The federal securities laws require that a Company carefully monitor and control its public communications throughout the public offering process.
Federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue while it is “in registration” in connection with a public offering. Failure to comply with these restrictions could delay or prevent the public offering and result in civil and criminal penalties. According to the SEC, “in registration” refers to the entire process from the time an issuer reaches an understanding with its managing underwriter or an internal decision to file a registration statement, through a period of at least 25 days after the effective date of the document filed with the SEC to register the shares to be sold to the public (a “Registration Statement”).
At all stages of the public offering process, a Company may continue its public communications in the normal course of business. That is, a Company may continue to issue press releases with respect to factual business developments, continue to discuss products or potential products and continue shareholder communications, provided that: (i) the disclosures are consistent with prior practice; (ii) the disclosures are in customary form; and (iii) the disclosures do not contain projections, forecasts, predictions, opinions or valuations. For example, press releases concerning significant new contracts, personnel changes or the opening of a new facility are permissible. Also, general advertising of the Company’s products and services is allowed.
These communications, however, should not include opinions about the value of the Company and should not mention the proposed public offering. The risk is that publicity regarding a Company or its securities prior to or after the filing of the Registration Statement could be viewed as an attempt to raise public interest in a Company and its stock in violation of federal securities laws. For example, predictions of increased earnings, market share or expected industry growth should be strictly avoided. In addition, all interviews, speeches and contacts with the general and financial press should be carefully monitored. A news article containing the comments of a director or employee of a Company regarding the offering or a Company’s prospects could be interpreted as an attempt to prepare the market for the offering.
To ensure that all disclosures made during the public offering process are proper, any proposed press releases, advertising, news articles or public statements planned by a Company should be reviewed by legal counsel prior to release.
DETAILED ANALYSIS
A. Pre-Filing Period. The period between the time an issuer reaches an understanding with its managing underwriter or agreement internally to pursue a public offering and the time that the issuer files a Registration Statement with the SEC is referred to as the “Pre-Filing Period.” During the Pre-Filing Period, there can be no offer to sell a Company’s securities, whether made through the use of a prospectus or any other form of communication. The phrase “offer to sell” is broadly defined, and may include publicity efforts in advance of a proposed offering that have the effect of arousing public interest in a Company or conditioning the market for the sale of its securities. There is no legal requirement to make a pre-filing press release announcing plans to begin a public offering, and generally it is not done. In unusual circumstances, however, a press release strictly complying with SEC rules may be used to end inquiries and conjecture prior to filing.
Companies are not required to cease all advertising and product announcements or to fail to answer inquiries from customers or vendors unrelated to a public offering. Thus, a Company may continue to issue press releases with respect to factual business developments, continue to discuss products or potential products and continue shareholder communications, provided that: (i) the disclosures are consistent with prior practice; (ii) the disclosures are in customary form; (iii) the disclosures do not contain projections, forecasts, predictions, opinions or valuations; and (iv) the content, timing and distribution of the disclosures do not otherwise suggest that a selling effort is underway. It is this last element that presents the most difficult issues and that often causes companies to act fairly conservatively. Each statement or activity must be examined in light of the circumstances in which it was made and must not be shaded to emphasize favorable rather than adverse information. In making any announcement during the Pre-Filing Period, companies must analyze and balance the nature and content of the information, as well as the length of time between the date of the statement and the filing and distribution of the Registration Statement, all in the context of the past practice and potential presumed motives for making the statement.
In addition to the civil and potential criminal penalties for violating these rules, the SEC can and has imposed delays in the effectiveness of a Registration Statement where improper disclosure or conditioning in the market has been made. This “cooling off” period can have a significant adverse effect on a company facing an unstable market or a crowded calendar of offerings.
B. Period Between Filing and Effectiveness (the “Waiting Period”). The period beginning with the filing of a Registration Statement and ending when the SEC completes its review of such Registration Statement and clears the issuer to sell its securities pursuant to such Registration Statement is known as the “Waiting Period.” During the Waiting Period, there may be oral offers to sell and written or oral offers to buy the securities. Written offers to sell, however, may only be made by use of a preliminary prospectus which is contained in the Registration Statement. The securities laws prohibit distribution of a “prospectus” unless that document meets the requirements of the Securities Act. The term “prospectus” is defined broadly to include any written communication, or any communication by radio or television, which offers any security for sale.
The SEC rules do exclude certain written communications from the definition of “prospectus,” such as a press release announcing the filing of a Registration Statement which contains only permitted information, including the name and address of the persons from whom the Preliminary Prospectus can be obtained.
While the prohibition against oral offers no longer applies during the Waiting Period, the guidelines discussed above concerning publicity, press releases and advertising in the Pre-Filing Period still apply concerning written communications.
C. Post-Effective Period. After the Registration Statement has become effective, both the sale and delivery of the securities must be preceded or accompanied by a copy of the written prospectus which is part of the Registration Statement÷the so-called “final prospectus.” Upon delivery of the final prospectus, supplemental sales literature may be used, provided that its not false or misleading.
Under the Securities Act and SEC rules, the prospectus delivery requirements continue during the period that the securities are being “distributed.” Any material change in the disclosures will, therefore, require the provision of an updated prospectus, which could be done either by a supplement or a new amended prospectus. Under the SEC rules, the underwriters of a public offering must continue to distribute a final prospectus for 25 days after the effective date or the date the first bona fide offer for the securities is made. This imposes an additional obligation on the issuer to keep the prospectus current during these time periods. One of the most frequent causes for incurring the expense of a post-effective update is the dissemination of information that materially changes the information contained in a final prospectus. Most issuers, therefore, try to avoid material developments shortly after a public offering and do not resume issuing financially related press releases until more than 25 days after the public offering. The Company, however, may make required government filings, such as quarterly or annual financial statements.
D. Conclusion and Guidelines. The important thing to realize is that the SEC may view publicity regarding a Company or its securities prior to or after the filing of the Registration Statement as part of the process of distributing the securities and deem the publicity to represent an offer to sell, or a solicitation of an offer to buy, a Company’s securities in violation of the Securities Act.
The management of a Company particularly should be aware of the content, form and frequency of public statements. Publicity in the normal course of business should not violate the Securities Act. For instance, the type of press releases typically made by a company regarding new employees or other business developments are not prohibited. The Company also should not feel hesitant about answering questions unrelated to the public offering regarding its business asked by prospective customers, suppliers or others in the normal course of business. Questions regarding the public offering prior to the filing of the Registration Statement should be declined. After the filing of the Registration Statement, questions regarding the public offering should be referred to the public filings in the EDGAR database or declined altogether.
On the other hand, the SEC has indicated that changes in the pattern of a company’s public communications during the period preceding a public offering may be viewed as an attempt to focus people on favorable publicity rather than on the prospectus. Thus, a violation of the SEC rules could occur if a company increases the circulation or frequency of its press releases and promotional materials, or changes the nature and emphasis of its releases and public relations activities by, for example, conducting a more comprehensive advertising campaign than normal.
The management of the Company also should be particularly careful to avoid any predictions of future financial performance or any statements about its value.
Prior to filing the Registration Statement, the Company should only tell its bankers, attorneys, accountants and other professionals with whom the Company does business on a “need to know basis” that the Company is considering a public offering. They also should be asked to keep this information confidential.
Given the potential delay that could be imposed by improper publicity, we urge you to review in advance with us and the underwriters (and their counsel):
- any press releases or other advertising that the Company proposes to issue;
- any articles that are expected to be published by trade journals or other news media concerning the Company or its products; and
- any speeches or other “public” statements or appearances planned by Company personnel.
