The Good, The Bad And The Offer: Law, Lore And FAQs

Article by Alexander F. Cohen, Kirk A. Davenport II, Gregory P. Rodgers, Joel H. Trotter and Gregory Yaecker*

It all seems simple enough. The concept of "offer" is broad under the securities laws, so companies and underwriters need to be careful about any publicity in connection with a securities transaction. But in practice, the puzzling questions come thick and fast. Can the company issue a press release about its latest product? Can the CEO speak at the upcoming industry conference? Can the CEO be interviewed on CNBC the day after the IPO? And if publicity is so tightly controlled, why is it fine to hold a road show?

Sorting out these issues can be challenging, especially in real time. And you have to be sure of yourself, because you will need a compelling reason to nix a hard-charging CEO's upcoming "Mad Money" appearance. This Client Alert provides a comprehensive summary of the law and lore relating to offers of securities and a guide to maneuvering safely through the maze of available safe harbors and industry customs. We have also included a variety of FAQs to help you answer questions that often come up in practice.

BACKGROUND — REGULATION OF THE OFFER

Let's begin at the beginning. Section 2(a)(3) of the Securities Act of 1933 (Securities Act) defines the term "offer" expansively to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." You can see the problem right off the bat — given the breadth of this language, it can be difficult to say with certainty what is or is not an offer under this definition. And the US Securities and Exchange Commission (SEC) long ago stated that any publicity that may "contribute to conditioning the public mind or arousing public interest" in the offering, can itself constitute an offer under the Securities Act.1

Section 2(a)(3) works closely with Section 5 of the Securities Act, which imposes an intricate framework of restrictions on offers in connection with securities transactions. It also closely regulates the use of a "prospectus" — a term defined in Section 2(a)(10) of the Securities Act in a manner that captures all written offers of any kind (and some that are not obviously written, as we discuss in more detail below). Private offerings, such as those made to qualified institutional buyers (QIBs) in reliance on Securities Act Rule 144A, are exempt from Section 5 but have their own set of restrictions. Over the years, the SEC has adopted a number of safe harbors to protect various activities that are either harmless or necessary to the proper functioning of the capital markets. The Appendix to this Client Alert includes a brief refresher course on the workings of Section 5 and the important provisions of private and offshore offerings and transactions. It also contains additional details about a special type of prospectus called a free writing prospectus (FWP) and large companies known as well-known seasoned issuers (WKSIs).

HOW IT ALL HANGS TOGETHER — THE OFFER FLOWCHART

The following flowchart gives an overview of how you can approach questions on offers that come your way.

Is It an Offer?

The first question to ask when analyzing any particular fact pattern is the common-sense question, "Is it an offer?" Despite the broad definition of offer, some activities are not problematic because they are clearly not offers or because an SEC rule provides a safe harbor exclusion from the definition of offer.

Clearly Not Offers

Some communications are far enough afield from an offer of securities that you do not need to worry further. Depending on your specific facts and circumstances, examples of things that may fall outside the definition include:

Product Advertising and Factual Business Communications. Just because a securities offering is planned or ongoing, a company need not stop advertising its products or refrain from issuing press releases regarding factual developments in the business (the opening of a new office, for example).2 As the SEC put it in the context of securities offering reform in 2005, "In general, as we recognized many years ago, ordinary factual business communications that an issuer regularly releases are not considered an offer of securities ... Such communications will not be presumed to be offers, and whether they are offers will depend on the facts and circumstances."3 The Collision Principle. As a general matter, where a company faces an obligation under the Securities Exchange Act of 1934 (Exchange Act) to make a public statement, or where good corporate citizenship calls for disclosure of important events to existing public securityholders, the required disclosure should not be considered an offer. We tend to think of this as the collision principle — in a collision between the requirements of the Exchange Act and those of the Securities Act, the Exchange Act's ongoing disclosure requirements ought to prevail over the Securities Act's close regulation of offers. As the SEC has explained, "We do not believe that it is beneficial to investors or the markets to force reporting issuers to suspend their ordinary course communications of regularly released information that they would otherwise choose to make because they are raising capital in a registered offering."4 Release of Material Non-public Information to Satisfy Regulation FD. The SEC Staff has recognized that a reporting company engaged in a private offering may have obligations under Regulation FD to publicly disclose material non-public information it provides to potential investors in the private offering. If so, the SEC Staff has indicated that it is permissible to release the material non-public information on a Form 8-K, so long as the entire private offering memorandum is not included in the filing.5 Arguably, this is simply an application of the collision principle discussed above. If common sense doesn't clearly answer whether a particular fact pattern constitutes an offer, the next step is to review the many safe harbors and determine if any of them would apply.

Safe Harbors — Public Transactions

Securities Act Rule 163A — The 30-Day Bright-Line Safe Harbor

Rule 163A provides all issuers (whether or not already public filers) with a non-exclusive safe harbor from Section 5(c)'s prohibition on pre-filing offers for certain communications made more than 30 days before the public filing of a registration statement, even if those communications might otherwise have been considered to be offers under Section 2(a)(3). Note, however, that Rule 163A is an issuer-only safe harbor and is not available to prospective underwriters.

The requirements for Rule 163A include that:

the communication cannot refer to the securities offering; the communication must be made by or on behalf of an issuer—in other words, the issuer will need to authorize or approve each Rule 163A communication (and any communication by an underwriter will not come within the safe harbor); and the issuer must take "reasonable steps within its control" to prevent further distribution of the communicated information during the 30-day period before filing the registration statement (although the SEC has suggested that the issuer may maintain this information on its website, if the information is appropriately dated, identified as historical material and not referred to as part of the offering activities).6 Securities Act Rule 135 — Pre-filing Public Announcements of a Planned Offering

Rule 135 provides that an issuer will not be deemed to make an offer of securities under Section 5(c) as a result of certain public announcements of a planned registered offering. Rule 135 notices can be released at any time, including before a registration statement is filed.

Under Rule 135, the announcement must contain a legend, as well as limited information, including:

the name of the issuer; the title, amount and basic terms of the securities offered; the anticipated timing of the offering; and a brief statement of the manner and purpose of the offering, without naming the prospective underwriters for the offering. Securities Act Rule 168 — Factual Business Communications by Reporting Companies

Rule 168 is a non-exclusive safe harbor from Section 5(c)'s prohibition on pre-filing offers (and from Section 2(a)(10)'s definition of prospectus) that is available only to reporting issuers with a history of making similar...