SEC Proposes to Amend Securities Act Rule 163 – Proposed Change May Facilitate “Wall-Crossed” Offerings by WKSIs

January 4, 2010

On December 21, 2009, the Securities and Exchange Commission issued a proposed amendment to paragraph (c) of Rule 163 under the Securities Act of 1933, as amended.  Rule 163 was initially adopted in 2005 as part of the SEC’s Securities Offering Reform, which, among other things, eased many of the “gun jumping” restrictions on communications by issuers and others in connection with registered securities offerings.  The proposed amendments to Rule 163 would further ease some of these restrictions and may thereby facilitate so called “wall-crossed” offerings by well-known seasoned issuers, or WKSIs.[1]

As currently in effect, Rule 163 permits a WKSI to offer securities before filing a related registration statement.  Such offers may be deemed made, for example, when discussions with potential investors take place to gauge market interest prior to broad public disclosure of a transaction.  However, as currently drafted, Rule 163 applies only to communications made “by or on behalf of the issuer itself.”  Other offering participants, such as underwriters or dealers, may not rely on this exception from the gun jumping restrictions.  This limitation can create a significant impediment to a WKSI seeking to communicate with potential investors in advance of a securities offering, but has not filed an automatic shelf registration statement, or ASR,[2] covering the security to be offered.

When the SEC adopted Rule 163, it expected that WKSIs would in most cases continuously maintain an ASR, and as such, would not often need to rely upon Rule 163 for pre-filing communications.  However, as the SEC notes in the proposed amendment, many WKSIs have not continuously maintained ASRs, or have not registered all the different types of securities they later find they want to offer.  As a result, some WKSIs have looked to rely on the Rule 163 safe harbor more often than had been anticipated by the SEC.

The limitation of Rule 163 can affect an issuer’s ability to conduct a “wall-crossed” offering.  In a wall-crossed offering, underwriters market the offering to a limited number of potential investors prior to the public announcement of the sale.  This method has become increasingly common over the last few years because it helps issuers and underwriters to confidentially gauge interest in an offering prior to public disclosure of the offering.  To participate, potential investors enter into confidentiality agreements allowing them to “cross the wall” and receive non-public information about the proposed offering and the issuer.  Because they become temporary insiders upon receipt of such information, these investors are restricted from trading in the issuer’s securities until a public announcement of the offering is made.  Although a WKSI could file an ASR in anticipation of a wall-crossed offering, an issuer may be reluctant to risk signaling a potential offering through such a filing, as this would be at odds with its confidential pre-marketing effort.

Under the current rule structure, a wall-crossed offering or other pre-offering effort to gauge investor interest can be conducted by or on behalf of a WKSI only if the WKSI has an ASR on file covering the relevant securities or communicates on its own with potential investors in reliance on Rule 163.  However, direct contact by issuers with potential investors can raise serious confidentiality and Regulation FD concerns.  Because the mere disclosure of the issuer’s identity and interest in a possible financing can itself constitute material non-public information, investment banks conducting wall-crossed offerings will often seek to secure non-disclosure agreements from potential investors before divulging the identity of an issuer.  This is not feasible when the issuer is forced to act on its own.  Further, as compared to an investment bank, a WKSI often is not in the position to best target potential investors.  As a result, an issuer typically retains an investment bank to act on its behalf in connection with a wall-crossed offering or other pre-offering communication with potential investors.

The proposed amendment to Rule 163 would permit a WKSI to authorize an underwriter or dealer to act as its agent or representative for purposes of making pre-filing communications.  Under the amended rule communications by such an underwriter or dealer prior to the filing of an ASR would be deemed to have been made “by or on behalf of the issuer” for purposes of Rule 163 and therefore would not constitute a violation of the gun jumping restrictions.

Under the proposed amendment, three conditions must to be met for the Rule 163 exemption to apply to pre-filing communications conducted by underwriters and dealers:

1.  The underwriter or dealer must receive written authorization from the WKSI to act as its agent or representative before making any written or oral communications on the issuer’s behalf;

2.  The issuer must authorize or approve any communication before it is made; and

3.  Any authorized underwriter or dealer that has acted on behalf of the issuer in reliance on Rule 163 must be identified in the prospectus filed for the offering to which the communication related.

All other provisions of Rule 163 would continue to apply, including compliance with Regulation FD.

These three conditions limit the scope of the proposed amendment.  The first two conditions are designed to ensure that the issuer is involved in, and in control of, the communications conducted by the underwriters and dealers.  The proposed amendment treats an authorized communication by an underwriter or dealer as a communication of the issuer.  In addition, any written communication used by an authorized underwriter or dealer would need to be filed as a free writing prospectus when the registration statement for the offering is filed.[3]  Oral communications would not be subject to this filing requirement.

The third condition is aimed at informing investors of pre-marketing activities.  For example, pursuant to the proposed amendment, an investment bank that contacted a potential investor on behalf of a WKSI would have to be identified in the prospectus for any related offering.  As proposed, this would appear to be true even where the investment bank ultimately does not participate as an underwriter in the offering.

Comments on the proposed amendment to paragraph (c) of Rule 163 are due January 27, 2010.

  [1]   A WKSI, as defined in Securities Act Rule 405, is an issuer that meets the registrant requirements of Form S-3 or Form F-3; has at least $700 million in worldwide market value of outstanding voting and non-voting publicly-held common equity or has issued, for cash, within the last three years at least $1 billion aggregate principal amount of non-convertible securities through registered offerings; and is not an “ineligible issuer,” as defined in Securities Act Rule 405.

  [2]   Pursuant to rules adopted as part of the Securities Offering Reform, a WKSI may file an ASR, which is effective immediately upon filing.  The ASR can cover an unlimited and unspecified amount of securities and a diverse range of securities.  Once an ASR is filed, the WKSI is no longer subjected to the SEC’s rules restricting pre-filing communications.

  [3]   As is currently the case under Rule 163, the filing condition under Rule 163(d) applies only if and when a registration statement, or amendment, is filed.  If a registration statement, or amendment, is not filed, then a free writing prospectus would not need to be filed.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn attorney with whom you work or any of the following:

New York
Steven Finley (212-351-3920, [email protected])
Glenn Pollner (212-351-2333, [email protected])
Andrew Fabens (212-351-4034, [email protected])

Washington, D.C.
John F. Olson (202-955-8522, [email protected])
Brian J. Lane (202-887-3646, [email protected])
Ronald O. Mueller (202-955-8671, [email protected])

James J. Moloney (949-451-4343, [email protected])
Dhiya El-Saden (213-229-7196, [email protected])
Stewart McDowell (415-393-8322, [email protected]
David C. Lee (949-451-4069, [email protected])

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