timely manner. Rather than continuing the statute's

``exclusive prospectus'' approach to disclosure, our proposals take an

``inclusive'' approach to disclosure. We seek to ensure that material

information is within the reach of investors when they need it most. We

also seek to lessen the gap in offerings done quickly between the

disclosure about the offering actually being used to sell the

securities and the disclosure that is filed with the Commission in a

registration statement. Overall, the revisions should create a more

flexible registration system under which public offerings proceed with

benefits to both buyers and sellers.

Our proposals are primarily focused on the structure of the

regulation of offerings; they are not primarily focused on the contents

of disclosure requirements. In the process of considering structural

reform, however, the Commission has recognized that it needs to study

whether the specific disclosure that is mandated both in Exchange Act

periodic reports and Securities Act registration statements should be

re-focused to serve the investing public better. As a result, the

Commission's reform work is not done. The next step in our ongoing

process will be to revisit the quantity and quality of required

disclosure.

V. Proposals Altering the Securities Act Registration Process

A principal premise of the existing Securities Act registration

system is that a prospectus containing mandated disclosure should be

virtually the exclusive written document used to offer the securities.

In the years since adoption, especially with the recent explosion of

information technology, this exclusivity premise is less a reality than

a theory, at least for certain offerings and issuers. We believe that

it is time to recognize that a different approach would be better for

those offerings.

For larger seasoned issuers, communications made around the time of

a typical registered offering, whether or not part of a traditional

prospectus, provide the basis for investment decisions in the offering.

Those issuers are well followed by the market and the important

statements that they make are quickly disseminated and considered by

investors even when the issuers are not making an offering. When they

are making an offering, any communication those issuers and other

offering participants make is of even greater interest to the markets.

For those issuers, therefore, we propose a transformation from the

``exclusive'' prospectus approach to the ``inclusive'' prospectus

approach as a means of facilitating informed investment decisions. That

approach would embrace as part of the registration system all

information used by or on behalf of the issuer during the offering

period that would be material to an investor in the offering. All

investors in the offering would receive or have access to such

information as well as the required material company and transactional

disclosure. The proposed system would maintain investor protection by

subjecting this information to the antifraud and civil liabilities

provisions of the Securities Act and the Exchange Act.

For most offerings by smaller or unseasoned issuers, and in

business combinations and exchange offers, we would primarily rely on

the current mandated prospectus to provide written offering

communication to investors, although there too we would allow them more

freedom to communicate in any medium by means other than the

prospectus.35

---------------------------------------------------------------------------

\35\ See Section VII. of this release regarding proposed changes

in the regulation of offering communications.

---------------------------------------------------------------------------

The proposed system would have three main registration forms: Form

A for smaller issuers and larger unseasoned issuers, Form B for larger

seasoned issuers and offerings to relatively well-informed or

sophisticated investors, and Form C for business combinations and

exchange offers. Both domestic and foreign issuers would use each of

these Forms.36 Small business issuers would continue to be

permitted to use Form SB-1 and revised Form SB-2 for their offerings

and would have to use new Form SB-3 for business combinations and

exchange offers.

---------------------------------------------------------------------------

\36\ While disclosure for foreign private issuers currently is

made through a separate set of registration forms, we believe that

it would be simpler to formulate a single set of forms for both

foreign and domestic issuers. In doing so, foreign private issuers

registering on Form A would be subject to the same disclosure

requirements as they are currently. In Form B, foreign private

issuers would have at least as much flexibility as domestic issuers.

Through designations on the front of the registration forms, it will

be possible to track the use by foreign private issuers regardless

of whether they register on the same forms as domestic issuers.

---------------------------------------------------------------------------

The new forms reflect our understanding of when investors need

more, or less, mandated disclosure and when investors benefit from

access to information from more than one source. In addition, the

proposed divisions of issuers and offerings would create a system that

more accurately reflects when an efficient market exists and when an

issuer has a significant market following. The new system also would

enhance the use of Exchange Act disclosure to satisfy Securities Act

disclosure requirements.

A. Form B Offerings

1. How Form B Works

a. Registration Statement Contents

At the time of effectiveness, a Form B registration statement would

consist of:

A cover page with a calculation of registration fee table;

A prospectus that contains:

--Offering information;

--The registrant's Exchange Act reports, via incorporation by

reference;

--A foreign private issuer's Item 18 reconciliation (or Item 17, as

applicable) to U.S. GAAP (if not already in an incorporated

report);37

---------------------------------------------------------------------------

\37\ See Items 17 and 18 of Form 20-F.

---------------------------------------------------------------------------

[[Page 67182]]

--The securities term sheet; 38

---------------------------------------------------------------------------

\38\ See Section VIII.C.4.a. of this release for a discussion of

this securities term sheet and delivery requirements relating to it.

---------------------------------------------------------------------------

--Undertakings to provide investors upon their request, and free of

charge, with information incorporated by reference but not delivered.

Signatures;

Selected exhibits: 39

---------------------------------------------------------------------------

\39\ See proposed revisions to Item 601 of Regulation S-K, 17

CFR 229.601.

---------------------------------------------------------------------------

--Any instrument that defines the rights of the security holders

(incorporated by reference if previously filed);

--Consents; 40

---------------------------------------------------------------------------

\40\ See infra note 73 for a discussion of consents of auditors

in delayed shelf registration statements.

---------------------------------------------------------------------------

--Statement of eligibility of trustee, where applicable (Form T-1);

--Legal opinions; and

--A representation that underwriters concur with the issuer's

designated effective date.41

---------------------------------------------------------------------------

\41\ See Sections V.A.1.d. and V.B.2.a. of this release for a

discussion of this underwriter concurrence.

---------------------------------------------------------------------------

Form B issuers would be required to deliver promptly a prospectus,

free of charge, to any investor who requests it. In addition to that

obligation, Form B issuers would be required to deliver a securities

terms sheet.42

---------------------------------------------------------------------------

\42\ We discuss prospectus delivery obligations for Form B

issuers at Section VIII.C.4.a. of this release.

---------------------------------------------------------------------------

i. Company Disclosure

Investors, as always, will obtain company information from a

variety of sources such as the Internet, television, newspapers and

radio. They also may acquire company information from securities

analysts or the company itself. While there are many possible sources

of information about Form B issuers that investors can access

today,43 one reliable source is the information that issuers

make public through filing their Exchange Act reports with the

Commission. Investors can rely on this information because it is

subject to the regulatory and antifraud provisions of the federal

securities laws as well as subject to review by the staff of the

Commission. This structure compels issuers to come forward with

information about their businesses that they might not choose to make

public otherwise.

---------------------------------------------------------------------------

\43\ We also believe our proposal to free communications by Form

B registrants, discussed below, would spur diverse public discourse

about the merits of the issuer and its offering, all of which would

be open to the public investor.

---------------------------------------------------------------------------

The proposed registration system takes account of this source of

information by providing that an issuer must incorporate by reference

into its effective registration statement on Form B:

1. Its latest annual report 44 filed under the Exchange

Act; and 45

---------------------------------------------------------------------------

\44\ We do not, however, permit incorporation by reference of

annual reports on Form 40-F. See General Instruction I.B.7. of

proposed Form B.

\45\ Financial statements included in the Form must be no older

than permitted in the age of financial statements requirements of

Regulation S-X. See Rules 3-12 and 3-19 of Regulation S-X, 17 CFR

210.3-12 and 210.3-19. Foreign issuers using Form B would be

required to reconcile to U.S. GAAP any financial statements either

incorporated by reference into or set forth in the Form. We would

require reconciliation in accordance with Item 17 or Item 18 of Form

20-F under the same standards used today.

---------------------------------------------------------------------------

2. Any Exchange Act reports filed since the end of the fiscal year

covered by its latest annual report.46

---------------------------------------------------------------------------

\46\ The proposed system would not permit Form B registrants to

incorporate by reference any Exchange Act report filed after the end

of the offering period. For delayed shelf offerings, each takedown

would have its own separate offering period.

Issuers that use Forms S-3 or F-3 currently must incorporate their

Exchange Act reports into those Forms. The 12-month reporting

requirements under those Forms, however, do not assure that an issuer

incorporates an annual report into either of those registration

statements because annual reports are not due until three months (or 6

months, for foreign private issuers) after the end of a company's

fiscal year. In addition to this information, issuers would be required

to disclose in their Form B registration statements updated company

information that describes material changes not reflected in any

Exchange Act reports incorporated by reference.

ii. Transactional Disclosure

We are seeking comment on two alternatives on Form B transactional

disclosure. The first would mandate the inclusion of ``offering

information'' that includes some of the traditional items of

transactional disclosure. This alternative would allow issuer

discretion as to materiality and applicability of other traditional

items of transactional disclosure. The second alternative would simply

mandate that issuers set forth in Form B the items of transactional

disclosure required today. Both alternatives would require that the

registrant file any offering information disclosed by or on behalf of

the issuer (including by the underwriter or participating dealer)

during the offering period.47 Under the first proposal, the

registrant would file offering information as part of the prospectus in

the effective registration statement.48 ``Offering

information'' consists of:

---------------------------------------------------------------------------

\47\ We would not permit a Form B registrant to file information

that had not been disclosed during the offering period. See Form B

``Information Required in the Prospectus that is Part of the

Effective Registration Statement,'' paragraph 1.(c), and proposed

Securities Act Rule 172(e), 17 CFR 230.172(e). Information

communicated orally during that period could be reduced to writing

and filed as part of the registration statement if the registrant so

chooses.

\48\ Information communicated orally would not have to be filed

and would be subject to section 12(a)(2) liability.

---------------------------------------------------------------------------

The amount of securities being offered; 49

---------------------------------------------------------------------------

\49\ Under Rule 457(a), 17 CFR 230.457(a), a number of

securities may be registered. Under Rule 457(o), 17 CFR 230.457(o),

a dollar amount may be registered. The registrant may choose between

these two alternatives in a typical capital-raising offering.

---------------------------------------------------------------------------

Material changes in the issuer's affairs since the end of

the latest fiscal year that are not reflected in incorporated Exchange

Act reports;

The information required by Item 504 of Regulation S-K

regarding use of proceeds;

The information about underwriter's discounts and

commissions required by Item 501(b)(3) of Regulation S-K;

Information about the risks of the offering of the type

described in Item 503 of Regulation S-K;

Information concerning who is selling the securities of

the type described in Item 507 of Regulation S-K;

Material information about the terms of the securities

offered as required by Item 202 of Regulation S-K, unless capital stock

is to be registered and securities of the same class are registered

pursuant to Section 12 of the Exchange Act;

All information regarding the transaction that is

material, which may include where applicable, but is not limited to:

--Information about dilution of the type described in Item 506 of

Regulation S-K;

--Information about the determination of the offering price of the type

described in Item 505 of Regulation S-K;

--Information about the plan of distribution of the type described in

Item 508 of Regulation S-K;

--Ratio of earning to fixed charges, as described in Item 503 of

Regulation S-K;

Any offering information disclosed by or on behalf of the

issuer during the offering period,50 other than information

communicated orally; and

---------------------------------------------------------------------------

\50\ For purposes of this Form, ``offering period'' means the

period beginning 15 days in advance of the first offer made by or on

behalf of the issuer in connection with the offering and ending when

the offering is completed.

---------------------------------------------------------------------------

Offering information communicated orally that the issuer

chooses to file.

This alternative could provide registrants, and those acting on

their

[[Page 67183]]

behalf, more flexibility to craft a selling document shaped by their

particular offering, the market demands for information, and the

requirements to provide material information to investors. We believe

the greater freedom may allow issuers to cut some boilerplate

disclosure and to omit non-material disclosure from the prospectus. We

solicit comment, however, with regard to whether issuers would use that

freedom to accomplish those objectives. At the same time, the Form's

requirements should ensure investor protection by requiring issuers to

disclose all material offering information in the prospectus that is

part of the effective Form B. We solicit comment on this point.

We solicit comment on whether traditional transactional line items

not included in Form B should be retained. If so, which of the items?

Conversely, should we permit Form B issuers to craft their

transactional disclosure based on what they believe is material

information, and what the market and investors would demand, rather

than based on traditional transactional line items? If so, should we

limit that flexibility to a narrower class of Form B issuers, such as

those with a minimum public float of $750 million or $1 billion?

The second alternative would mandate that issuers disclose in Form

B all the information required by the Regulation S-K transactional

disclosure items currently required in Form S-3 and/or Form F-3. In

addition to the information that would be required by the first

alternative, this alternative would require the registrant to provide

further information in accordance with Regulation S-K.51

Should Form B include as mandated itemized information all of the

topics listed under that requirement? Should mandated itemized

disclosure be a different subset of the Regulation S-K information

currently required in Form S-3 and/or Form F-3?

---------------------------------------------------------------------------

\51\ That additional information would be: certain portions of

Item 501 of Regulation S-K (forepart of registration statement and

outside front cover page of prospectus); Item 502 of Regulation S-K

(inside front and outside back cover pages of prospectus); certain

portions of Item 503 of Regulation S-K (prospectus summary and

address and telephone number); Item 509 of Regulation S-K, where

applicable (interests of named experts and counsel) and Item 510 of

Regulation S-K, where applicable (disclosure of Commission position

on indemnification for Securities Act liabilities).

---------------------------------------------------------------------------

b. Free Writing Materials

For Form B issuers, written information 52 disclosed

during the ``offering period'' would be classified as either ``offering

information'' or ``free writing'' materials.53 The

``offering period'' with respect to a Form B offering would be defined

as the period beginning 15 days before the first offer made by or on

behalf of the issuer and ending at the time of completion of the

offering. ``Free writing'' materials would include all written

information disclosed by or on behalf of the issuer during the offering

period, other than ``offering information,'' factual business

communications 54 and limited notices of proposed

offerings.55 Free writing could include, but would not be

limited to, sales literature and selling documents that include

forward-looking information.56 A document that contains both

offering information and ``free writing'' would be treated as ``free

writing,'' if the offering information was filed as part of the

issuer's registration statement. If the offering information was not

filed as part of the issuer's registration statement, the document,

including the ``free writing'' portion, would be treated as offering

information and would be required to be filed as part of the

registration statement.

---------------------------------------------------------------------------

\52\ For these purposes, ``written'' includes all information

disseminated otherwise than orally and therefore would include

electronic communications and other future uses of changing

communications technology.

\53\ If a document includes offering information, whether or not

it also contains free writing, it would be treated as an offering

information document for all purposes unless that offering

information is otherwise included in the registration statement.

\54\ ``Factual business communications'' would be defined in

proposed Securities Act Rule 169, 17 CFR 230.169.

\55\ See proposed revisions to Securities Act Rule 135, 17 CFR

230.135.

\56\ Section 12(a)(2) would apply to free writing materials (and

to all oral statements made by or on behalf of the issuer during the

offering period).

---------------------------------------------------------------------------

The registrant would file, at the same time it files its Form B

registration statement, the free writing materials it disseminated

before filing its Form B.57 It would file free writing

materials used after the filing of its Form B at the time of first

use.58 The registrant would not file free writing materials

as part of the effective registration statement, nor would it have to

file information in the effective registration statement as free

writing materials.59

---------------------------------------------------------------------------

\57\ See proposed Securities Act Rule 425(b)(2), 17 CFR

230.425(b)(2). As proposed, Rule 425 would describe the materials

that would not have to be filed. They consist of:

1. Any factual business communication (as defined in proposed

Rule 169) regardless of when it is made;

2. Any research report used in reliance on Rules 137, 138 or

139;

3. Any information used in connection with an offering under

Form S-8;

4. Any information used in connection with an offering on Form B

under a dividend or interest reinvestment plan;

5. Any information used in connection with a direct stock

purchase plan; or

6. Any information filed or to be filed as part of an effective

registration statement.

For purposes of proposed Rule 425, ``direct stock purchase

plan'' refers to a registrant-sponsored plan pursuant to which the

registrant offers registered common stock for cash to only its

existing common stock holders (``plan participants'') and in which

there is no underwriter participation. The common stock registered

pursuant to the plan may either be newly issued or purchased by the

registrant for the account of plan participants at prices not in

excess of current market prices at the time of purchase, or at

prices not in excess of an amount determined under a pricing formula

specified in the plan and based on average or current market prices

at the time of purchase.

\58\ See proposed Securities Act Rule 425(b), 17 CFR 230.425(b).

\59\ See proposed Securities Act Rule 425, 17 CFR 230.425.

---------------------------------------------------------------------------

Given the significance of the offering period, should the

Commission require the registrant to state on the front cover page of

the registration statement the date of the first offer in connection

with the offering being registered? Should the Commission require free

writing materials to be filed at the time of their first use since

investors might prefer access to them as they make their investment

decisions?

c. Time of Filing

A registrant could file a registration statement on Form B at any

time before the first sale of the securities.60 Issuers

wishing to file immediately before sale could do so.61

Because issuers may wish to price Form B offerings before filing and

because many offerings are currently priced after hours, we would allow

registrants to file Form B registration statements with the Commission

after hours via EDGAR or facsimile until 10:00 p.m.62

Issuers would pay the filing fee under the same procedures used today

by issuers filing Rule 462(b) registration statements after hours via

facsimile.63

---------------------------------------------------------------------------

\60\ See Section VII of this release for a discussion of the

restrictions on communications that are being eliminated for Form B

offerings.

\61\ Because Form B offerings would not have to be filed until

the time of first sale, the payment of registration fees would also

be delayed until the time of first sale.

\62\ See proposed revisions to Securities Act Rules 110(d) and

402, 17 CFR 230.110(d) and 230.402. In the usual case, a registrant

may file a registration statement in paper format only until 5:30

p.m. It may file on EDGAR between 5:30 p.m. and 10:00 p.m., but

those registration statements are treated as if they were filed the

following day. Form B registration statements filed after hours via

EDGAR would be treated as filed the same day. See proposed revisions

to Rule 13 of Regulation S-T, 17 CFR 232.13. We also have proposed

revisions to Securities Act Rule 111(b), 17 CFR 230.111(b), to allow

for special fee payment procedures for Form B filings made after

hours.

\63\ See Securities Act Rule 111, 17 CFR 230.111. That procedure

is described in detail in Securities Act Release No. 7168 (May 11,

1995).

---------------------------------------------------------------------------

[[Page 67184]]

d. Becoming Effective

A Form B and any amendment to a Form B would be effective by

operation of rule at the issuer's discretion to give issuers maximum

flexibility.64 The issuer would simply select one of three

choices on the cover page:

---------------------------------------------------------------------------

\64\ See proposed Securities Act Rule 462(f)(1) and (f)(2), 17

CFR 230.462(f)(1) and 230.462(f)(2).

---------------------------------------------------------------------------

(1) Effective upon filing;

(2) Effective ____________ (date and time specified by the issuer);

or

(3) effective as specified in a later amendment to the registration

statement.65 The Commission staff would not have to take

action for the registration statement to become effective.

---------------------------------------------------------------------------

\65\ The later amendment could amount to no more than a cover

page on which the registrant would check the appropriate box to

designate immediate effectiveness or a specified effective date.

---------------------------------------------------------------------------

In most underwritten offerings under the current registration

system, the Commission requires that a request for effectiveness of a

registration statement be made by the underwriters in addition to the

issuer.66 Both underwriters and issuers are subject to

liability under Section 11 for the disclosure in an effective

registration statement. A request for effectiveness is therefore an

acknowledgment by each requester that it is aware of its obligations

under the Securities Act.67

---------------------------------------------------------------------------

\66\ See Securities Act Rule 461(a), 17 CFR 230.461(a). The Rule

requires the managing underwriters, or if there are no managing

underwriters, the principal underwriters, to join in the issuer's

request for acceleration of a registration statement.

\67\ See Securities Act Rule 461(a), 17 CFR 230.461(a).

---------------------------------------------------------------------------

Because the issuer would have complete control over effectiveness

by controlling the filing, we would include in Form B a requirement

that the issuer obtain and file as an exhibit evidence of the managing

underwriters' or principal underwriters' concurrence with the issuer's

designation of effectiveness.68 The issuer would have to

obtain that concurrence before it files the Form B registration

statement in which it requests either immediate effectiveness or

effectiveness at a specified date.

---------------------------------------------------------------------------

\68\ See proposed Form B ``Exhibits'' section and proposed

revisions to Item 601 of Regulation S-K. Evidence of concurrence

could be, for example, in a writing from the underwriter to the

issuer or an electronic message to that effect.

---------------------------------------------------------------------------

Would the requirement to file the evidence of the underwriters'

concurrence as an exhibit to Form B be unnecessarily burdensome?

Alternatively, should we require the issuer to represent in the

registration statement that it obtained the underwriters' concurrence,

but not require it to file the concurrence, and require it to retain

the concurrence for 5 years? Should we require that the issuer obtain

the concurrence, but not require that the concurrence be evidenced in

writing? Would an oral concurrence provide the issuer and the

underwriters with sufficient assurance of agreement and protection

against misunderstanding?

e. Delayed Shelf Offerings and Form B

Form B would provide much the same flexibility to issuers that

delayed shelf registration on Forms S-3 and F-3 has

provided,69 and those benefits would be available to

approximately the same issuers.70 Unlike current shelf

registration, however, issuers using Form B would not need to file a

base or core prospectus to be able to offer and sell at will. Base

prospectuses today, particularly those used for unallocated delayed

shelf registration statements, tend to describe in the broadest of

terms the many different types of securities and offerings that might

be done off the shelf. Thus, in offerings off the shelf, the key

offering disclosure is usually filed in the Rule 424 prospectus

supplement. Form B would allow an issuer to avoid writing transactional

disclosure that covers ``everything but the kitchen sink'' and simply

file whatever transactional disclosure it gives to investors at the

time of the offering.

---------------------------------------------------------------------------

\69\ For convenience, we refer to Rule 415(a)(1)(x), 17 CFR

230.415(a)(1)(x), offerings as delayed shelf offerings or shelf

offerings in this release. Other types of Rule 415 shelf offerings,

such as continuous offerings, generally are unaffected by the

proposed system.

\70\ Our research indicates that, of the 379 existing issuers

who utilized the equity and unallocated shelf registration system

between calendar year 1993 to the third quarter of 1996, only 37

would be ineligible to use new Form B under the public float/ADTV

tests (the tests are described at Section V.B.2.a. of this release).

Of those, 23 issuers appear to be REITs. The 37 that are eliminated

would be able to use Form B for offerings to QIBs and offerings of

investment grade securities, among others.

---------------------------------------------------------------------------

There are also other Form B benefits as compared to the current

delayed shelf system. First, the Form B registration statement would

not be subject to pre-effective staff review. Under the existing

delayed shelf system, the Form S-3 or F-3 containing the core

prospectus is subject to the staff's selective pre-review. Second,

issuers may have less concern about market overhang effects on its

stock price under Form B.71 Under the current system, an

issuer wishing to put equity securities on the shelf has to include

them in the registration statement even before it intends to offer

those securities. Under the proposed system, a registrant need only

file a Form B registration statement before sale. The absence of a

filing that signals an upcoming offering well before the time it can be

completed may be welcomed by issuers, but may be of concern to

secondary market participants.72

---------------------------------------------------------------------------

\71\ For a discussion of market overhang effects, see Securities

Act Release No. 6383, (Mar. 16, 1992) (adopting integrated

disclosure system and unallocated shelf registration rules).

\72\ See Section XVII of this release for a solicitation of

comment regarding the effect this proposal would have on the

secondary market.

---------------------------------------------------------------------------

Another advantage for issuers in Form B as compared to existing

shelf registration relates to fees. In shelf registration today, an

issuer must file the base prospectus and pay the full filing fee at

that time, even though it may not take down securities from the shelf

until much later. An issuer using Form B other than for delayed

offerings would pay upon filing but generally that would not occur

until sale. There would be no need to register more than is needed for

that offering at that time.

We believe that the way Form B operates would largely eliminate the

incentive for a registrant to set up a delayed shelf registration

statement. We recognize, however, that some issuers are accustomed to

doing shelf takedowns and do so on a frequent basis. As proposed, a

registrant wishing to file some preliminary information could still do

so on Form B and either become effective then and file the remaining

disclosure concerning the offering in a post-effective amendment or

delay effectiveness of the Form B until the rest of the information is

available. The issuer could designate when those post-effective

amendments become effective. The current delayed shelf does not require

directors and officers to sign the Rule 424(b) supplements filed for

each takedown.73 Under the proposal, registrants may use a

power of attorney to avoid the inconvenience of obtaining multiple

signatures upon the filing of a pre-effective or post-effective

amendment. We also would provide in delayed shelf offerings that when

the persons signing a Form B do not appoint a person to

[[Page 67185]]

sign via a power of attorney, a signature on a post-effective amendment

by an authorized representative of the registrant shall be deemed to

constitute signature by the persons signing the original filing unless

otherwise specified in the amendment.74

---------------------------------------------------------------------------

\73\ Under the current system, auditors do not provide consents

for prospectus supplements. They consent to inclusion of the

financial statements in the registration statement and also consent

at the time of filing most post-effective amendments. Subsequently

filed Forms 10-K that are incorporated by reference include the

auditor's consent to inclusion of the financial statements to update

the shelf. Under the proposed system, post-effective amendments will

be more common because transactional information will be filed in

that manner.

The consents of auditors are not required today with respect to

the filing of prospectus supplements and certain post-effective

amendments to shelf registration statements. The Commission

similarly would not require an auditor's consent for post-effective

amendments that amount to prospectus supplements and have no bearing

on the financial statements.

\74\ See Signatures section of Form B and proposed revisions to

Securities Act Rule 471, 17 CFR 230.471. See also Section XI.C. of

this release, the discussion of the proposal to require management

to certify that to management's knowledge, the filings they sign

contain no material misstatement or omission.

---------------------------------------------------------------------------

Delayed shelf offerings on Form B would, however, improve upon the

Form S-3/F-3 shelf registration system in two ways that would enhance

investor protection. First, we would provide clearly in Form B that any

transactional disclosure used in connection with a Form B offering is

within the effective registration statement. With Form B, transactional

information disclosed to investors before the end of the offering

period would have to be filed either as part of the effective

registration statement or on a post-effective amendment that becomes

effective whenever the issuer wishes before the time of sales. That

information would be within the scope of Section 11 under the

Securities Act. That transactional disclosure would include information

filed under Rule 424 as prospectus supplements to shelf registration

statements today. We also would provide clearly in Form B that

historical and forward-incorporated Exchange Act reports would be part

of the effective registration statement. That information also would be

within the scope of Section 11. We recognize that certain commentators

have questioned whether Section 11 applies to Rule 424 information

75 and forward-incorporated Exchange Act

reports.76 While we believe that under existing law such

Section 11 liability applies, and do not accept the views of those

commentators on these issues, we recognize that an explicit statement

in the proposed Form would serve to eliminate any uncertainty

practitioners may believe exists.

---------------------------------------------------------------------------

\75\ For example, the Advisory Committee expressed the belief

that Section 11 may not apply and recommended that the Commission

address this potential lapse in application of Securities Act

protections. See Advisory Committee Report at p. 28.

\76\ See, e.g., Johnson and McLaughlin, Corporate Finance and

the Federal Securities Laws 2d ed. 508-09 (1997). But see proposed

revisions to Item 512 of Regulation S-K, 17 CFR 229.512.

---------------------------------------------------------------------------

The other change to the way delayed shelf would operate relates to

the time of filing with the Commission information about the offering

off the shelf. Today, that information may be filed pursuant to Rule

424 up to two business days after the earlier of pricing of the

securities or first use of the prospectus supplement. Under the

proposed registration system, we would require that Form B issuers file

this information as part of the effective registration statement by the

time of sale.77 We believe that both investors and the

market are better served by having this disclosure filed promptly.

Moreover, because the transactional information that may be filed as

part of the Form B registration statement includes only information

about which investors have been informed before committing to purchase

the securities, there is less reason to contemplate a filing after the

sale takes place. In addition, the Commission is aware that some

investors trading in shelf registrants' securities after a takedown and

before the filing have been troubled by the absence of disclosure

during that period. We have concerns that some investors are aware of

the shelf takedowns while others become aware days later when notice is

filed with the Commission. Although a two-business-day wait may not

have been considered a material delay at the outset of modern shelf

registration, it appears to be one in today's market framework.

Eliminating this delay would support our goal of reducing the risks of

selective disclosure.

---------------------------------------------------------------------------

\77\ See proposed revisions to Rule 424(b)(2), 17 CFR

230.424(b)(2).

---------------------------------------------------------------------------

We solicit comment on whether there is a continued need for a

delayed shelf concept under Form B. Do registrants see advantages to

delayed registration on Form B over and above what would be allowed on

Form B without that concept? Does the delayed shelf concept needlessly

complicate the system? Is there a reason to retain the two-year

limitation on the amount registered? Would concerns about market

overhang keep issuers from taking advantage of any extension? Should we

limit the extension to 3 or 4 years? Would issuers benefit more if we

remove completely any restrictions on the amount of securities that

issuers could register for a delayed shelf? What if we extended the

possible life of a shelf registration statement to 6, 7 or 10 years?

Would issuers register securities to be offered over those periods of

time?

2. Offerings Eligible for Registration on Form B

An issuer may register on Form B only offerings that fit in one of

the following categories.

a. Offerings by Larger Seasoned Issuers

Given the envisioned disclosure and delivery aspects of Form B, we

believe that only those issuers with a demonstrated market following

should be eligible to use Form B to register primary and secondary

offerings of any type to the general public. The current threshold for

short-form registration (Forms S-3 and F-3) is a public float of $75

million. Based on our research, we believe that the most accurate

measurement to attain the goal of choosing issuers for which there is

an efficient market is a combination of public float of the issuer's

common equity securities 78 and average daily trading volume

(``ADTV'') of the issuer's equity securities.79 We propose

that an issuer able to use Form B should either have:

---------------------------------------------------------------------------

\78\ Public float is the aggregate market value of the issuer's

outstanding voting and non-voting common equity held by non-

affiliates of the issuer. 17 CFR 228.10(a)(1). We used market

capitalization information as a proxy for public float figures.

Public float information is less readily available and would require

a determination of the equity interests of affiliates of a company

in order to derive it from market capitalization data.

\79\ Our research showed that a public company's market

capitalization, public float and ADTV are closely and positively

associated with the number of analysts that follow firms.

Combination tests of ADTV and either market capitalization or public

float are more closely associated with the speed of price discovery

than any of those tests alone. The proposed tests would preclude

lesser followed companies from Form B registration eligibility. We

use a similar combination in Regulation M. See Exchange Act Rules

100-105, 17 CFR 242.100-242.105.

---------------------------------------------------------------------------

A public float of $75 million or more and an ADTV of $1

million or more; 80 or

---------------------------------------------------------------------------

\80\ Our research indicates that, just taking into account ADTV

levels, 4% of the companies with an ADTV of $1 million or more would

have fewer than 3 analysts covering them. Our research also

indicates that, just taking into account market capitalization, 14%

of the companies with market capitalizations of $75 million or more

would have fewer than 3 analysts covering them.

---------------------------------------------------------------------------

A public float of $250 million or more.81

---------------------------------------------------------------------------

\81\ Our research indicates that 5% of the companies that have

market capitalizations of $250 million or more have fewer than 3

analysts covering them. On average, companies of this size have 15

analysts covering them.

Thus, if an issuer has a public float of less than $250 million then it

must have an ADTV of at least $1 million in addition to a public float

of $75 million.

In determining these thresholds, we considered, among other things,

the level of analysts coverage that would result at different public

float and ADTV thresholds. Our research indicates that companies that

meet the proposed combined public float/ADTV test would have an average

of 14 analysts following them.

[[Page 67186]]

We looked at analyst coverage not because we believe that analysts

create market following or because we believe that analysts statements

are wholly accurate and unbiased or because we believe that all

investors would have access to or rely upon analysts reports. Instead,

we looked to analyst coverage because we believe that the number of

analysts that cover companies that fit a certain profile is indicative

of the level of investor interest in companies within the profile. Like

news organizations, analysts tend to cover companies that are of

interest to their customers.82

---------------------------------------------------------------------------

\82\ Both issuers and investors suggest that multiple analysts

are necessary to provide the public with broad, relatively unbiased

information about a company. We obtained information concerning

analyst coverage from Nelson Publications, publisher of Nelson's

Directory of Investment Research (1996). The research that we

conducted considered the number of analyst firms that follow a

company rather than the number of individual analysts. In proposing

thresholds, we have considered that not all analysts contained in

that listing would be actively following the issuer at all times.

Thus, we have chosen thresholds that provide a significant number of

analysts following the issuer. Where an issuer has significant

analyst following and the market operates efficiently with respect

to price discovery, we believe it is fair to assume some level of

investor awareness of company information. It is also fair to assume

that investors would have access to multiple sources of information

about a company, making short-form registration and elimination of

communications restrictions appropriate.

---------------------------------------------------------------------------

For purposes of Form B, issuers would be required to measure their

ADTV during the three full calendar months (or any 90 consecutive

calendar days ending within 10 calendar days) immediately preceding the

filing of the registration statement. They would measure their public

float as of the end of their last fiscal quarter. While the alternative

stand-alone public float test of $250 million may be used by both

domestic and foreign issuers to qualify for Form B eligibility, we

propose it primarily for the benefit of large foreign issuers whose

shares trade principally on foreign markets.83 In comparison

to current Form S-3 and F-3 public float levels, 1,175 fewer companies

would be eligible to register on Form B due to size.84 Those

companies, and even smaller ones, would, however, be eligible to

register on Form B under other criteria discussed below, such as when

offering only to QIBs or offering investment grade securities.

---------------------------------------------------------------------------

\83\ ADTV is measured for purposes of Form B on U.S. trading

markets only. We believe that provides a better measure of U.S.

market following than world-wide ADTV for these purposes. To avoid

creating a test that would disproportionately exclude well followed

foreign issuers with little or no U.S. trading market, we provide

the alternative $250 million float test without an ADTV component.

\84\ Of these companies, only 13 have taken advantage of

unallocated shelf registration. This eligibility criteria includes

801 more issuers than were eligible to register securities on Form

S-3 when the Commission lowered the public float requirements from

$150 million to $75 million in 1992. See Securities Act Release No.

6943 (July 16, 1992) [57 FR 32461].

---------------------------------------------------------------------------

In addition to the public float/ADTV criteria, Form B would be

available only to issuers that have a history of reporting under the

Exchange Act. The reporting history would ensure that issuers have been

reporting long enough so that adequate information about them is

publicly available. It also gives issuers enough time to adjust to the

disclosure requirements applicable to reporting companies. We propose a

one-year reporting history requirement coupled with the requirement

that the issuer have filed at least one annual report. Because annual

reports are due months after the end of a fiscal year, simply requiring

that Form B issuers have a one-year reporting history would not

necessarily ensure that all issuers using the Form had prepared and

filed at least one annual report.85 We believe the annual

report requirement would provide benefits to investors, due to the fact

that they would have more Exchange Act information to use in evaluating

the issuer and also because the issuer would have more reporting

experience. In addition, an issuer would not qualify to use Form B

unless it had filed all Exchange Act reports due and had filed all of

its reports on a timely basis in the 12 months immediately before the

filing.86

---------------------------------------------------------------------------

\85\ Form S-3 currently requires simply a one-year reporting

history. Form F-3 requires a one-year reporting history and also

imposes a requirement that the registrant previously filed an annual

report on Form 20-F.

\86\ Issuers also would be required to be in compliance with our

EDGAR rules. These timeliness and EDGAR requirements currently apply

to offerings registered on short-form registration statements on

Forms S-3 and F-3.

---------------------------------------------------------------------------

We request your comment on this proposal. Should the $75 million

threshold used in conjunction with the ADTV threshold be higher (e.g.,

$100 million, $150 million, $200 million or $250 million)?

87 Should the ADTV test used with the public float test be

higher (e.g., $1.5 million or $2 million)? 88 Should the

ADTV test be lower (e.g., $750,000)? 89 Should we raise the

proposed stand-alone public float test of $250 million (e.g., to $300

million, $350 million, $400 million or $450 million)? Should we lower

the stand-alone public float test (e.g., to $200 million)?

90 Should we raise the one-year and one annual report

reporting requirement to two years? 91 Is there any reason

why the ADTV/public float test thresholds should be consistent with the

thresholds used for the actively-traded security exception in Rule

101(c)(1) of Regulation M? Instead of worldwide volume, which is used

in Regulation M, would U.S. market volume, as proposed, be a better

indicator of market following by U.S. investors? Unlike Regulation M

and the proposals, should ADTV be calculated solely on the basis of

trading conducted on the NYSE, AMEX or Nasdaq-NMS so as to exclude

microcap companies? 92

---------------------------------------------------------------------------

\87\ At the $100 million market capitalization level, our

research indicates that 5% of the companies have fewer than 3

analysts covering them. At $150 million, 5% have fewer than 3

analysts; at $200 million, 5% have fewer than 3 analysts; and at

$250 million, 5% have fewer than 3. At the $100 million threshold,

an average of 14 analysts follow the company. At $150 million, the

average increases to 15, at $200 million the average increases is

15, and at $250 million the average is 16.

\88\ Our research indicates that companies with an ADTV between

$1 million and $2.5 million have an average of 8 analysts following

them.

\89\ Our research shows that 33% of companies with an ADTV of

less than $1 million have no analyst following.

\90\ Companies with a market capitalization of at least $200

million have an average of 14.5 analysts following them.

\91\ We studied the impact of extending the reporting history by

additional years and found no resulting statistically significant

improvement in price discovery or analyst following.

\92\ See Section V.A.2.g. of this release for a discussion

relating to microcap companies.

---------------------------------------------------------------------------

b. Offerings to QIBs

As the Commission determined in adopting Rule 144A, larger

institutional investors, or QIBs as denominated in the rule, are

presumed to be sophisticated securities investors.93 Their

investing experience and size purportedly puts them in a position to

insist upon as much information as would be provided by

registration.94 Also, their size, which may be viewed as

signifying buying and bargaining power, should allow them to demand

from issuers protective covenants and restrictions. In other words,

their sophistication enables them to fend for themselves.95

Rule 144A applies both with respect to securities of

[[Page 67187]]

reporting companies and non-reporting companies.96

---------------------------------------------------------------------------

\93\ Securities Act Release No. 6862 (Apr. 23, 1990). Rule 144A

provides a safe harbor from the registration requirements of the

Securities Act for resales of restricted securities to QIBs as

defined in Securities Act Rule 144A(a)(1), 17 CFR 230.144A(a)(1).

\94\ In many instances, issuers prepare materials that are

almost identical in presentation and substance to registration

statements. See, e.g., McGeehan, Money Raised in Private Placement

of Issues Doubles as Companies Take Advantage of SEC's Rule 144A''

Wall St. J., Jan. 2, 1998, at 38, col. 1.

\95\ See Securities Act Release No. 6808 (Oct. 25, 1988) [53 FR

50038] Section IV.A.1. (institutional investors possess sufficient

knowledge and experience in financial and business matters, and so

are capable of evaluating the risks of an investment and are less in

need of the protections of registration); see also Securities Act

Release No. 6839 (July 11, 1989) [54 FR 30076], Section II.B.

\96\ When the issuer of the securities to be resold under Rule

144A is neither a reporting company nor exempt from reporting under

Exchange Act Rule 12g3-2(b), availability of the Rule is conditioned

on the right of the current or prospective holder of the issuer's

securities to obtain specific information from the issuer. See Rule

144A(d)(4), 17 CFR 230.144A(d)(4).

---------------------------------------------------------------------------

If QIBs can fend for themselves in unregistered transactions

involving securities of both reporting and non-reporting companies,

they certainly should be able to fend for themselves at least as easily

in connection with an offering by a public company registered on Form

B. Moreover, when QIBs fend for themselves in Form B offerings, they

will share the benefit of the disclosure they acquire with the rest of

the investing public through the filing of that disclosure. To

encourage registration of offerings that otherwise would be made in

reliance on Rule 144A, we propose to extend Form B for registration of

offerings made solely to QIBs, as defined in Rule 144A, where the QIBs

are purchasing for their own accounts or for the accounts of other

QIBs.97 Those offerings could be made where the issuer has

been a reporting company for at least one year, has filed at least one

annual report under Section 13(a) of the Exchange Act and is current

and timely in fulfilling its reporting requirements.

---------------------------------------------------------------------------

\97\ An issuer that wishes to register an offering on Form B

made solely to QIBs may offer or sell only to persons it reasonably

believes are QIBs. The Division of Corporation Finance has

interpreted the filing of a registration statement as a general

solicitation. The filing of a Form B registration statement could,

in and of itself, be viewed as a general solicitation and therefore

as making offers to non-QIBs. Therefore, under the proposals, the

Division would reconsider the issue regarding filing as a general

solicitation for the purposes of QIB-only Form B offerings.

---------------------------------------------------------------------------

i. Advantages of Registered Offerings

Domestic issuers and foreign issuers that are already reporting

would have the same key advantage under Form B registration that they

find today in making Rule 144A offerings: they would find it just as

easy to time their offerings because the issuer would control when its

registration statement becomes effective and it need only file before

the first sale. We believe issuers and investors would realize two

significant benefits from registration of securities that otherwise

would be sold only in reliance on Rule 144A:

1. Unlike Rule 144A, securities fungible with those that are listed

on exchanges or quoted on NASDAQ could be offered and sold under Form B

registration.

2. Unlike Rule 144A securities, the securities generally would be

freely resalable because they would be covered by a registration

statement. Because the securities would not be restricted, some QIBs

that otherwise would be subject to limitations on the amount of

restricted securities they may hold would be permitted to purchase

these registered securities freely.98

---------------------------------------------------------------------------

\98\ The fact that Rule 144A, 17 CFR 230.144A, offerings are

frequently conditioned on the issuer's promise to register the

offering with the Commission within three to six months evidences

the attraction of holding registered securities even for QIBs.

---------------------------------------------------------------------------

ii. Limitations on QIB Purchases

Because the securities registered on Form B would not be restricted

securities, there is some chance that investors and issuers would

arrange to use the Form where the offering is not truly a QIB-only

offering but instead is a distribution to the public using a QIB as a

conduit.99 We therefore would provide that certain QIBs

would be ineligible to purchase under a Form B QIB-only offering.

Dealers and investment advisers would be excluded from those offerings.

Those purchasers do not generally purchase securities for their own

investment. Dealers are in the business of selling securities.

Moreover, the size threshold in Rule 144A for dealers is significantly

lower than the thresholds for other QIBs. Given those factors, we

believe the risk of indirect distribution by QIBs in those categories

is sufficient to warrant precluding their participation. Should other

QIB groups be excluded? If so, which ones?

---------------------------------------------------------------------------

\99\ This kind of indirect distribution would deprive the

ultimate public purchasers of the liability protections of

Securities Act registration.

---------------------------------------------------------------------------

Furthermore, issuers and QIBs that attempt to effect an indirect

public distribution of securities through a QIB-only offering on Form B

would violate Section 5 absent an applicable exemption. The transaction

that the issuer would register under this provision of Form B would be

its sale of securities to QIBs, not a sale to the public. If the

securities do not come to rest with the QIBs and the QIBs are mere

conduits for sales to the public, the offering would be ineligible for

registration on Form B.100 If a QIB purchases and effects a

distribution, it will be acting as an underwriter as defined in Section

2(a)(11) of the Securities Act. Its transaction would not be registered

and likely would not be exempt and therefore would be illegal.

---------------------------------------------------------------------------

\100\ Securities Act Rule 401(g), 17 CFR 230.401(g), states that

any registration statement or amendment is deemed to be filed on the

proper form unless the Commission objects to the form before the

effective date. The rule thus requires the Commission and the

registrant to resolve disputes about form eligibility before

effectiveness. We recently have proposed to amend Rule 401(g) to

exclude from its scope all registration statements and post-

effective amendments that become effective automatically upon

filing. See Securities Act Release No. 7506 (Feb. 17, 1998) (63 FR

9648). In this release we propose to expand that exclusion to cover

all registration statements in which the registrant could designate

the effective date. See proposed revisions to Rule 401(g), 17 CFR

230.401(g). This change would eliminate the presumption existing

today that an effective Securities Act registration statement is on

the appropriate form and therefore aid the Commission staff in

asserting that securities are offered and sold in violation of

Section 5 if anyone attempts to use QIBs as conduits in connection

with a QIB-only Form B offering.

---------------------------------------------------------------------------

iii. QIB Definition

The current general QIB test, which was established with the

adoption of Rule 144A, is whether the institution, acting for its own

account or for that of other QIBs, in the aggregate owns and invests on

a discretionary basis at least $100 million of securities of non-

affiliates.101 The QIB threshold differs for dealers and

banks, savings associations and equivalent institutions. We solicit

comment on whether the thresholds for defining ``qualified

institutional buyer'' for purposes of Form B and Rule 144A should be

revised upward in light of the length of time since Rule 144A was

adopted and the changes that have occurred in the markets since

then.102

---------------------------------------------------------------------------

\101\ See Securities Act Rule 144A(a)(1), 17 CFR 230.144A(a)(1).

See also Securities Act Release No. 6862 (Apr. 23, 1990); Securities

Act Release No. 6806 (Oct. 25, 1988) [53 FR 44016].

\102\ In 1997, companies raised approximately $254 billion

through 144A offerings. This figure represents a 94% increase from

1996 and a 250% increase from 1995. McGeehan, supra, n. 94, at 38,

col. 1.

---------------------------------------------------------------------------

Taking into account only inflation since 1990, use of the $100

million threshold today would have been the same as if the Commission

in 1990 had approved a 144A threshold of $81 million

dollars.103 Taking into account only market changes since

1990, our use of the $100 million QIB threshold today is equivalent to

us adopting in 1990 a threshold of only $29.2 million.104

Thus, taking into account market changes, the $100 million 1990

threshold would translate to approximately $240 million today. Even

with some adjustments, therefore, we believe more entities would

qualify as QIBs today than could have qualified at the time we adopted

Rule 144A in 1990.

---------------------------------------------------------------------------

\103\ This figure is based on changes in the consumer price

index between January 1, 1990 and January 1, 1998.

\104\ This figure is based on increases in the S&P 500 between

January 1, 1990 and January 1, 1998.

---------------------------------------------------------------------------

We solicit comment on whether one should have to own and invest on

a discretionary basis at least $125, $150 or $200 million in securities

of non-affiliated issuers to qualify as a QIB. We also solicit comment

on whether we

[[Page 67188]]

should increase the $10 million eligibility requirement for dealers

acting for their own accounts or for the accounts of other QIBs. Should

it be raised to $15, $20 or $25 million? Should we increase the net

worth test for banks, savings associations and equivalent institutions?

If so, should it be raised from $25 to $30, $35 or $50 million in order

for them to qualify as QIBs? 105 Should a net worth test be

applied to those institutions at all?

---------------------------------------------------------------------------

\105\ See Securities Act Rule 144A(a)(ii) and (a)(vi), 17 CFR

230.144A(a)(ii) and (a)(vi).

---------------------------------------------------------------------------

Are upward revisions necessary to provide continued assurance that

QIBs are sophisticated investors with some ability to require

appropriate disclosure from the sellers? If so, should they be based on

inflation only or should we revise them in accordance with market-

related measures?

We also request your comment on whether we should expand the

eligibility standards for Rule 144A QIB status. If so, what categories

of entities should we make eligible as QIBs? For example, should we

permit certain state pension funds to qualify as QIBs if they meet the

current thresholds in Rule 144A?

iv. Other Reporting and Non-Reporting Issuers

In light of the sophistication of QIB purchasers, we solicit

comment about whether we should extend Form B to issuers subject to the

Exchange Act reporting requirements that do not satisfy a one-year and

one annual report reporting history. If we were to extend Form B in

that way, an issuer could choose to register not long after registering

for the first time another offering under the Securities Act or a class

of securities under the Exchange Act. Even in that event, however, the

issuer would have filed virtually the same company information in its

prior registration statement that it otherwise would file in its

periodic reports. That information, like periodic reports, could be

incorporated into its Form B registration statement. In the case of

offerings made only to QIBs, is a year of seasoning as a reporting

company going to provide significant investor protections that the QIBs

themselves could not attain? Alternatively, should we increase the

reporting requirement to two years for offerings to QIBs on Form B by

issuers that do not meet the public float/ADTV threshold?

Non-reporting foreign issuers that currently make Rule 144A

offerings would not be eligible for Form B even for QIB-only offerings.

We solicit comment concerning whether the largest non-reporting foreign

issuers (e.g., those with a public float over $500 or $750 million)

should be permitted to use Form B to register offerings to QIBs of

investment grade securities. These issuers would be required to

reconcile their financial statements to conform to U.S. GAAP. This

alternative would allow large foreign issuers to enter the U.S. markets

in a registered context rather than through Rule 144A, and would give

the initial investors freely tradeable securities.106

---------------------------------------------------------------------------

\106\ Through 1992, foreign issuers accounted for about 30% of

the 144A market. See, e.g., Bostwick, The SEC Response to

Internationalization and Institutionalization: Rule 144A Merit

Regulation of Investors, 27 Law and Policy in Int'l. Bus. 423

(Winter 1996); Devere, 144A Deal Volume Surges in Dynamic Second

Quarter, 62 Investment Dealer's Digest 13 (July 22, 1996).

---------------------------------------------------------------------------

By registering, those companies would become reporting issuers. We

would require reconciliation of their financial statements in the Form

B registration statement. Also, because these issuers would not have

Exchange Act reports to incorporate by reference, we would require that

they disclose in the Form B registration statement the company

information set forth in Regulation S-K. Under those circumstances,

would allowing foreign issuers the opportunity to register investment

grade securities on an expedited basis encourage them to enter the U.S.

registration and reporting system? Would they be unlikely to register

even on that basis due to the reporting and disclosure requirements, or

for other reasons? Should we preclude non-reporting foreign issuers

from registering even investment grade QIB-only offerings on Form B

absent staff review?

c. Offerings to Certain Existing Security Holders

We propose to extend Form B to smaller issuers that do not meet the

Form's public float and ADTV threshold eligibility requirements for

registration of offerings to certain existing shareholders. Under the

proposed registration system, those issuers, which otherwise would be

required to use Form A, may use Form B to register: rights offerings;

offerings of securities pursuant to a dividend or interest reinvestment

plan; offerings of common stock to existing common stock holders, such

as under a direct stock purchase plan; offerings of securities upon

exercise of either outstanding transferable options or outstanding

transferable warrants; and offerings of securities upon conversion of

outstanding convertible securities.

Current short-form registration statements, Forms S-3 and F-3, may

be used in some, but not all, of these cases.107 The

Commission extended Forms S-3 and F-3 for registration of these kinds

of offerings based on the premise that, despite the issuers' inability

to meet the eligibility requirements and the possibility they may not

be well known or widely followed by the market, these offerings would

be directed to specific investors that previously invested in the

issuer's securities and could therefore be expected to follow the

issuer or to receive information from the issuer. Similarly, we propose

to allow issuers that do not meet proposed Form B's public float and

ADTV tests to register these and similar offerings on Form B as long as

they meet the reporting requirements of the proposed Form and the

transactional requirements described below.

---------------------------------------------------------------------------

\107\ See Instruction I.B.4. to Forms S-3 and F-3.

---------------------------------------------------------------------------

i. Dividend or Interest Reinvestment Plans

As early as 1977, we began relaxing registration requirements for

dividend or interest reinvestment plans (``DRIPs'').108 We

currently allow all issuers to use short-form registration for

securities offered pursuant to their DRIPs even if they do not meet the

Forms' public float tests.109 These registration statements

become effective automatically upon filing without staff

review.110

---------------------------------------------------------------------------

\108\ See Securities Act Release No. 5923 (Apr. 11, 1978) [43 FR

16677].

\109\ Most DRIPs are registered on Form S-3. For purposes of

this discussion, we will refer to Form S-3 rather than Forms S-3 and

F-3.

\110\ Securities Act Release No. 6964 (Oct. 22, 1992).

---------------------------------------------------------------------------

Under the proposed registration system, we seek both to maintain

the relaxed regulatory approach to registration of DRIP offerings and

to prevent abuses of the registration system's investor

protections.111 We therefore would extend Form B for DRIP

offerings of seasoned issuers that do not otherwise meet the Form's

eligibility requirements if:

---------------------------------------------------------------------------

\111\ Some issuers have been known to register DRIP offerings on

Form S-3 as a pretext for making what are basically primary

offerings to the public. Some issuers otherwise ineligible to use

Form S-3 have registered DRIPs on the Form to raise amounts of

capital that, in the worst cases, exceed the issuer's public float

at the commencement of the offering.

---------------------------------------------------------------------------

1. The issuer has not discontinued or suspended dividend payments

on the securities held by DRIP participants;

2. The DRIP securities registered on Form B are offered only to

existing security holders that have held the issuer's securities for at

least 2 months;

[[Page 67189]]

3. The dollar amount of the DRIP securities registered on Form B

represents no more than 15% of the issuer's public float when

aggregated with the dollar amount of securities previously registered

by the issuer on Form B pursuant to any offering directed solely to

common security holders, including a DRIP, within the 12 months before

the start of, and during, the current offering; and

4. The shareholder purchases in any 12-month period no more than

the smaller of 100% of the value of the issuer's securities owned by

the shareholder at the start of the 12-month period, or 5% of the total

offering amount, except that any shareholder may purchase up to $10,000

of securities in any 12-month period.

We would preclude issuers from using DRIPs to sell securities

directly to participants at a time when the issuer has discontinued or

suspended dividend payments on the DRIP securities. A purchase is not

merely a dividend reinvestment when the company is not paying

dividends. This is consistent with the Division's current

interpretation.112

---------------------------------------------------------------------------

\112\ See The Division of Corporation Finance Manual of Publicly

Available Telephone Interpretations (July 1997), available on our

web site (http://www.sec.gov).

---------------------------------------------------------------------------

We also would set a limit on the amount of DRIP securities an

issuer may register on Form B equal to an aggregate of 15% of the

issuer's public float within the 12 months before the start of and

during the offering.113 Under this proposal, issuers could

make several DRIP offerings on Form B over the course of a 12-month

period as long as the total amount registered within that period did

not exceed 15%.114 While Form B would cover the offering of

securities by a smaller issuer to its existing shareholders, if such an

issuer uses its shareholders merely as conduits to distribute the

securities to the public, the offering would not be eligible for Form

B. If a shareholder purchases to effect a public distribution, it would

be considered an underwriter and its sale would not be considered

registered. To avoid the potential use of Form B in these conduit

situations, we propose to restrict the amount of securities that may be

purchased by any one shareholder and its affiliates. This provision, in

addition to the 15% limitation, would protect against an unregistered

distribution to the public.

---------------------------------------------------------------------------

\113\ Based on our research of DRIP offerings made during the

last year, the 15% limit should not affect the amount of securities

that the vast majority of issuers register for offerings pursuant to

DRIPs. We specify this threshold in the instructions to proposed

Form B.

\114\ The issuer would refer to its most recently filed Form 10-

K to determine its public float for calculating how much it may

register on Form B. This limitation also may allow issuers to avoid

market overhang problems that may be associated with registering at

one time a large amount of securities to be offered over a long

period.

---------------------------------------------------------------------------

Our proposal would limit the amount that an existing shareholder

may purchase in any 12-month period. It could purchase the smaller of:

100% of the value of the issuer's securities it owns at the start of

the 12-month period; or 5% of the total offering amount. A shareholder

would have to aggregate its securities purchases and ownership with

those of its affiliates. The shareholder also would have to count its

purchases in all Form B offerings to existing security holders within

the 12-month period. Any one shareholder and its affiliates would be

able to purchase at least $10,000 of the issuer's securities in any 12-

month period in Form B offerings to existing security holders, despite

the percentage tests. For example, where a shareholder owned $5,000 of

the issuer's securities at the start of a 12-month period, it would be

able to purchase $10,000 of securities in the subsequent 12-month

period in all Form B registered offerings to existing security holders.

Finally, the Commission notes that investor eligibility to

participate in a DRIP is often based on ownership of a certain amount

of the issuer's securities. In many cases, ownership of just one share

or even a partial share worth as little as $25 qualifies a person for

participation in a DRIP. The Commission is concerned that where there

may be little public information about an issuer and the investor does

not have a significant ownership interest in the securities of an

issuer, the investor may not have access to adequate issuer information

or have the inclination to follow the issuer and its

business.115 To help ensure that investors have a chance to

learn about the issuer before deciding whether to participate in its

DRIP, the Commission proposes to provide that small issuers may not use

Form B to register their DRIPs unless the DRIP is limited to investors

who have held securities of the issuer for at least two months.

---------------------------------------------------------------------------

\115\ Securities Act Rule 405, 17 CFR 230.405, defines the term

dividend or interest reinvestment plan and states that such plans

may allow participants to contribute additional cash amounts for the

purchase of securities offered under the DRIP. Accordingly, once an

issuer registers a DRIP, it may offer securities to participants in

addition to or even in lieu of those purchased by the reinvestment

of dividends or interest.

---------------------------------------------------------------------------

Should the proposed 15% threshold be lowered to 5% or 10%, or

raised to 20%? Would the shareholder purchase limitations adequately

protect against unregistered distributions to the public? Should the

percentage limitations be lower (e.g., 75% of the securities owned at

the start or 2% of the total offering) or higher (e.g., 150% of the

securities owned at the start or 10% of the total offering)? Should the

$10,000 minimum purchase amount during any 12-month period be lower

(e.g., $5,000) or higher (e.g., $20,000)? Should we lengthen the 12-

month measurement period to two years? Should the two-month ownership

period before participation be longer (e.g., 3, 4, 5 or 6 months) or

should it be shorter (e.g., one month) or eliminated completely?

Finally, would the holding period requirement make it overly burdensome

for issuers to determine who is eligible to participate in the DRIP?

ii. Offerings to Existing Common Stock Holders

For the same reasons we would permit small issuers to register on

Form B securities issued pursuant to DRIPs, rights offerings, or in

connection with convertible securities and exercise of transferable

warrants, we would permit smaller issuers to use Form B to register

offerings of common stock to existing common stock holders, without

regard to whether the offering was pursuant to an ongoing plan. This

proposal represents an extension of our current approach to offerings

to existing security holders and reflects, in part, our recognition

that more and more companies offer securities to existing security

holders through direct stock purchase plans (``DSPPs'').

To register on Form B, these offerings would have to meet the

following conditions:

1. The securities registered on Form B are offered only to existing

common stock holders that have held the issuer's common stock for at

least two months;

2. The dollar amount of the securities registered on Form B

represents no more than 15% of the issuer's public float when

aggregated with the dollar amount of securities previously registered

by the issuer on Form B pursuant to any offering directed solely to

common security holders, including under DRIPs, within the 12 months

before the start of, and during, the current offering; and

3. The shareholder purchases in any 12-month period no more than

the smaller of 100% of the value of the issuer's common stock owned by

the shareholder at the start of the 12-month period, or 5% of the total

offering amount, except that any shareholder may purchase up to $10,000

of common stock in any 12-month period.

[[Page 67190]]

We propose the first two conditions for the same reasons we propose

them in connection with DRIPs. Just as with DRIPs, we seek to prevent

small companies otherwise ineligible to use Form B from being overly-

aggressive in labeling a sale to the public as a sale to existing

shareholders. Therefore, we impose these conditions. The first

condition requires issuers to aggregate all their offerings of common

stock to existing security holders, including those under DRIPs, to

determine how much common stock they may register on the Form B for

offerings to existing common stock holders. We believe the condition is

appropriate because it would inhibit smaller issuers from circumventing

the 15% public float mechanism designed to prevent smaller issuers from

using DRIPs to raise excessive amounts of capital through a short-form

registration statement that they would otherwise be ineligible to

use.116 These common stock offerings raise concerns similar

to offerings under DRIPs. We therefore propose to add the same kind of

common stock shareholder purchase limitation as proposed for DRIP

offerings registered on Form B.

---------------------------------------------------------------------------

\116\ Many issuers offer securities to existing security holders

through DSPPs to qualify those holders to participate in their

DRIPs. Depending on the circumstances, the two plans could work in

the same ways and provide holders with the same benefits.

Accordingly, at this time, we believe it is appropriate to limit the

amount of securities a small issuer can register under either

offering when registering them on Form B--no matter how the offering

is characterized.

---------------------------------------------------------------------------

The Commission believes this proposal will make it easier for

smaller issuers to publicly offer securities to its existing

shareholders. The proposal also may benefit investors because extending

Form B for offerings pursuant to DSPPs may encourage issuers to

register them.

We solicit your comment on this proposal. Should we narrow or

expand the offering thresholds? Would the shareholder purchase

limitations adequately protect against unregistered distributions to

the public? Should the purchase limitations be the same as used in DRIP

offerings or should they be lower or higher? Is two months a sufficient

amount of time to ensure that investors would have time to familiarize

themselves with the issuer? Is it a sufficient period of time to ensure

the offering is truly one to existing shareholders and not simply an

offering to the public at large? Should we have a minimum ownership

requirement to ensure that investors have reason to keep informed about

the company? If so, how much? Would a $1,000, $2,000, $5,000 or $10,000

threshold be appropriate? Should we apply a minimum ownership

requirement to DRIPs as well? If so, should the threshold be the same

as for offerings of common stock to common stock holders?

We are proposing to make Form B available for offerings to existing

common stock holders of smaller issuers, in part, because we assume

that those investors are following those issuers. Therefore, those

investors would not need delivery of company information. Is our

assumption correct that an existing common stock holder is likely to

follow the issuer? Would it be more appropriate to move such offerings

to Form A but permit small issuers to designate the effective date of

their Form A registration statement? What additional costs, if any,

would issuers incur as a result of requiring them to use Form A for

these offerings, with the ability to designate their effective dates,

instead of Form B?

iii. Convertible Securities, Transferable Warrants and Rights Offerings

In 1972, we adopted amendments to our short-form registration

statement to provide that seasoned issuers could use Form B to register

securities to be offered upon the conversion of outstanding convertible

securities and upon the exercise of outstanding transferable

warrants.117 In 1978, we adopted, in the ``nature of an

experiment,'' short-form registration to register rights offerings to

existing shareholders.118 We determined not to require that

issuers of rights offerings, or of the other kinds of offerings to

existing shareholders, meet the newly adopted eligibility standards

applied to primary offerings by large, seasoned

companies.119 When we adopted Form S-3, we explained that

offerees in offerings to existing shareholders pursuant to rights

offerings, exercises of convertible securities, exercises of

transferable warrants and dividend or interest reinvestment plans did

``not need the additional assurances of wide information dissemination

provided by the test for primary offerings'' because they already owned

securities of the issuer and could be presumed to follow the issuer

through corporate communications and Exchange Act

reports.120

---------------------------------------------------------------------------

\117\ See Securities Act Release No. 5265 (June 27, 1972) [37 FR

15989].

\118\ Securities Act Release No. 5879 (Nov. 2, 1977) [42 FR

58677].

\119\ Securities Act Release No. 5923 (Apr. 11, 1978) [43 FR

16672]; Securities Act Release No. 5931 (May 15, 1978) [43 FR

21661].

\120\ Securities Act Release No. 6331 (Aug. 6, 1981) [46 FR

41902].

---------------------------------------------------------------------------

We believe that reasons that have historically supported a

streamlined and relaxed approach to offerings by smaller seasoned

issuers to existing shareholders would support extending the

availability of proposed Form B to smaller reporting issuers that make

offerings of securities pursuant to: rights offerings,121

conversion of outstanding convertible securities and exercise of

transferrable warrants.122 Those issuers would continue to

realize the benefits of short-form registration for offerings to

existing shareholders that had already made a decision to invest in the

issuer. At the same time, the reporting requirement of Form B would

ensure the public availability of at least 12 months of public

information about the issuer.

---------------------------------------------------------------------------

\121\ In situations where securities underlying rights may be

acquired by new investors because, for instance, the rights are

transferable, an issuer may not use short-form registration unless

it meets the eligibility requirements for a primary offering on the

form. See, e.g., Securities Act Release No. 6943 (July 16, 1992).

Our proposals would not alter this position. Accordingly, smaller

issuers would be ineligible to use Form B to register securities

underlying rights that may be acquired by new investors. We also

would preclude smaller issuers from using Form B to register

securities underlying rights that were not taken up by existing

shareholders and that would be offered on a ``standby'' basis to new

investors.

\122\ Form B would not be available for the issuance of

securities pursuant to a conversion of a convertible security or the

exercise of a transferable warrant if the issuance of such

securities could occur within one year of the company's issuance of

the convertible security or transferable warrant. If the underlying

security is issuable within one year of the company's issuance of

the convertible security or transferable warrant, the underlying

security would be part of the offering of the convertible security

or transferable warrant. Consequently, the underlying securities

must be registered with the convertible security or transferable

warrant. In that case, unless the issuer is eligible to use Form B

to register the convertible security or transferable warrant, it

would not be eligible to register the underlying security on Form B.

See The Division of Corporation Finance Manual of Publicly Available

Telephone Interpretations, Section A.9. (July 1997).

---------------------------------------------------------------------------

We seek your comment on this proposal. Do any of these three types

of offerings present risks that should result in exclusion from Form B?

Is there any reason to preclude such issuers from using Form B? Should

we restrict availability of Form B to smaller issuers that have sent at

least a glossy annual report to their shareholders 123

within the twelve months before making their offering to existing

shareholders? Is that requirement useful in light of the fact that the

warrants or convertible securities are transferable, and therefore the

shareholders to whom the issuer

[[Page 67191]]

would send that information may not be the same persons who exercise or

convert? Are we correct in continuing to believe that existing

investors would follow the issuer and keep informed of its business?

Or, to ensure investor follow-up, should we limit Form B for offerings

to existing security holders that hold a minimum amount or value of the

issuer's securities (e.g., $2,000)?

---------------------------------------------------------------------------

\123\ Throughout this release, all references to ``annual

report'' or ``Exchange Act annual report'' refer to the annual

report filed under Section 13(a) of the Exchange Act, generally on a

Form 10-K or 20-F. All references to the ``glossy annual report to

security holders'' or ``the annual report to security holders''

refer to the annual report filed under Rule 14a-3, 17 CFR 240.14a-3.

---------------------------------------------------------------------------

Under current requirements, an issuer may not use Form S-3 to

register securities pursuant to DRIPs, upon exercise of outstanding

rights or transferable warrants, or upon conversion of outstanding

convertible securities unless it has sent an annual report

124 within the 12 months preceding the filing of the Form S-

3 to all record holders of those outstanding or DRIP

securities.125 Foreign private issuers registering such

offerings on Form F-3 are not subject to any prior information delivery

requirement.126 We have not included a prior delivery

requirement in the proposed system. These issuers would be ineligible

to use Form B unless they had already filed with the Commission at

least one annual report.127

---------------------------------------------------------------------------

\124\ Form S-3 states that the material that issuers must

deliver to existing security holders must include the information

required by Rule 14a-3(b), 17 CFR 240.14a-3(b). The information

required under that Rule is most frequently included in companies'

glossy annual reports, and is less detailed than the information

required in an annual report filed under cover of Form 10-K. Form S-

3 also states that management-related information need only be

delivered to existing security holders who may be issued common

stock in connection with their exercises or conversions of

securities or participation in a DRIP.

\125\ See General Instruction I.B.4. of Form S-3.

\126\ See General Instruction 1.B.4. of Form F-3. Foreign

private issuers, however, are not permitted to use Form F-3 for

these kinds of offerings if any of the securities are to be offered

or sold in a standby or similar underwriting arrangement.

\127\ Smaller issuers of securities under these kinds of

offerings, whether domestic or foreign, would not be eligible to use

Form B unless they: were seasoned (subject for at least 12 months to

the reporting requirements of Section 12 or 15(d)); were timely in

meeting their reporting obligations; and had filed at least one

annual report under the Exchange Act. See General Instruction I.B.

of proposed Form B.

---------------------------------------------------------------------------

We solicit comment on whether to impose any information delivery

requirement on smaller issuers that would use Form B to register

securities issuable in connection with these kinds of securities

offerings. Is it fair to assume that security holders would have

adequate information about an issuer they already invested in if the

issuer were not required to deliver annual report information to

security holders? Should we require them to provide existing security

holders with more information than would be required under current

rules (e.g., information in an annual report on Form 10-K or 20-F)?

In connection with this proposal, are there any reasons to continue

to distinguish domestic issuers from foreign private issuers? Should we

require foreign private issuers making these kinds of offerings to

deliver information to their existing security holders? If so, should

they be required to deliver the same kind of information required by

Form 20-F, or should we allow them to deliver the level of information

required by Rule 14a-3?

iv. Exercise of Outstanding Transferable Options

We propose to allow smaller seasoned issuers to use Form B to

register offerings to existing security holders of securities issuable

upon exercise of outstanding transferable options. Issuer options are

like warrants in that they entitle the holder to buy or sell securities

at a fixed price, during a specified period in the future. In deciding

whether to buy the option, an investor speculates about the future

value of the security underlying the option. An option holder then

either trades the option on the basis of the premium price, exercises

it or lets it lapse.

If an option holder has already made one investment decision about

the underlying securities before exercising the option, we believe it

is fair to presume that the holder has access to information about the

issuer. (In the case of employee options, the employee may have simply

received a grant of options.) To at least the same extent as existing

shareholders, we believe that such investors may be expected to follow

the issuer closely through corporate communications or Exchange Act

reports. Therefore, we propose to extend Form B to smaller seasoned

issuers for registration of securities issuable upon exercise of

options.

As in the case of conversions of convertible securities and

exercises of transferable warrants, if the underlying security is

issuable within one year of the company's issuance of the option, the

underlying security would be part of the offering of the option.

Consequently, the underlying securities must be registered with the

option. In that case, unless the issuer is eligible to use Form B to

register the option, it would not be eligible to register the

underlying security on Form B.128

---------------------------------------------------------------------------

\128\ See The Division of Corporation Finance Manual of Publicly

Available Telephone Interpretations, Section A.9. (July 1997).

---------------------------------------------------------------------------

We seek comment on this proposal. Would allowing Form B

registration for option exercises by smaller companies otherwise

ineligible for Form B result in indirect distributions of common stock

to the public? Does their ineligibility to use Form B for this purpose

if exercisable within a year avoid that possibility? Should we preclude

Form B registration for exercises of options by dealers to avoid the

possibility of issuers entering into options with underwriters as a

means to effect a delayed distribution by issuers that would be

ineligible for delayed shelf registration?

For domestic issuers that would use Form B for offerings to

existing shareholders, should we, following Form S-3's current

requirements, extend the Form only if within the 12 months preceding

the filing on Form B the issuer sent out material company and financial

information to all its existing shareholders to whom it would extend

the Form B offering? 129 If so, would investors need more or

less information than what Form S-3 currently calls for in order to

make an informed investment decision? 130 Would 6 months be

more appropriate because it would be more timely? What information, if

any, should foreign companies using the Form be required to have

provided? Would this registration option render Form S-8 unnecessary

for exercises of employee stock options? Should we continue to require

issuers to register employee stock option exercises on Form S-8 in

light of the fact that employees may not have made an investment

decision when acquiring the options?

---------------------------------------------------------------------------

\129\ Prior delivery of specific information to existing

shareholders is not currently required on Form F-3.

\130\ See General Instruction I.B.4. of Form S-3, citing to Rule

14a-3(b) of the Exchange Act, 17 CFR 249.13a-3(b), and Items 401,

402 and 403 of Regulation S-K, 17 CFR 229.401-229.403.

---------------------------------------------------------------------------

d. Non-Convertible Investment Grade Securities

Today, companies that do not meet the public float requirement of

Form S-3 may nevertheless register an offering of non-convertible

investment grade securities on that Form. When the Commission adopted

Form S-3 in 1982, we indicated that Form S-3 was appropriate for the

registration of investment grade securities because investors purchase

those securities on the basis of their interest rate and credit

rating.131 The Commission continues to believe that

investors rely on a security's credit rating, although investors may

well seek more than just

[[Page 67192]]

rating information in order to evaluate the investment.

---------------------------------------------------------------------------

\131\ Securities Act Release No. 6383 (Mar. 3, 1982).

---------------------------------------------------------------------------

Given the historical precedent of using investment grade rating as

an eligibility criterion for Form S-3 registration, we are proposing to

allow non-convertible investment grade securities offerings to be

registered on Form B by issuers that have been reporting under the

Exchange Act for at least a year, have filed at least one annual report

and are current and timely in filing those reports. We solicit comment,

however, regarding whether we should continue to have a registration

system in which Form eligibility turns solely on a credit rating,

particularly in the case of Form B. A credit rating is one

organization's judgment about the likelihood of default. That judgment

is not a guarantee of no risk. Rather than allowing use of Form B on

the sole basis of an investment grade rating for the securities being

offered, should we provide for registration of those securities on Form

A with its mandated transactional disclosure but allow for

effectiveness of those Form A filings upon demand?

e. Market Making Transactions by Affiliated Broker-Dealers

When a broker-dealer that is an affiliate of an issuer

132 engages in market making transactions in that issuer's

securities, registration under the Securities Act is

required.133 The registration requirement arises under the

statute due to either of two reasons. First, in the definition of

``underwriter'' under the Securities Act, the term ``issuer'' includes

any person affiliated with the issuer.134 Because of the

affiliation between the broker-dealer and the issuer, the broker-dealer

itself is considered an issuer. Thus, the exemption from Securities Act

registration for persons other than ``issuers, underwriters and

dealers'' would not be available.135

---------------------------------------------------------------------------

\132\ A broker-dealer is considered an affiliate of the issuer

when the broker-dealer controls, or is controlled by, the issuer or

when the broker-dealer and the issuer are under common control. See

Rule 405 of Regulation C, 17 CFR 230.405. The determination of

control is based on the facts and circumstances of the particular

situation.

\133\ Market-making transactions are principal transactions. A

principal transaction is a transaction in which the broker-dealer

purchases or sells for its own account, rather than the account of

another party.

\134\ Section 2(a)(11) of the Securities Act defines the term

``underwriter'' to mean ``any person who has purchased from an

issuer with a view to, or offers or sells for an issuer in

connection with, the distribution of any security, * * * or

participates or has a participation in the direct or indirect

underwriting of any such undertaking. * * * As used in this

paragraph the term ``issuer'' shall include, in addition to an

issuer, any person directly or indirectly controlling or controlled

by the issuer, or any person under direct or indirect common control

with the issuer.'' 15 U.S.C. Sec. 77b(a)(11).

\135\ See Section 4(1) of the Securities Act, 15 U.S.C.

Sec. 77d(1).

---------------------------------------------------------------------------

The second reason registration is required flows from the

definition of ``dealer'' under the Securities Act. The Securities Act

exempts from registration most securities transactions by

dealers.136 ``Dealer,'' as defined under the Securities Act,

means any person that engages in transactions in ``securities issued by

another person.'' 137 If an issuer and its broker-dealer are

affiliated, the broker-dealer would be considered to be an issuer.

Hence, if it engages in a transaction in the issuer's securities, its

transaction would not be in securities ``issued by another person.''

Thus, the affiliated broker-dealer is not a ``dealer'' under the

Securities Act and the dealer's exemption is not available. Absent an

exemption, registration under the Securities Act is required by Section

5.

---------------------------------------------------------------------------

\136\ See Section 4(3) of the Securities Act, 15 U.S.C.

Sec. 77d(3).

\137\ Section 2(a)(12) of the Securities Act defines the term

``dealer'' to mean ``any person who engages either for all or part

of his time, directly or indirectly, as agent, broker, or principal,

in the business of offering, buying, selling, or otherwise dealing

or trading in securities issued by another person.'' 15 U.S.C.

Sec. 77b(a)(12).

---------------------------------------------------------------------------

In accordance with Section 5, therefore, the broker-dealer must

prepare and deliver ``market making prospectuses'' in market making

transactions in securities of its affiliates. This prospectus discloses

the affiliation between the issuer and broker-dealer, explains the use

of the prospectus in offers and sales by the affiliated broker-dealer

in market making activities, and provides information about the issuer.

We have recognized that prospectus delivery in market making

transactions imposes a burden on affiliated broker-

dealers.138 We seek to reduce that burden w

This text is long and has been trimmed here. Open the source document for the complete record.