US public offering reforms

On June 29 2005, the SEC unanimously adopted a series of new rules to reform the registration, communication and offering processes in the US.^[34] The final rule changes took effect on December 1 2005.^[35]

Among other things, the new rules:

• Create a new breed of issuers called well-known seasoned issuers, or WKSIs. WKSIs are large cap, seasoned issuers (representing about 30% of all listed issuers), and benefit from special treatment in securities offerings. In particular, they are able to make offers to sell securities before a registration statement has been filed and without regard to previously applicable gun-jumping restrictions. In addition, WKSIs are entitled to automatic shelf registration on demand without SEC review.
• Encourage communications with the market both before and during public securities offerings. Even non-WKSI issuers have greater freedom to communicate without fear of the prohibitions on pre-offering publicity (often referred to as gun jumping), so long as those communications occur more than 30 days before a registration statement is filed and do not refer to a securities offering. In addition, two new safe harbours allow the continued regular release of certain factual and forward-looking information by certain issuers during the offering process.
• Allow use of a new species of prospectus, the so-called free writing prospectus. Issuers can use a new type of written document in connection with offerings, called a free writing prospectus. Free writing prospectuses are not subject to the strict form and content requirements of current statutory prospectuses. In most but not all cases, free writing prospectuses need to be filed with the SEC concurrently with first use.
• Change the liability regime. In an authoritative interpretation of Section 12(a)(2) of the Securities Act, the rules make clear that information delivered after an investor makes his or her investment decision – which the rules define as the point at which the investor enters into a contract for sale – will not be taken into account in determining whether the investor previously received materially inaccurate information.

General

A foreign private issuer begins the registration process by submitting a registration statement on the applicable form to the SEC staff. The SEC staff may then elect to review the registration statement. They will almost always review the registration statement of an issuer that does not already file reports with the SEC and they will review all initial public offerings (IPOs). (As noted above, WKSIs may file immediately effective registration statements without SEC review.)

If the SEC elects to review the registration statement, the SEC will provide comments to the issuer. The SEC will typically provide its first comments within 30 days of submission or filing. The length of time of the registration process will depend on the nature of the SEC's comments, particularly on the financial statements, and on the SEC's workload.

When the issuer initially submits the registration statement to the SEC, the registration statement is assigned to an examiner and a member of the SEC's accounting staff for review. The examiner will be the issuer's primary contact at the SEC in connection with the comment process.

The examiner will provide comments regarding compliance with prescribed disclosure requirements and will often:

• make requests for additional, clearer or more concise disclosure;
• provide comments relating to the SEC's Plain English rules, which took effect in October 1998;^[36] and
• seek supplemental information to document and support statistics and claims contained in the registration statement relating to market data and the issuer's competitive position.

The SEC's accounting staff will comment on the financial statements and other financial information required by or included in the registration statement. They generally provide wide-ranging comments on many aspects of the issuer's financial disclosure, particularly with respect to:

• the accounting treatment of acquisitions and internal restructurings;
• inclusion of historical financial statements of acquired companies, guarantors and entities in which the issuer has a minority investment;
• reconciliation to US Gaap by issuers with audited financial statements prepared under other accounting standards;
• accounting for contingencies and the establishment of reserves;
• disclosures concerning market risk exposure (interest rates, currencies, commodities) and hedging transactions;
• disclosure of off-balance-sheet arrangements;
• the appropriateness of adjustments in pro forma financial information;
• compliance with the newly adopted conditions for use (and prohibitions on the use) of non-Gaap financial measures;
• revenue recognition; and
• accounting for stock options, particularly those granted less than one year before an equity offering.

After the issuer has resolved all issues raised in the SEC's comment letters, the SEC will declare the registration statement effective at a time jointly determined by the issuer and the underwriters. Immediately after effectiveness, underwriters typically confirm orders orally, with written confirmation mailed promptly thereafter along with the final prospectus.

Issues to identify before registration

Any issuer considering a public offering in the US, a private offering with US registration rights or a listing in the US is strongly advised to consult with its auditors' SEC specialists well in advance of the first submission to the SEC to assure that required financial statements are available and complete. The availability of required financial statements often affects significantly the timing of an offering.

A first-time issuer must also compile significant amounts of non-accounting data about its business and markets, its strategy and the regulatory environment in which it operates, and must distill this information into a clear and understandable prospectus and thoroughly check the disclosure for accuracy before submitting the registration statement to the SEC. First-time issuers will also become subject to Sarbanes-Oxley's wide-ranging requirements.

Prospective underwriters and counsel can assist the issuer in assembling this information and an assortment of disclosure documents from "comparable" issuers, but the process of preparing for a first-time registration often takes several months.

Issues to address in advance of any offering include the following:

• A foreign private issuer can submit financial statements prepared in accordance with local Gaap or IFRS, in either case with a reconciliation to US Gaap. What are the significant differences between local Gaap or IFRS and US Gaap? How long will reconciliation take?
• Have all required audits been conducted in accordance with the standards of the US Public Company Accounting Oversight Board (PCAOB)? The SEC requires all financial statements to be audited in accordance with the PCAOB's standards, even in the case of an issuer using local Gaap or IFRS.^[37]
• Does the issuer have the corporate governance procedures and mechanisms in place to comply with Sarbanes-Oxley's requirements (for example, management certifications, internal control over financial reporting, disclosure controls and procedures, the appropriate audit committee functions)? Note that a first-time issuer that is not already an SEC reporting company becomes subject to Sarbanes-Oxley upon the initial public filing of its registration statement, even before the SEC declares that registration statement effective.
• Has the issuer completed any significant acquisitions or dispositions during the three full financial years or any subsequent interim period preceding the date of the offering? Separate subsidiary financial statements and pro forma financial information may be required.
• Guarantees in respect of a security are considered to be separate securities under the US federal securities laws that must be registered, sometimes with separate audited guarantor financial statements. Will the issuer's securities be guaranteed by any company?
• If the issuer is offering debt securities, will they be secured by a pledge of the capital stock or inter-company debt of any related company? A pledgor often must file separate financial statements for the company that issued the pledged securities.
• SEC registration requires many material contracts to be filed as exhibits (subject, under certain circumstances, to confidential treatment of designated portions). Does the issuer have any material contracts that contain commercially sensitive information, or that are subject to confidentiality agreements that would be violated if they were filed publicly? Note that under the SEC rules mandating electronic filing by all foreign private issuers documents (including material contracts) generally have to be submitted in English. Does the issuer have any material contracts that must be translated into English?
• Does the issuer have a significant minority investment in any other entity or any 50/50 joint venture? Separate financial statements may be required for such an entity and the issuer may not have access to these statements or to such entity's auditors.
• Does the issuer manage its business in separate segments and, if so, are the issuer's internal accounts enough to prepare financial statements that meet the SEC's "segment reporting" requirements?
• Are the auditors of every set of required financial statements prepared and qualified to have their audits used in a US securities offering and filed with the SEC? If not, re-audits may be necessary.
• Has the issuer granted stock options within the year prior to an equity offering? If so, the difference between the exercise price and the offering price could constitute compensation expense that could reduce net income under US Gaap.
• The SEC requires issuers in certain types of industries (such as banking and oil and gas) to provide detailed and specific disclosure on various matters. Will the issuer be able to assemble and develop the required information?
• Is there a possibility that the issuer will wish to pursue an unregistered transaction instead of the public offering? Based on Securities Act Rule 155, an issuer is permitted to conduct a private placement 30 days after withdrawing a public offering.^[38] Rule 155 gives general guidance that 30 days is an appropriate "quiet period" in advance of a private placement.^[39]

Available registration forms

The SEC has specific forms for the registration of securities under both the Securities Act and the Exchange Act. Forms not only contain their own disclosure requirements, but also specify certain items that must be disclosed under Securities Act Regulation S-K (for textual disclosure requirements) (S-K) and under Securities Act Regulation S-X (S-X) (which governs financial statements).

The central form for foreign private issuers is Form 20-F. Form 20-F sets out the required disclosure for US listings and annual reports by foreign private issuers. In addition, the registration forms for public securities offerings refer extensively to Form 20-F.

For both the Securities Act and the Exchange Act, the relevant forms typically prescribe broad categories of information, rather than specific disclosures. In the case of a Securities Act registration form, the registration statement includes a prospectus containing prescribed categories of financial and non-financial disclosure, as well as additional information not included in the prospectus, including exhibits (such as corporate documents and material contracts). The registration statement, prospectus and annual report must contain a basic package of financial statements and other financial information to illustrate the financial condition and results of operations of the issuer.

A checklist showing the non-financial information required by Forms F-1, F-3 and 20-F is attached as Annex A. Financial statement requirements are discussed in Required Financial Statement Disclosure, below.

(i) Form F-1

Form F-1 is the Securities Act form for any securities of a foreign private issuer that is a first-time SEC registrant or for which no other form is authorized or prescribed. Although certain non-IPO issuers are allowed to incorporate information by reference from previous Exchange Act filings, a Form F-1 is typically a lengthy document.

(ii) Form F-3

Form F-3 is available to a foreign private issuer that has:^[40]

• securities registered under the Exchange Act or is required to file reports with the SEC under Section 15(d) of the Exchange Act (by virtue of having registered an offering under the Securities Act);
• filed at least one annual report on Form 20-F;
• been subject to the reporting requirements of the Exchange Act and filed all required materials on a timely basis for at least 12 months before the filing of the registration statement; and
• had no material default on loans or long-term leases or failure to pay a sinking fund installment or dividend on preferred stock since the end of the last financial year covered by audited financial statements in its Exchange Act reports, and no subsidiary of the issuer has had such a default.

Form F-3 is available for the following transactions:^[41]

• offerings by the issuer of non-convertible investment grade securities;
• offerings of securities by the issuer (other than non-convertible investment grade debt securities) for cash if the aggregate market value worldwide of the issuer's common equity held by non-affiliates is at least $75 million;
• secondary offerings of securities by holders of the issuer's securities (often pursuant to a registration rights agreement); and
• offerings of securities by the issuer upon exercise of certain outstanding transferable warrants, upon exercise of rights granted pro rata by the issuer to existing holders of the class offered, pursuant to a dividend or interest reinvestment plan, or upon conversion of outstanding convertible securities.

(iii) Form F-4

Form F-4 is the applicable form for foreign private issuers who are offering new securities for outstanding securities, including securities issued in connection with business combinations and exchange offers.

Form F-4 requires information concerning:^[43]

• the relevant transaction, including pro forma financial information for an acquisition or, as applicable, the terms of the exchange;
• the issuer, its business and the risks associated with the relevant investment, consistent with the disclosure required by Forms F-1 or F-3 (issuers eligible to use Form F-3 may incorporate by reference in Form F-4 to the same extent as permitted by those forms); and
• for acquisitions, the company being acquired, including most of the same business and financial information that is required for a similarly situated issuer (if the company to be acquired already files reports with the SEC, the necessary information may be incorporated by reference in certain circumstances).

(iv) Form F-6

Form F-6 is a separate, additional form filed by a depositary bank to register ADSs evidenced by ADRs, the form in which equity interests in foreign private issuers are frequently held and traded in the US. Form F-6 may only be used if:^[44]

• the deposited shares have been offered or sold in transactions registered under the Securities Act or exempt from registration;
• the foreign private issuer files periodic reports with the SEC or is exempt from those filing requirements pursuant to Rule 12g3-2(b), discussed above; and
• the holder of ADRs is entitled to withdraw the deposited securities at any time, subject only to temporary delays for specified, limited reasons.

Automatic shelf registration for WKSIs

Modifications to Form F-3, coupled with 1933 Act Rule 430B, allow a foreign private issuer that is a WKSI (and in certain cases, its majority-owned subsidiaries) to register (without paying a filing fee) an unspecified amount of securities on a shelf registration statement. The shelf registration statement becomes automatically effective, so that sales can take place immediately after filing, without risk of SEC review. We discuss automatic shelf registration in Annex B, below.

ADRs and ADSs

Many foreign private issuers that sell equity securities into the US do so through the use of ADRs evidencing ADSs. ADRs are issued by a depositary, usually a large multinational bank, and represent a specified number of the issuer's underlying equity securities held by the depositary or its custodian. Although ADR holders have essentially the same ultimate rights as holders of the underlying securities and can always, with limited exceptions, exchange their ADRs for the underlying securities, ADR programmes have certain advantages for issuers and holders (such as denomination in US dollars).

The SEC considers ADRs to be separate securities from the underlying shares they represent. The issuer must register the offering of the underlying shares on the applicable form. Issuances of ADRs in connection with a US public offering of the underlying shares by the issuer are known as "Level III ADR" programmes; issuances of ADRs in connection with listing or quoting existing shares in the US are known as "Level II ADR" programmes; and issuances of ADRs representing existing shares that are traded only over-the-counter in the US are known as "Level I ADR" programmes. ADR depositaries may establish ADR programmes to facilitate secondary trading in a foreign private issuer's previously issued shares either with the issuer's participation (a sponsored programme) or, less commonly, without the issuer's participation (an unsponsored programme). In either case, assuming the ADR programme results in more than 300 holders in the US, the issuer must either register the underlying class of shares with the SEC under the Exchange Act or claim the benefit of the Rule 12g3-2(b) exemption. If, however, the issuer desires to have its ADRs listed on a US national securities exchange or quoted on Nasdaq, Rule 12g3-2(b) is not available and accordingly the issuer must register the shares under the Exchange Act.

The depositary receives fees for transactions in the underlying shares, such as withdrawals from or deposits into the ADR facility and currency exchanges in connection with dividends.

Filing electronically – EDGAR

Since November 4 2002, the SEC has required foreign private issuers to use the SEC's Electronic Data Gathering and Retrieval (EDGAR) system for nearly all SEC filings.^[45] Previously, only domestic US issuers were required to file documents through EDGAR.

As a result, documents such as registration statements for offerings of securities, annual reports on Form 20-F and most current reports on Form 6-K must be filed electronically.^[46] In addition, all exhibits and attachments to SEC filings (such as material contracts) must be filed electronically, except for exhibits and attachments previously filed in paper form, which may generally be incorporated in an EDGAR filing by reference.^[47]

There are only limited exceptions to the requirement to file electronically. These include:

• a foreign private issuer's annual report to the holders of its securities submitted on Form 6-K;^[48]
• a report or other document submitted on Form 6-K that the issuer is required to furnish and make public under the laws of its home country or the issuer's home country exchange, that (i) is not a press release, (ii) is not required to be and has not been distributed to the holders of the foreign private issuer's securities, and (iii) if discussing a material event, has already been the subject of a Form 6-K filing or other SEC filing via EDGAR;^[49] and
• material submitted under Rule 12g3-2(b).^[50]

As a general matter, all filings in EDGAR must be made in the English language.^[51] Non-English documents must be fairly and accurately translated into English for filing in accordance with the SEC's rules on foreign-language documents,^[52] including most documents submitted to the SEC under cover of Form 6-K.^[53] Alternatively, a summary of certain documents filed with the SEC as exhibits may be provided,^[54] although the SEC's rules require specified significant documents (for example, articles of incorporation, instruments defining the rights of security holders and contracts on which an issuer's business is substantially dependent) to be provided in full translation.^[55] Similarly, certain documents provided to the SEC on Form 6-K may be provided in English summary, including a report required to be furnished and made public under the laws of the issuer's home country or the rules of the issuer's home country stock exchange, as long as it is not a press release and is not required to be and has not been distributed to the issuer's security holders.^[56] Any permitted summary must fairly and accurately summarize the terms of each material provision of the original text and fairly and accurately describe the terms that have been omitted or abridged.^[57]

Confidentiality

As discussed above, foreign private issuers that are registering with the SEC for the first time may submit registration statements for review on a confidential basis. Those registration statements remain confidential until the point of public filing (which is done at the time of printing a preliminary prospectus).

In almost all other circumstances, issuers are required to file registration statements and Exchange Act reports publicly. These documents – including any exhibits, such as material contracts – become available immediately upon filing through the SEC's EDGAR database (or the SEC's public reference facilities in Washington, DC). In addition, the SEC makes public both its comment letters on issuer's registration statements and required Exchange Act reports, as well as issuers' responses to those comments, within 45 days of the end of the SEC's review process.^[58]

Issuers often wish to preserve the confidentiality of certain portions of their response to SEC comments, as well as key terms of material contracts. The Securities Act and the Exchange Act include rules detailing how confidential treatment may be obtained for information contained in documents that are required to be filed with the SEC.^[59] The SEC has historically been unwilling to grant broad-brush requests for confidential treatment, particularly of contractual terms.

National Association of Securities Dealers review

Underwritten public offerings in the US are, in most cases, subject to review and approval by the National Association of Securities Dealers, Inc (NASD), a self-regulatory organization that, among other things, monitors the terms of public offerings underwritten by US investment banks. The NASD review will primarily focus on any pre-existing relationships between the underwriters and the issuer and whether the underwriters' proposed compensation is fair and not excessive. The NASD compensation review will look at the underwriting commission to be paid in connection with the offering as well as any other compensation received by the underwriters from the issuer and any of its affiliates in any capacity. The NASD will also review the terms of any securities transactions (including purchases of equity and warrants) between the underwriters and their affiliates and the issuer and its affiliates. The SEC will not declare a registration statement effective until the NASD has formally cleared the underwriting arrangements.

NYSE and Nasdaq listing requirements

To be eligible for listing on the NYSE or for quotation on Nasdaq, a foreign private issuer must meet certain quantitative listing requirements and corporate governance standards. Once listed, foreign private issuers must meet certain requirements relating to ongoing shareholder communication and disclosure. The quantitative NYSE and Nasdaq listing criteria and corporate governance standards are summarized in Annex C, below.

NYSE and Nasdaq have adopted wide-ranging changes in corporate governance requirements for listed companies in response to recent corporate scandals and Sarbanes-Oxley. However, foreign private issuers may follow home-country practice in lieu of certain of the new corporate governance requirements, although they must also disclose any significant ways in which their home-country practices differ from those followed by domestic US companies under the NYSE or Nasdaq listing standards.^[60]

Endnotes

[34]

The final text of the rules were released on July 19 2005. Securities Offering Reform, Securities Act Release 8591, Exchange Act Release 52056, Investment Company Act 26993 (www.sec.gov/rules/final/33-8591.pdf) [Securities Act Reform Release].

[35]

Securities Act Reform Release.

[36]

Plain English Disclosure, Securities Act Release 7497, Exchange Act Release 39593, Investment Company Act Release 23011, [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,003, at 80,125 (Jan. 28, 1998).

[37]

In May 2004, the SEC approved Auditing Standard 1, which had been adopted by the PCAOB in December 2003. Order Approving Proposed Auditing Standard 1, References in Auditors' Reports to the Standards of the Public Company Accounting Oversight Board [Auditing Standard 1], Exchange Act Release 34-49707, File PCAOB 2003-10, (May 14 2004). Auditing Standard 1 is effective beginning May 24 2004. PCAOB Press Release, PCAOB Auditing Standard 1 Effective May 24. Auditing Standard 1 requires that auditor's reports on the financial statements of issuers include a statement that the engagement was conducted in accordance with the "'standards of the Public Company Accounting Oversight Board (United States)'" as opposed to US generally accepted auditing standards. Auditing Standard 1– References in Auditor's Reports to the Standards of the Public Company Accounting Oversight Board, PCAOB Release 2003-025, PCAOB Rulemaking Docket Matter 010 (December 17 2003).

[38]

1933 Act Rule 155(c)(3).

[39]

Id.

[40]

Form F-3, General Instruction I.A.

[41]

Id. General Instruction I.B.

[42]

See 1933 Act Rule 415.

[43]

Form F-4, General Instructions B, C.

[44]

Form F-6, General Instruction I.A.

[45]

Mandated EDGAR Filing for Foreign Issuers, Securities Act Release 8099, Exchange Act Release 45922, International Series Release 1259, [2001-2002 Transfer Binder] Fed Sec L Rep (CCH) ¶ 86,640, at 85,471 (May 14 2002) [EDGAR Filing Release]. See also 1933 Act Regulation S-T, Rule 100(a) (Regulation S-T applies to all registrants whose filings are subject to review by the SEC's Division of Corporation Finance).

[46]

Regulation S-T, Rule 101(a).

[47]

Id. Rule 102(a).

[48]

Id. Rule 101(b)(1).

[49]

Id. Rule 101(b)(7).

[50]

EDGAR Filing Release, ¶ 86,640, at 85,476.

[51]

Regulation S-T, Rule 306(a).

[52]

Id.

[53]

Form 6-K, General Instruction D(1).

[54]

Regulation S-T, Rule 306(a).

[55]

1933 Act Rule 403(c)(2); 1934 Act Rule 12b-12(d)(2).

[56]

Form 6-K, General Instruction D(2).

[57]

1933 Act Rule 403(c)(3)(ii); 1934 Act Rule 12b-12(d)(3)(ii); Form 6-K, General Instruction D(4).

[58]

SEC Staff to Publicly Release Comment Letters and Responses (June 24 2005) (www.sec.gov/news/press/2004-89).

[59]

1933 Act Rule 406 and 1934 Act Rule 24b-2.

[60]

NYSE Rules 303A.00, 303A.11; National Association of Securities Dealers Inc [NASD Manual], Rule 435(a)(1).