[Federal Register Volume 74, Number 247 (Monday, December 28, 2009)]
[Proposed Rules]
[Pages 68545-68552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-30589]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 74, No. 247 / Monday, December 28, 2009 /
Proposed Rules
[[Page 68545]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-9098; File No. S7-30-09]
RIN 3235-AK29
Revisions To Rule 163
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to Rule 163(c) under the
Securities Act of 1933 that would allow a well-known seasoned issuer to
authorize an underwriter or dealer to act as its agent or
representative in communicating about offerings of the issuer's
securities prior to the filing of a registration statement. We believe
that the proposed amendments should further facilitate capital
formation by well-known seasoned issuers by removing certain
impediments to issuer communications with broader groups of potential
investors regarding offerings of securities.
DATES: Comments must be received on or before January 27, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-30-09 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-30-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Ted Yu, Special Counsel, Office of
Chief Counsel, at (202) 551-3500, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-4561.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 163(c)
\1\ under the Securities Act.\2\
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\1\ 17 CFR 230.163(c).
\2\ 15 U.S.C. 77a et seq.
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Table of Contents
I. Background
II. Purpose of the Proposed Amendments to Securities Act Rule 163(c)
III. Proposed Amendments to Securities Act Rule 163(c)
IV. General Request for Comments
V. Paperwork Reduction Act
A. Background
B. Summary of Information Collections
C. Paperwork Reduction Act Burden Estimates
D. Request for Comment
VI. Cost Benefit Analysis
A. Background
B. Benefits
C. Costs
D. Request for Comment
VII. Consideration of Promotion of Efficiency, Competition and
Capital Formation
VIII. Regulatory Flexibility Act Certification
IX. Small Business Regulatory Enforcement Fairness Act
X. Statutory Authority--Text of the Proposed Amendments
I. Background
In 2005, we adopted various modifications to the registration,
communications and offering processes under the Securities Act.\3\ As
part of those modifications, we liberalized the communications rules
for a new category of issuers, called ``well-known seasoned issuers''
(``WKSIs''), so they would not be unnecessarily constrained in their
capital formation activities while retaining important investor rights
and remedies under the Securities Act. A WKSI 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
common equity held by non-affiliates (or has issued, for cash, within
the last three years at least $1 billion aggregate principal amount of
non-convertible securities through primary offerings registered under
the Securities Act); and is not an ``ineligible issuer,'' as defined in
our rules.\4\ We permitted these issuers to benefit the most from the
liberalization of our offering and communication rules because they
have a reporting history under the Exchange Act \5\ and are
presumptively the most widely-followed issuers in the marketplace.\6\
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\3\ See Securities Offering Reform, Securities Act Release No.
8591 (Aug. 3, 2005) [70 FR 44721] (``Securities Offering Reform
Adopting Release'').
\4\ See Securities Act Rule 405 [17 CFR 230.405].
\5\ 15 U.S.C. 78a et seq.
\6\ See Securities Offering Reform Adopting Release, supra note
3, at Section II.A.
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We adopted Rule 163 under the Securities Act as part of our 2005
reforms.\7\ Pursuant to Rule 163, WKSIs can engage in unrestricted oral
and written offers \8\ before a registration statement is filed without
violating the ``gun-jumping'' provisions of the Securities Act.\9\ Rule
163 exempts an offer made ``by or on behalf of'' a WKSI from the
prohibition in Section 5(c) of
[[Page 68546]]
the Securities Act \10\ on offers to sell, offers for sale, or offers
to buy an issuer's securities before the filing of a registration
statement, so long as the conditions of the rule are met. Under the
current rule, a communication is deemed to be ``by or on behalf of'' a
WKSI if the issuer or agent or representative of the issuer, other than
an offering participant who is an underwriter or dealer, authorizes or
approves the communication before it is made.\11\
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\7\ 17 CFR 230.163.
\8\ Securities Act Section 2(a)(3) [15 U.S.C. 77b(a)(3)] defines
``offer'' as any attempt or offer to dispose of, or solicitation of
an offer to buy, a security or interest in a security, for value.
The term ``offer'' has been interpreted broadly and goes beyond the
common law concept of an offer. See Diskin v. Lomasney & Co., 452
F.2d 871 (2d. Cir. 1971); SEC v. Cavanaugh, 1 F. Supp. 2d 337
(S.D.N.Y. 1998).
\9\ As we described in the Securities Offering Reform Adopting
Release, the Securities Act restricts the types of offering
communications that issuers or other parties subject to the Act's
provisions (such as underwriters) may use during a registered public
offering. The nature of the restrictions depends on the period
during which the communications are to occur. Violations of these
restrictions generally are referred to as ``gun jumping.'' See
Securities Offering Reform Adopting Release, supra note 3, at
Section III.A.
\10\ 15 U.S.C. 77e(c).
\11\ See Rule 163(c) [17 CFR 230.163(c)].
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II. Purpose of the Proposed Amendments to Securities Act Rule 163(c)
Rule 163 was adopted with the purpose of liberalizing the
communication rules for WKSIs so that they could engage in oral and
written communications, subject to certain enumerated conditions,
before the filing of a registration statement for the offered
securities. We believed that this rule, along with other modifications
to the registration and offering process under the Securities Act
adopted at the same time, would encourage more issuers to conduct their
offerings on a registered basis, thereby enhancing investor
protection.\12\ At the time we adopted the rule and the automatic shelf
registration process,\13\ we expected that a WKSI would usually have a
shelf registration statement on file that it could use for any of its
registered offerings--an expectation shared by some commenters.\14\
Accordingly, we expected that it would be unusual for WKSIs to make
offers prior to the filing of a registration statement in reliance on
the Rule 163 exemption.\15\ We have since learned, however, that many
WKSIs have not filed automatic shelf registration statements or that
the automatic shelf registration statements they have filed may not
register all of the types of securities that they may want to
offer.\16\ If a WKSI wants to make offers before a registration
statement is filed, it must rely on the Rule 163 exemption, and many
WKSIs do not have registration statements on file.\17\ As noted above,
the Rule 163 exemption is not available for communications made by an
offering participant that is an underwriter or dealer.
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\12\ See Securities Offering Reform Adopting Release, 70 FR at
44777 (``We hope that providing these automatic shelf issuers more
flexibility for their registered offerings, coupled with the
liberalized communications rules we are adopting, will encourage
these issuers to raise their necessary capital through the
registration process'').
\13\ Under the automatic shelf registration process, eligible
WKSIs can register unspecified amounts of different specified types
of securities using Form S-3 or Form F-3 registration statements
that are effective upon filing.
\14\ See letter from the Committee on Federal Regulation of
Securities of the American Bar Association's Section of Business
Law. http://www.sec.gov/rules/proposed/s73804/dljohnson021105.pdf.
\15\ See Securities Offering Reform Adopting Release, supra note
3, at Section III.D.2.b.ii.
\16\ According to the data analyzed by the staff in our Office
of Economic Analysis, 50% of the 2,273 registrants that indicated
that they were WKSIs as of the end of their 2006 or 2007 fiscal
years have filed an automatic shelf registration statement on either
Form S-3 or F-3. At the time we proposed the modifications to the
registration, communication, and offering processes under the
Securities Act, we recognized that some issuers may have concerns
regarding possible market overhang effect and solicited comments on
whether the automatic shelf registration procedure should be made
mandatory in order to eliminate concerns over any such effect. See
Securities Offering Reform, Release No. 33-8501 (Nov. 14, 2004) [69
FR 67392] (``Securities Offering Reform Proposing Release'') at
Section V.B.2. Commenters believed that use of the automatic shelf
registration process should be optional. See, e.g., letter from the
Committee on Federal Regulation of Securities of the American Bar
Association's Section of Business Law. As we noted in the Securities
Offering Reform Adopting Release, we did not mandate the use of the
automatic shelf registration process by WKSIs so that issuers would
have the flexibility to file a registration statement on any form
for which they are eligible and, if they wished, delay the effective
date of their registration statements. See Securities Offering
Reform Adopting Release, supra note 3, at Section V.B.2.a.ii.
\17\ If a WKSI had filed a registration statement covering the
securities being offered, then it would not need the exemption
because Securities Act Section 5(c)'s prohibitions on offers being
made before a registration statement has been filed would no longer
apply to the securities included in the registration statement.
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Some methods used in capital raising transactions have highlighted
certain impediments in Rule 163 to a WKSI's communications with broader
groups of potential investors regarding offerings of the issuer's
securities.\18\ Specifically, WKSIs may want to assess the level of
investor interest in their securities before filing a registration
statement (or a post-effective amendment to an already-filed automatic
shelf registration statement) \19\ for the offered securities. Although
Rule 163 currently allows these issuers to communicate directly with
potential investors to determine their interest in purchasing
securities without violating the ``gun-jumping'' provisions of the
Securities Act, we understand that many of these issuers either do not
have sufficient knowledge about potential investors to contact them
directly or prefer not to contact investors directly out of concern
that any such contact could itself constitute and reveal material, non-
public information about the issuers' capital-raising plans without the
opportunity to first obtain a confidentiality agreement. Consequently,
these issuers wish to be able to engage underwriters or dealers to
approach their broader base of institutional clients on the issuers'
behalf to ascertain their clients' interest in investing in the
issuers' securities before filing a registration statement.\20\ Because
Rule 163 does not permit an offering participant who is an underwriter
or dealer to make communications, or to authorize or approve
communications, as an agent or representative of a WKSI, a WKSI without
a registration statement on file or without having particular classes
of securities included in the registration statement cannot engage
underwriters or dealers to have discussions with potential investors on
its behalf. This reduces the benefits of our earlier reforms for
issuers considering registered offerings and could lead such issuers to
conduct unregistered offerings, with the resultant loss of the rights
and remedies available under the Securities Act to investors in
registered offerings.
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\18\ See, e.g., Lynn Cowan, Follow-On Deals Take a Night Shift--
Increasing Number of Companies Work After-Hours to Line Up Orders,
Wall St. J., Apr. 27, 2009 (``In a trading environment that can
still be volatile, bankers and companies don't want to follow the
traditional practice of marketing a deal over several days and then
gauging investor interest. Instead, they are reaching out to large
institutional investors such as mutual funds to make sure there's
sizable interest, swiftly building a book of orders after the
closing bell, and pricing before the market reopens the next
day.''); Lynn Cowan, ``Wall Crossings'' Provide Fund-Raising Edge,
Wall St. J., Dec. 29, 2008 (``In a wall crossing, institutional
investors are lined up to buy substantial chunks of new stock ahead
of a public sale. In order to participate in what is essentially a
private placement, those investors sign a confidentiality agreement
that lets them cross the wall and become insiders. In exchange for
gaining access to inside information, they are barred from trading
in the stock until the public end of the deal is done. They gain no
price advantage for signing on early.'').
\19\ Under Securities Act Rule 413(b), a WKSI can add new
classes of securities or securities of an eligible subsidiary to an
automatic shelf registration statement at any time before the sale
of those securities. In order to add new classes of securities, an
issuer must file a post-effective amendment, which will be
immediately effective, to register an unspecified amount of the new
class of securities.
\20\ We understand that underwriters or dealers generally do not
reveal the identity of the issuer to potential investors before
securing agreements to retain the confidentiality of the information
until it is publicly disclosed or is no longer material, non-public
information. See, e.g., Cowan, ``Wall Crossings'' Provide Fund-
Raising Edge, supra note 18. See also the discussion in Section III
below on the applicability of Regulation FD to communications made
in reliance on Rule 163.
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To address this concern, we are proposing to amend the ``by and on
behalf of an issuer'' definition in Rule 163(c) so that, under certain
circumstances, underwriters or dealers can be agents or representatives
of
[[Page 68547]]
WKSIs under the rule.\21\ By preventing underwriters or dealers from
acting on behalf of issuers, the current definition may be causing
unnecessary impediments to the ability of WKSIs to communicate with a
broader group of potential investors regarding the possibility and
terms of securities offerings by the issuers. If adopted, the proposed
amendments will enable WKSIs to better gauge the level of interest in
the market for an offering and explore possible terms for such an
offering before filing a registration statement or including the
securities in the registration statement through a post-effective
amendment. Allowing authorized underwriters or dealers to be agents or
representatives of a WKSI will provide these issuers with access to the
underwriters' or dealers' existing networks of investors to assess
market interest in the issuer's securities.
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\21\ We are proposing to amend the ``by or on behalf of''
definition solely for purposes of Rule 163,
which, by its terms, is available only to WKSIs.
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The proposed amendments would remove impediments from the ability
of WKSIs to raise capital through registered offerings rather than
through private offerings which, as we previously recognized, often
require issuers to offer liquidity discounts to potential investors due
to the corresponding resale restrictions imposed on the securities
sold.\22\ We also believe that investors would benefit from our
existing regulatory framework of specific disclosure requirements that
apply to registered offerings,\23\ from greater liquidity for the
acquired securities because they will not be acquired in private
transactions with corresponding resale restrictions,\24\ and from
important rights and remedies under the Securities Act.\25\ We believe
the proposed amendments are consistent with our traditional recognition
of the ``broad remedial purposes'' of the Securities Act and the
underlying ``public policy which strongly supports registration.'' \26\
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\22\ See Securities Offering Reform Proposing Release, supra
note 16, at Section XI.C.3.
\23\ See, e.g., Regulation S-K [17 CFR 229.10 et seq.].
\24\ We have previously recognized that securities sold pursuant
to registration statements generally enjoy more liquid markets than
unregistered securities. See, e.g., Securities Offering Reform
Proposing Release, supra note 16, at Section XI.C.3.
\25\ While communications made pursuant to Rule 163 are exempt
from the prohibitions of Securities Act Section 5(c), they are still
considered offers and, therefore, subject to liability provisions
applicable to such offers. These provisions include Securities Act
Section 12(a)(2) [15 U.S.C. 77l(a)(2)], Securities Act Section 17(a)
[15 U.S.C. 77q(a)], Exchange Act Section 10(b) [15 U.S.C. 78j(b)],
and Exchange Act Rule 10b-5. In addition, written communications
made in reliance on Rule 163 must be filed as free writing
prospectuses when the related registration statement is filed, and
will be subject to liability as such.
\26\ See Notice of Adoption of Rules 145 and 153A, Prospective
Rescission of Rule 133, Amendment of Form S-14 under the Securities
Act of 1933, and Amendment of Rules 14a-2 and 14c-5 under the
Securities Act of 1934, Securities Act Release No. 5316 (Oct. 6,
1972) [37 FR 23631]; Notice of Adoption of Rule 144 Relating to the
Definition of the Terms ``Underwriter'' in Sections 4(1) and 2(11)
and ``Brokers' Transactions'' in Section 4(4) of the Securities Act
of 1933, Adoption of Form 144, and Rescission of Rules 154 and 155
under that Act, Securities Act Release No. 5223 (Jan. 11, 1972) [37
FR 591].
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III. Proposed Amendments to Securities Act Rule 163(c)
We are proposing to amend Rule 163(c) to provide that an
underwriter or dealer could be an agent or representative of a WKSI
under Rule 163 if the following conditions are satisfied:
The underwriter or dealer receives written authorization
from the WKSI to act as its agent or representative before making any
communication on its behalf; \27\
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\27\ See proposed Rule 163(c)(1).
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The issuer authorizes or approves any written or oral
communication before it is made by an authorized underwriter or dealer
as agent or representative of the issuer; \28\ and
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\28\ See proposed Rule 163(c)(2). One way that an issuer could
satisfy this condition is to approve the contents of the information
that will be conveyed by the authorized underwriter or dealer to
potential investors through oral communications.
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Any authorized underwriter or dealer that has made any
authorized communication on behalf of the issuer in reliance on Rule
163 is identified in any prospectus contained in the registration
statement that is filed for the offering to which the communication
relates.\29\
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\29\ See proposed Rule 163(c)(3).
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All other provisions of Rule 163 would continue to apply, including
that:
All communications made by or on behalf of the issuer and
in reliance on Rule 163 would continue to be subject to Regulation FD;
\30\
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\30\ Rule 163(e) [17 CFR 230.163(e)]; Regulation FD [17 CFR
243.100 et seq.]. We note that the amendments we are proposing today
do not affect any other provision of existing Rule 163, including
the continued applicability of Regulation FD to communications made
in reliance on the exemption. As discussed below, communications
made in reliance on Rule 163 are not considered to be in connection
with a registered securities offering for purposes of the exclusion
from Regulation FD.
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Every written communication that is an offer made in
reliance on the Rule 163 exemption would contain substantially the
legend required by the rule; \31\ and
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\31\ Rule 163(b)(1) [17 CFR 230.163(b)(1)]. Under the proposed
amendments, issuers or their agents or representatives would
continue to have the ability under Rule 163(b)(1) to ``cure'' a
failure to include the required legend in any written communication
made in reliance on the exemption.
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Every written communication that is an offer made in
reliance on the Rule 163 exemption would be filed with the Commission
as a free writing prospectus when the registration statement, or
amendment to the registration statement, is filed.\32\
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\32\ As is currently the case, the filing condition of Rule
163(d) would apply only if and when a registration statement, or an
amendment to the registration statement, is filed. Accordingly, if
no such registration statement is filed, a free writing prospectus
used pursuant to Rule 163 does not have to be filed. Issuers or
their agents or representatives would continue to have the ability
under Rule 163(b)(2) to ``cure'' a failure to meet the filing
condition when making any written communication in reliance on the
Rule 163 exemption.
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We believe that the proposed expansion of Rule 163 to permit
authorized underwriters and dealers to communicate on behalf of a WKSI
would enable the issuer to communicate with a broader group of
potential investors in a manner that would not adversely affect the
market for the issuer's securities. This proposed expansion also would
be in the interest of investors as it would allow underwriters or
dealers acting on behalf of an issuer to communicate directly with
investors. If an issuer decides to sell securities pursuant to a
registration statement after its authorized underwriter or dealer
determines that there is sufficient interest, investors would have the
same rights and remedies as any other investor in a registered offering
under the Securities Act.
Under the proposed amendments to Rule 163, the first condition is
that the underwriter or dealer must receive written authorization from
the issuer to act as its agent or representative before engaging in any
communication on behalf of the issuer in reliance on the proposed
amended rule.\33\ The proposed amendments are for the limited purpose
of enabling issuers to authorize underwriters or dealers to approach
potential investors on their behalf regarding a possible offering of
the issuers' securities.\34\ We are not proposing to amend the rule to
permit unrestricted communications by any market participant. We do not
believe an underwriter or dealer should be able
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to rely upon Rule 163, without prior authorization from the issuer, to
gauge interest in the market for an issuer's securities and then
present the issuer with an unsolicited proposal for an offering of that
class of securities. Such activities would go beyond the limited
purpose of the proposed amendments to Rule 163. By requiring that the
underwriter or dealer receive written authorization before making pre-
filing offers on behalf of the issuer in reliance on Rule 163, the
proposed amendments require that the issuer be involved with any
communications made by the underwriters or dealers in reliance on Rule
163.\35\
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\33\ See proposed Rule 163(c)(1).
\34\ As we noted at the time we liberalized the communication
regime for WKSIs, we believe that communications made by WKSIs have
less potential for conditioning the market for the securities to be
sold in a registered offering because of the market's familiarity
with such large, more seasoned issuers and the ongoing market
following of their activities. See Securities Offering Reform
Adopting Release, supra note 3, at Section III.C.
\35\ We note that the requirement for prior written
authorization in proposed amended Rule 163(c) is not intended to
limit or otherwise affect the existing ability of an underwriter or
dealer that is not acting on behalf of an issuer from making
``reverse inquiry'' offers in registered offerings. Under the
``reverse inquiry'' process, which is commonly used in medium-term
note programs, an investor may be allowed to purchase securities
from the issuer through an underwriter or dealer that is not
designated in the prospectus as the issuer's agent by having such
underwriter approach the issuer with an interest from the investor.
See Joseph McLaughlin and Charles J. Johnson, Jr., Corporate Finance
and the Securities Laws (4th ed. 2006). If the reverse inquiry
process is used in offerings for which the issuer has already filed
a registration statement, the requirement in proposed Rule 163(c)(1)
for prior written authorization should not affect reverse inquiry
offers since Section 5(c) of the Securities Act permits offers to be
made after the filing of a registration statement.
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The second condition of the proposed amended rule is that the
issuer must authorize or approve any written or oral communication
before it is made by an authorized underwriter or dealer.\36\ Any
written or oral communication made by an authorized underwriter or
dealer under the proposed amended Rule 163(c) would be considered an
issuer communication. Any written communication that is approved or
authorized by the issuer and made pursuant to the proposed amended rule
on behalf of the issuer would need to be filed as a free writing
prospectus when a registration statement for the offering is filed.\37\
An oral communication made by an authorized underwriter or dealer
pursuant to the proposed amended rule would not be subject to a filing
requirement.
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\36\ See proposed Rule 163(c)(2).
\37\ Rule 163(b)(2) [17 CFR 230.163(b)(2)].
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The proposed rule amendment is not intended to permit
communications authorized by persons other than the WKSI. Thus, while
the proposed amended Rule 163(c) would permit underwriters and dealers
to act as the issuer's agents or representatives for purposes of making
a communication, they would not be permitted, in turn, to authorize or
approve a communication to be made by another person.
We emphasize that the amendments that we are proposing today do not
change the applicability of Regulation FD to communications made in
reliance on Rule 163. As is the case today, communications made in
reliance on the proposed amended rule would not be considered to be in
connection with a registered securities offering for purposes of the
exclusion from Regulation FD.\38\ Therefore, WKSIs would need to
continue to comply with the provisions of Regulation FD with regard to
any communications made pursuant to proposed amended Rule 163 to which
Regulation FD would apply (including pre-filing communications made on
behalf of the issuer by an authorized underwriter or dealer). If an
authorized underwriter or dealer acting on behalf of an issuer desires
to communicate material non-public information \39\ in reliance on
proposed amended Rule 163 to persons enumerated in Regulation FD,\40\
the issuer, or the underwriter or dealer acting on its behalf, would
first need to obtain a confidentiality agreement from the enumerated
persons or the issuer would need to publicly disclose the information
in the manner \41\ and within the timeframe set forth in Regulation
FD.\42\ Moreover, any misuse of the information for trading by any
person subject to a confidentiality agreement would be covered under
either the ``temporary insider'' or the misappropriation theory of
insider trading.\43\
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\38\ Rule 163(e); Exchange Act Rule 100(b)(2)(iv) [17 CFR
243.100(b)(2)(iv)].
\39\ When we adopted Regulation FD, we recognized that, while
not necessarily per se material, ``events regarding the issuer's
securities,'' such as ``public or private sales of additional
securities,'' were one of the types of information or events that
should be reviewed carefully to determine whether they are material.
See Selective Disclosure and Insider Trading, Release No. 33-7881
(Aug. 15, 2000) [65 FR 51716] (``Regulation FD Adopting Release'')
at Section II.B.2.
\40\ Rule 100(b)(1) [17 CFR 243.100(b)(1)]. Regulation FD
provides that when an issuer, or person acting on its behalf,
discloses material non-public information to certain enumerated
persons (in general, securities market professionals and holders of
the issuer's securities who may trade on the basis of the
information), it must make public disclosure of that information.
See Regulation FD Adopting Release, supra note 39, at Section I.
\41\ Under Regulation FD, the required public disclosure may be
made by filing or furnishing a Form 8-K, or by another method or
combination of methods that is reasonably designed to affect broad
non-exclusionary distribution of the information to the public. See
Exchange Act Rule 101(e) [17 CFR 243.101(e)].
\42\ The timing of the required public disclosure depends on
whether the selective disclosure of material non-public information
was intentional or non-intentional. For an intentional selective
disclosure, the issuer must make public disclosure simultaneously;
for a non-intentional disclosure, the issuer must make public
disclosure promptly. See Exchange Act Rule 100(a) [17 CFR
243.100(a)].
\43\ See Regulation FD Adopting Release, supra note 39, at
Section II.B.1.a.
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The third condition in proposed amended Rule 163(c) is that an
authorized underwriter or dealer who makes a communication on behalf of
a WKSI in reliance on Rule 163 must be identified in the prospectus
contained in the registration statement for the offering of the
issuer's securities related to the communication.\44\ This
identification would provide investors with information to supplement
disclosure about the plan of distribution of the WKSI's securities.\45\
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\44\ See proposed Rule 163(c)(3).
\45\ See Item 508 of Regulation S-K [17 CFR 229.508] and
Securities Act Rule 430B [17 CFR 230.430B]. Item 508 of Regulation
S-K requires the identification of the underwriters through which
the securities are offered and certain disclosures regarding the
identified underwriters, such as the nature of any material
relationships between the underwriters and the issuer as well as the
nature and amount of underwriter compensation. Underwriters for
securities offered pursuant to a registration statement are subject
to Section 11 liability for untrue statements of material facts or
omissions of material facts required to be included in a
registration statement or necessary to make the statements in the
registration statement not misleading at the time the registration
statement became effective.
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Request for Comment
We are soliciting comment on all conditions of the
proposed amendments to Rule 163(c).
Should an underwriter or dealer be required to obtain
written authorization from the issuer to act as its agent in order to
make offers pursuant to proposed amended Rule 163(c)? If not, why?
Should the issuer be required to authorize or approve any
written or oral communications before it is made by an underwriter or
dealer acting as its agent?
Should any written communications made by such authorized
underwriters or dealers be required to be filed as any other issuer
free writing prospectus under Rule 163? If not, why?
What effect, if any, would the proposed amendments to Rule
163 have on the timing of the subsequent registered offering and what
effect would such timing have on the ability of other investors in the
registered offering, such as those investors who may not be approached
until after the registration statement has been filed, to evaluate the
offering?
To what extent would the proposed amendments to Rule 163
enable WKSIs to reach a broader group of investors and affect their
ability to raise capital
[[Page 68549]]
through registered offerings? Are there any other modifications that
should be made to the conditions of Rule 163 that may facilitate the
ability of WKSIs to raise capital with appropriate protections? What
other effects, if any, would the proposed amendments have on the
ability of WKSIs to raise capital? Would the proposed amendments have
any effect on the ability of issuers other than WKSIs to raise capital?
Please explain in detail and provide supporting empirical data.
What are the reasons that WKSIs may not have filed
automatic shelf registration statements or included certain classes of
securities on filed automatic shelf registration statements? How would
the proposed amendments to Rule 163 affect an issuer's decision to file
an automatic shelf registration statement? Please provide empirical
data to the extent available.
Should we limit the types of investors that an authorized
underwriter or dealer could approach under proposed amended Rule 163,
such as to qualified institutional buyers, as defined in Securities Act
Rule 144A(a)(1),\46\ or to other types of investors who may not need
the protections afforded by the Securities Act's registration
provisions? \47\ If so, why?
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\46\ 17 CFR 230.144A(a)(1).
\47\ See The Resale of Restricted Securities; Changes to Method
of Determining Holding Period of Restricted Securities Under Rules
144 and 145, Securities Act Release No. 6806 (Oct. 25, 1988) [53 FR
33147].
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Should an underwriter or dealer that made any authorized
communications on behalf of an issuer in reliance on the proposed
amended Rule 163 be required to be identified in the prospectus
contained in the registration statement that is filed for the offering
related to the communications?
IV. General Request for Comments
We request and encourage any interested person to submit comments
regarding:
The proposed rule changes that are the subject of this
release;
Additional or different changes; or
Other matters that may have an effect on the proposal
contained in this release.
We request comment from the point of view of registrants, investors
and other users of information who may be affected by the proposed rule
changes. With respect to any comments, we note that they are of
greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
V. Paperwork Reduction Act
A. Background
Our proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(PRA).\48\ We are submitting these to the Office of Management and
Budget (OMB) for review in accordance with the PRA.\49\ The title for
the information collection is ``Rule 163 (17 CFR 230.163)(OMB Control
No. 3235-0619).'' An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a current valid control number. The information collection
requirements related to proposed amendments to Rule 163(c) would apply
only to WKSIs and authorized offering participants choosing to rely on
the proposed amended rule. Specifically, any free writing prospectus
used by a WKSI or by an authorized offering participant would have to
be filed and be publicly available on the EDGAR system if and when the
WKSI files a registration statement (or a post-effective amendment to
an automatic shelf registration statement) to cover the securities
offered pursuant to the proposed amended rule. Although WKSIs would not
be required to engage offering participants to make authorized
communications, if they did, the information collection requirement
would be mandatory.
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\48\ 44 U.S.C. 3501 et seq.
\49\ See 44 U.S.C. 3507 and 5 CFR 1320.11.
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The estimates of reporting and cost burdens provided in this PRA
analysis address the time, effort and financial resources necessary to
provide the proposed collections of information and are not intended to
represent the full economic cost of complying with the proposal.
B. Summary of Information Collections
The proposed amendments to Rule 163(c), if adopted, would revise
the ``by and on behalf of an issuer'' definition used in the rule so
that, under certain circumstances, underwriters or dealers could be
agents or representatives of WKSIs and communicate on behalf of the
issuers before a registration statement (or a post-effective amendment
to an automatic shelf registration statement) covering the offered
securities has been filed. The proposal could increase the number of
free writing prospectuses filed pursuant to Rule 163 as a result of the
WKSIs' new ability to engage underwriters or dealers to make
communications, which, if written, would be free writing prospectuses,
on their behalf.
One of the conditions of the proposed amendments to Rule 163(c) is
the identification of any authorized underwriters or dealers that made
communications in reliance on the rule in the prospectus contained in
the registration statement (or post-effective amendment to an automatic
shelf registration statement) filed for the offered securities. This
proposed condition does not impose a new disclosure requirement because
an authorized underwriter or dealer that made a communication on behalf
of a WKSI in reliance on the proposed amended rule would generally be
an underwriter or dealer for the offering related to that communication
and would, therefore, already be required to be identified under Item
508 of Regulation S-K, regardless of the proposed condition.
C. Paperwork Reduction Act Burden Estimates
At the time we adopted Rule 163, we estimated that most WKSIs would
have an automatic shelf registration statement on file and would
therefore not rely on the exemption provided in the rule. Accordingly,
we estimated that 53 free writing prospectuses would be filed under
Rule 163 per year and that issuers would spend 13.25 hours per year on
such filings.\50\ We have since learned that many WKSIs have not filed
automatic shelf registration statements; the staff estimates that only
50% of the 2,273 registrants that were WKSIs as of the end of their
2006 or 2007 fiscal years have filed an automatic shelf registration
statement on either Form S-3 or F-3. Therefore, we believe it is
appropriate to update our PRA estimates of the costs and burdens
imposed by the collection of information requirements of the proposed
amended Rule 163. For the free writing prospectus rules, as was the
case when we proposed Rule 163,\51\ we estimate that 25% of the burden
of preparation is carried by the issuer internally and 75% of the
burden is carried by outside professionals retained by the issuer at an
average cost of $400 per hour. The portion of the burden carried by
outside professionals is reflected as a cost, while the portion of
[[Page 68550]]
the burden carried by the issuer internally is reflected in hours.
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\50\ See Securities Offering Reform Proposing Release, supra
note 16, at Section X.C.2. The calculation for the incremental
burden hours issuers would spend under Rule 163 was 13.25 hours (53
free writing prospectuses filed, multiplied by 0.25 hours per
filing).
\51\ See Securities Offering Reform Proposing Release, supra
note 16, at Section X.C.
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The fact that many WKSIs do not have automatic shelf registration
statements on file (or do not have the securities they propose to offer
already included in their filed registration statements), along with
our proposal to permit underwriters or dealers to make communications
pursuant to Rule 163, may result in greater use of the Rule 163
exemption by issuers and potentially greater numbers of free writing
prospectuses filed pursuant to the rule. However, since some
communications made by underwriters or dealers in reliance on Rule 163
would be oral rather than written, and since an oral communication that
is an offer need not be filed with the Commission as a free writing
prospectus, the potential increase might be small. As a result of these
two counteracting effects, we estimate for this analysis that the
number of free writing prospectuses will double from our estimate at
the time that Rule 163 was proposed. More specifically, we estimate
that the incremental increase in the number of free writing
prospectuses that may be filed pursuant to the proposed amended rule
and number of incremental burden hours will be 53 free writing
prospectuses and 13.25 hours per year, resulting in issuer personnel
time of 3.3 hours and a cost of approximately $3,980 for the services
of outside professionals. The following table illustrates the
incremental annual compliance burden of the collection of information
in hours and in cost for the proposed amendments to Rule 163:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Incremental
annual Hours/form Incremental 25% Issuer 75% $400 prof. cost
responses burden Professional
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C)=(A)*(B) (D)=(C)*0.25 (E)=(C)*0.(F)=(E)*$400
-----------------------------------------------------------------------------------------------------
Rule 163 filing................................... 53 0.25 13.25 3.3 9.95 $3,980
--------------------------------------------------------------------------------------------------------------------------------------------------------
D. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comments to (1)
evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information would have practical utility; (2) evaluate the
accuracy of our estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility and clarity of the information to be collected; and
(4) evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-30-09.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be in writing, refer to File
No. S7-30-09, and be submitted to the Securities and Exchange
Commission, Records Management, Office of Filings and Information
Services, 100 F Street, NE., Washington, DC 20549. Because the OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication, your comments are best
assured of having their full effect if the OMB receives them within 30
days of publication.
VI. Cost Benefit Analysis
A. Background
We believe that the definition of ``by or on behalf of an issuer''
currently in Rule 163(c) may be causing unnecessary impediments to the
ability of WKSIs to communicate with a broader group of potential
investors about offerings of the issuers' securities by preventing
underwriters or dealers from acting on behalf of such issuers. Further,
the current definition may also be impeding potentially useful
discourse with prospective investors regarding the possibility and
terms of securities offerings by the issuers. Accordingly, we believe
that it is appropriate to propose to amend the definition in Rule
163(c) so that, under certain circumstances, underwriters or dealers
could be agents or representatives of WKSIs under Rule 163. We believe
that the proposed amendments would enable WKSIs to better gauge the
level of interest in the market for an offering and explore possible
terms for such an offering before filing a registration statement (or a
post-effective amendment to an already filed automatic shelf
registration statement) covering the offered securities while retaining
for investors important rights and remedies under the Securities Act.
B. Benefits
The purpose of the proposed amendments to Rule 163(c) is to allow
authorized underwriters or dealers to communicate on behalf of WKSIs
before a registration statement (or a post-effective amendment to an
already filed automatic shelf registration statement) covering the
offered securities has been filed. By removing impediments to the
ability of WKSIs to communicate with a broader group of potential
investors and access the capital markets through registered offerings,
we believe that investors should benefit from our existing regulatory
framework of specific disclosure requirements and remedies that apply
in registered offerings and greater liquidity for the acquired
securities because they will not be acquired in private transactions
with corresponding resale restrictions. For WKSIs, the ability to
engage offering participants who are underwriters or dealers for the
purpose of communicating with a broader group of potential investors
should allow greater access to capital through the use of the
underwriters' or dealers' existing networks of investors and the
increased flexibility in evaluating the possible terms of offerings.
The proposed amendments to Rule 163(c) would maintain the existing
Securities Act liability scheme for communications made in reliance on
the proposed amended rule and, because all communications made in
reliance on proposed amended Rule 163 would be considered issuer
communications regardless of whether they are made by an issuer or an
authorized underwriter or dealer, the existing filing conditions in the
rule would continue to apply to any written
[[Page 68551]]
communications made in reliance on the rule. We believe that investor
protection is further enhanced by removing certain impediments that
WKSIs face in reaching a broader group of prospective investors in
their capital raising activities through registered offerings rather
than private offerings, while retaining for such investors important
rights and remedies under the Securities Act, including available
remedies under Securities Act Sections 11 and Section 12(a)(2).\52\
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\52\ 15 U.S.C. 77k and 77l(a)(2).
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C. Costs
The proposed amendments to Rule 163(c) may involve certain costs.
To the extent that a communication made on behalf of a WKSI pursuant to
the proposed amended rule is a written communication, it would be a
free writing prospectus that the issuer would have to file as with any
other written communication made in reliance on Rule 163. For purposes
of the PRA, we estimate the incremental costs to be issuer personnel
time of 3.3 hours and approximately $3,980 for the services of outside
professionals. If the communications are made orally, however, there
would be no significant incremental costs because such communications
would not have to be transcribed and filed in written form.
Another cost that may arise from the proposed amendments to Rule
163(c) is a possible decrease in the number of automatic shelf
registration statements filed by WKSIs prior to an offering. In
adopting the rules for automatic shelf registration statements for
WKSIs, we hoped to provide sufficient flexibility for WKSIs to
encourage capital formation through the registration process. Expanding
Rule 163(c) to allow WKSIs to engage underwriters and dealers to act as
their agent or representative in communicating with a broader group of
investors may result in WKSIs waiting to file automatic shelf
registration statements until after they have gauged the market's
interest in an immediate offering. This decision not to file a
registration statement in advance of identifying the classes of
securities to be sold may delay the dissemination to the market of
certain information regarding the issuer and its plans, such as the
possibility that the issuer is contemplating an immediate offering of
those types of securities. We believe, however, that many WKSIs will
still file automatic shelf registration statements, even if they have
no plans for an immediate offering, to have the capacity to sell their
registered securities on an immediate basis without having to wait for
an automatic shelf registration statement to be filed.
To the extent that the proposed amended rule would encourage more
WKSIs to file automatic shelf registration statements, these filings,
as is the case today, would not be subject to review by the staff of
the Division of Corporation Finance because they become effective
automatically upon filing. Investors may lose the benefit of better
disclosure prompted by staff review. These filers, however, would
continue to be obligated to disclose, on an annual basis, written,
unresolved staff comments on their periodic report disclosures that
were issued more than 180 days prior to the fiscal year end covered by
the report and that the issuer believes are material.
The proposed amendments to Rule 163 would enhance access to the
capital markets for only WKSIs. As a result, it is possible that other
issuers, smaller than WKSIs or ineligible to be WKSIs, may encounter a
more competitive capital-raising environment if they attempt to solicit
investments from the same class of potential investors as those
targeted by the WKSIs.
As proposed, an issuer must authorize an underwriter or dealer in
writing before the underwriter or dealer can make any communications
pursuant to the proposed amended rule. Arranging for this authorization
may result in additional costs for issuers and underwriters or dealers.
D. Request for Comment
We request comments on this cost-benefit analysis and any of the
costs and benefits associated with the proposed amendments to Rule
163(c). We solicit quantitative data to assist with our assessment of
the costs and benefits of the proposed rule amendments.
VII. Consideration of Promotion of Efficiency, Competition and Capital
Formation
Securities Act Section 2(b) \53\ requires us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. The proposed
amendments to Rule 163(c) are intended to remove certain impediments to
communications by or on behalf of WKSIs with a broader group of
potential investors before filing a registration statement (or a post-
effective amendment to an already-filed automatic shelf registration
statement) covering the securities being offered. We anticipate the
proposed rule amendments will enhance a WKSI's ability to identify and
communicate with investors regarding potential investments with the
issuer and, as a result, make the capital formation process more
efficient for these issuers. WKSIs will benefit from their authorized
underwriter's or dealer's existing networks of investors when assessing
market interest in their securities offerings, thereby potentially
increasing their access to capital and improving their ability to issue
securities on favorable terms to the issuer.
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\53\ 15 U.S.C. 77b(b).
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The proposed amendments to Rule 163 would enhance access to the
capital markets for only WKSIs. As a result, it is possible that other
issuers may not have the same capital-raising efficiencies if they
attempt to solicit investments from the same class of potential
investors as those targeted by the WKSIs, potentially creating a
competitive advantage for some WKSIs. As we discussed in the Securities
Offering Reform Adopting Release, these potential effects are justified
in order to ensure that investors have appropriate access to
information about issuers of different sizes.\54\
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\54\ See Securities Offering Reform Adopting Release, supra note
3, at Section X.
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We request comment on whether the proposed rule amendments, if
adopted, would promote efficiency, competition, and capital formation.
Commenters are requested to provide empirical data and other factual
support for their views, if possible.
VIII. Regulatory Flexibility Act Certification
Section 3(a) of the Regulatory Flexibility Act \55\ requires the
Commission to undertake a Regulatory Flexibility Analysis of the effect
of its rules on small entities unless the Commission certifies that the
rules do not have a significant economic impact on a substantial number
of small entities. Securities Act Rule 157 \56\ defines an issuer to be
a ``small business'' or ``small organization'' for purposes of the
Regulatory Flexibility Act if it had total assets of $5 million or less
on the last day of its most recent fiscal year.
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\55\ 5 U.S.C. 603(a).
\56\ 17 CFR 240.0-10(a).
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Pursuant to Section 605(b) of the Regulatory Flexibility Act,\57\
the Commission hereby certifies that the proposed amendments to Rule
163(c), if
[[Page 68552]]
adopted, will not have a significant economic impact on a substantial
number of small entities. Rule 163 is, by its terms, available only to
WKSIs. We believe that few, if any, small entities will be able to meet
the $700 million non-affiliate equity market capitalization threshold
\58\ or the $1 billion non-convertible securities issuance threshold
\59\ to be considered WKSIs. For this reason, the proposed rule
amendments, if adopted, should not have a significant economic impact
on a substantial number of small entities.
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\57\ 5 U.S.C. 605(b).
\58\ To satisfy this threshold, the worldwide market value of
the issuer's outstanding voting and non-voting common equity held by
non-affiliates must be $700 million or more as of a date within 60
days of the determination date. See Securities Act Rule 405 [17 CFR
230.405]
\59\ To satisfy this threshold, the issuer must have issued for
cash more than an aggregate of $1
billion in non-convertible securities, other than common equity,
through registered primary offerings over the prior three years. See
Securities Act Rule 405 [17 CFR 230.405].
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We solicit written comments regarding this certification. We
request that commenters describe the nature of any impact on small
entities and provide empirical data to support the extent of the
impact.
IX. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\60\ a rule is ``major'' if it has resulted, or is likely
to result, in:
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\60\ 5 U.S.C. 801 et seq.
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An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether the proposed amendments to Rule
163(c) would be a ``major rule'' for purposes of the Small Business
Regulatory Enforcement Fairness Act. We solicit comment and empirical
data on: (1) The potential effect on the U.S. economy on an annual
basis; (2) any potential increase in costs or prices for consumers or
individual industries; and (3) any potential effect on competition,
investment, or innovation.
X. Statutory Authority--Text of the Proposed Amendments
We are proposing the amendments pursuant to Sections 7, 10, 19, and
28 of the Securities Act, as amended.
List of Subjects in 17 CFR Part 230
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, we are proposing to amend
title 17, chapter II of the Code of Federal Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-
37, unless otherwise noted.
* * * * *
2. Amend Sec. 230.163 by revising paragraph (c) to read as
follows:
Sec. 230.163 Exemption from section 5(c) of the Act for certain
communications by or on behalf of well-known seasoned issuers.
* * * * *
(c) For purposes of this section, a communication is made by or on
behalf of an issuer if the issuer or an agent or representative of the
issuer, other than an offering participant who is an underwriter or
dealer, authorizes or approves the communication before it is made.
Provided, however, an offering participant who is an underwriter or
dealer may be an agent or representative of the issuer for purposes of
this section if:
(1) The underwriter or dealer receives written authorization from
the issuer to act as its agent or representative prior to making any
communication in reliance on this exemption;
(2) The issuer authorizes or approves any written or oral
communication before it is made by an underwriter or dealer authorized
pursuant to the provision of this section to act as agent or
representative of the issuer; and
(3) Any underwriter or dealer authorized pursuant to the provision
of this section that has made any communication authorized pursuant to
the provision of this section is identified in the prospectus contained
in the registration statement or amendment that may be filed for the
offering of the issuer's securities related to the communication.
* * * * *
By the Commission.
Dated: December 18, 2009.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30589 Filed 12-24-09; 8:45 am]
BILLING CODE 8011-01-P