[Federal Register Volume 61, Number 148 (Wednesday, July 31, 1996)]
[Notices]
[Pages 40044-40052]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19461]


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SECURITIES AND EXCHANGE COMMISSION
[Release Nos. 33-7314; 34-37480; International Series Release No. 1010; 
File No. S7-19-96]
RIN 3235-AG83


Securities Act Concepts and Their Effects on Capital Formation

AGENCY: Securities and Exchange Commission.

ACTION: Concept Release.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') 
has received the Report of the Advisory Committee on the Capital 
Formation and Regulatory Processes (the ``Advisory Committee'') 
chartered by the Commission. In addition to its consideration of the 
Report of the Advisory Committee (the ``Advisory Committee Report''), 
the Commission is reexamining the application of the Securities Act of 
1933 and the rules thereunder to securities offerings. Information and 
comment are being sought with regard to what reforms could or should be 
undertaken, consistent with the Commission's investor protection 
mandate, to reform the current regulation of the capital formation 
process. Varying approaches, including a ``company registration'' 
concept recommended by the Advisory Committee, are being considered.

DATES: Comments should be received by September 30, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, N.W., Stop 6-9, Washington, D.C., 20549. Comments also may be 
submitted electronically to the following electronic mail address: 
[email protected]. All comment letters should refer to File No. S7-
19-96; this file number should be included in the subject line if 
electronic mail is used. Comment letters will be available for public 
inspection and copying at the Commission's Public Reference Room, 450 
Fifth Street, N.W., Washington, D.C. 20549. Electronically submitted 
comment letters will be posted on the Commission's Internet Web site 
(http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Anita Klein, Office of Chief Counsel, 
Division of Corporation Finance, (202) 942-2900. For copies of the 
Advisory Committee Report, please fax a request to the Office of 
Commissioner Wallman at (202) 942-9563 or call (202) 942-0800.1
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    \1\ The Advisory Committee Report is also available through the 
Commission's Public Reference Room and the Commission's Internet Web 
site (http://www.sec.gov). For further information with respect to 
the Advisory Committee Report, contact the Advisory Committee staff: 
David A. Sirignano, Staff Director, at (202) 942-2870; Dr. Robert 
Comment (202) 942-8036; Catherine T. Dixon, (202) 942-2920; Meridith 
Mitchell (202) 942-0890; or Luise M. Welby (202) 942-2990.
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SUPPLEMENTARY INFORMATION:

I. Introduction

    The Securities Act of 1933 (the ``Securities Act'') 2 and the 
rules and regulations thereunder have long provided the foundation for 
a capital formation system whose integrity, fairness and liquidity are 
unparalleled. Because U.S. capital formation methods and markets are 
characterized by innovation, the Commission vigilantly seeks to 
identify ways to improve its regulatory framework governing that 
system.3 Two studies presented to the

[[Page 40045]]

Commission this year are assisting the Commission with its most recent 
efforts to reexamine that regulatory framework.
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    \2\ 15 U.S.C. Secs. 77a et seq.
    \3\ The current reexamination of the Securities Act registration 
system is the most recent step in the modern reevaluation of the 
regulatory framework that many date back to the publication of the 
1966 article by Milton Cohen which first suggested the integration 
of the Securities Act and the Securities Exchange Act of 1934 (the 
``Exchange Act'') (15 U.S.C. Secs. 78a et seq.) disclosure systems. 
See M. Cohen, ``Truth in Securities'' Revisited, 79 Harv. L. Rev. 
1340 (1966). Since the publication of that article, the Commission 
has conducted or arranged several studies related to the disclosure 
system, including those completed by the Commission's Disclosure 
Policy Study Group in 1969 and the Commission's Advisory Committee 
on Corporate Disclosure in 1977. See Disclosure to Investors--A 
Reappraisal of Administrative Policies under the '33 and '34 Acts 
(Mar. 1969) (commonly referred to as the ``Wheat Report''); Report 
of the Advisory Committee on Corporate Disclosure to the Securities 
and Exchange Commission (Nov. 1977). Those efforts paved the way for 
significant integration of the Securities Act and Exchange Act 
disclosure systems by the Commission in 1982. See Securities Act 
Release No. 6383 (Mar. 3, 1982) [47 FR 11380].
    Further refinement of the Securities Act registration system 
included, for example, the development of the short-form shelf 
registration system, which has enabled ``seasoned issuers'' to 
conduct a primary offering on a delayed or continuous basis if 
certain requirements are met. Shelf registration has afforded an 
eligible registrant a certain degree of flexibility by enabling it 
to time its offering when market conditions are most advantageous. 
The Commission's subsequent adoption of a ``universal'' shelf 
registration system in 1992 increased this flexibility even further 
by permitting an eligible company to register debt, equity, and 
other securities on a single shelf registration statement, without 
having to specify the amount of each class of securities to be 
offered. See Securities Act Release Nos. 6499 (Nov. 17, 1983) [48 FR 
52889] and 6964 (Oct. 22, 1992) [57 FR 48970].
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    The first report delivered to the Commission was the Report of the 
Task Force on Disclosure Simplification (the ``Task Force'') of March 
1996 (the ``Task Force Report'').4 Among many other 
recommendations, the Task Force identified a number of areas in which 
modernization and simplification of the registration and disclosure 
processes could be accomplished.5
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    \4\ Report of the Task Force on Disclosure Simplification (March 
1996).
    \5\ Comment is being solicited infra Section II.B.2, II.B.5 and 
II.B.6 with respect to a limited number of specific aspects of the 
Task Force Report.
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    Today, the second report is being presented to the Commission by 
the Advisory Committee, chaired by Commissioner Steven M.H. 
Wallman.6 The Advisory Committee has been studying the securities 
offering process and the Commission's rules regulating it since 
February 1995.7 The objective of the Advisory Committee has been 
to assist the Commission in evaluating the efficacy of the regulatory 
process relating to the public offering of securities, securities 
market trading, and corporate reporting. The Advisory Committee Report 
is being published contemporaneously with this release and reflects 18 
months of extensive study and analysis of the regulatory 
framework.8 The Advisory Committee's work has assisted the 
Commission in focusing on diverse developments in the markets (some of 
which are more recent in origin and some of which reflect longer-term 
trends) and their current effects on the regulatory framework. Those 
developments and effects are the impetus for the Commission's current 
reexamination of some of the fundamental concepts of the regulatory 
framework. The Advisory Committee Report and its recommendations will 
be the subject of an ongoing review by the Commission and its 
staff.9
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    \6\ Report of the Advisory Committee on the Capital Formation 
and Regulatory Processes (July 24, 1996).
    \7\ The Advisory Committee consisted of: The Honorable Steven 
M.H. Wallman, Chairman; Professor John C. Coffee, Jr.; The Honorable 
Barber B. Conable, Jr.; Robert K. Elliott; Edward F. Greene; Dr. 
George N. Hatsopoulos; A. Bart Holaday; Paul Kolton; Roland M. 
Machold; Dr. Burton G. Malkiel; Claudine B. Malone; Charles Miller; 
Karen M. O'Brien; and Larry W. Sonsini. The Commission gratefully 
acknowledges the time and efforts of the members and staff of the 
Advisory Committee in producing a thoughtful and comprehensive 
report.
    The Advisory Committee held eight public meetings and Committee 
members and staff met with a number of groups and individuals 
concerned with or affected by the Commission's regulation of the 
capital formation process.
    \8\ Given the concurrent publication of the Advisory Committee 
Report and the recent publication of the Task Force Report, both of 
which are available on the Commission's Internet Web site and 
through the Commission's Public Reference Room, this release does 
not attempt to explain in full the varying proposals to reform the 
capital formation regulatory process that give rise to many of the 
questions asked in this release. Familiarity with the detailed 
discussions contained in those documents is assumed, as is 
familiarity with many basic Securities Act concepts. The Commission 
strongly urges interested parties to read the Advisory Committee 
Report in its entirety, as well as Section III of the Task Force 
Report.
    \9\ See the comprehensive discussions contained in the Advisory 
Committee Report concerning market developments and the effects they 
have had on the operation of the Securities Act framework. Advisory 
Committee Report at pp. 4-9 and Appendix A (``App. A''). Similarly, 
see the Task Force Report at pp. 23-28.
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    The Advisory Committee Report's primary recommendation is that the 
Commission further its integrated disclosure system by implementing a 
system based on a ``company registration'' concept first envisioned by 
the American Law Institute's Federal Securities Code.10 As 
formulated by the Advisory Committee, a company registration system 
generally would be accomplished through the following steps:
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    \10\ The American Law Institute's Federal Securities Code was 
developed, after many years of effort, under the direction of 
Professor Louis Loss. See American Law Institute, Federal Securities 
Code (1980). See also L. Loss, ``The American Law Institute's 
Federal Securities Code Project,'' 25 Bus. Law. 27 (1969).
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    On a one-time basis, the issuer 11 files a registration 
statement (deemed effective immediately) that includes information 
similar to that currently provided in an initial short-form shelf 
registration statement. This registration statement could then be used 
for all types of securities and all offerings (including those offered 
in furtherance of business acquisitions) and all offerings could be 
subject to Section 11 strict liability;
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    \11\ The Advisory Committee recommends that eligibility for an 
initial pilot be limited to issuers that: have registered at least 
one public offering under the Securities Act; have been reporting 
under the Exchange Act for two years; have a public float of at 
least $75 million; and have securities listed on the New York Stock 
Exchange, the American Stock Exchange or NASDAQ NMS. Foreign issuers 
would be eligible if they file annual, quarterly and other periodic 
reports with the Commission on forms designed for domestic issuers, 
although the Advisory Committee specifically requests the Commission 
to consider whether current foreign issuer eligibility requirements 
for Form F-3 primary offerings should be sufficient for eligibility 
in the pilot. Most foreign countries (other than Canada) do not 
require their issuers to prepare quarterly reports.
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    Current and future Exchange Act reports are incorporated by 
reference into that registration statement;
    Around the time of the offering, transactional and updating 
disclosures are filed with the Commission, usually in a Form 8-K that 
is incorporated by reference into the registration statement and 
subject to Section 11 strict liability, but in certain cases, at the 
option of the issuer, through a prospectus supplement like those 
traditionally filed in shelf takedowns;
    Other than a nominal fee paid at the initial filing, registration 
fees would be paid at the time of sale rather than prior to making any 
offers (the ``pay as you go'' feature);
    Issuers would be required to adopt some disclosure enhancements 
(and encouraged to adopt others) that seek to improve the quality and 
timeliness of disclosure provided to investors and the markets; and
    Formal prospectuses would be required to be physically delivered 
only in non-routine transactions and, when so required to be delivered, 
they would have to be delivered in time to be considered in connection 
with the investment decision. In almost all instances, an issuer could 
incorporate by reference filed information into selling materials or 
the confirmation of sale to satisfy the legal obligation to deliver a 
prospectus (which, under the statute, must precede or accompany a 
confirmation of sale).
    The Commission seeks comment with respect to the Advisory 
Committee's company registration system, as a whole, as well as each of 
the separate recommendations contained in the Advisory Committee 
Report.12 The Commission is not today proposing and is not in a 
position to endorse or reject the views or recommendations expressed in 
the Advisory Committee Report, the Task Force Report or any other ideas 
contained herein.

[[Page 40046]]

Consideration of public comment on the recommendations in the Advisory 
Committee Report, the Task Force Report, and other ideas herein will be 
undertaken prior to any future Commission action. In the event the 
Commission determines to take such action, a specific proposal will be 
published for comment.
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    \12\ Comment also is solicited infra Section II.B.1 with respect 
to a limited number of specific aspects of the Advisory Committee 
Report.
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II. Securities Act Concepts

    The Securities Act and the issuer disclosure provisions of the 
Exchange Act are premised on the view that investors are best protected 
in making investment decisions if they are presented with full and fair 
disclosure of all material information about the investments. The 
continuing challenge for the Commission lies in adapting the statutory 
disclosure framework to developments in the capital markets while 
ensuring that investors receive full and fair disclosure in a manner 
13 and at a time that allows such informed decision-making.
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    \13\ In accordance with a Task Force Report recommendation, the 
Commission is currently contemplating the ``plain English'' approach 
to prospectus writing in another context. See Task Force Report at 
pp. 17-18. This release focuses on the content of the information 
delivered rather than the language in which information is 
presented.
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    Faced with the following developments, among others: increasing 
institutionalization of the markets; advances in technology and 
communication media; continuing globalization of securities markets; 
and the erosion of distinctions between private and public 
transactions, the Commission is examining whether the existing investor 
protection mechanisms, such as registration of both offers and sales 
and physical delivery of final prospectuses to investors around the 
time of sale, remain the best methods for accomplishing this full 
disclosure objective. The Commission is considering as well whether 
specific aspects of the integration of the registration requirements 
under the Securities Act and the periodic reporting requirements under 
the Exchange Act, if adjusted, could better serve investors' needs for 
full disclosure. Finally, the Commission is considering whether certain 
distinctions between public and private offerings of public companies 
remain necessary and how the increasingly institutional nature of 
investors should be reflected in the regulatory framework.

A. Request for Comments on Securities Act Concepts

    In this release, the Commission seeks comment on the best methods 
for eliminating unnecessary obstacles to capital formation while 
improving the quality and timing of disclosure and, therefore, investor 
protection. To assist the Commission in its deliberations, certain 
concepts that are central to the current capital-raising process and 
transcend any one approach to reform are highlighted below. Comment is 
solicited regarding the best approach to resolving concerns raised by 
those concepts, whether that approach is one or more of the approaches 
mentioned herein, a combination thereof, or any approach not described 
in this release. In commenting on the issues and approaches discussed 
in this release, commenters are requested to focus on how those matters 
impact on full and fair disclosure to investors in a manner and at a 
time that allows for informed investment decisions.
    1. Quality of ongoing disclosure. Investors in primary offerings 
for repeat issuers and investors in the secondary markets generally 
rely on periodic disclosure prepared pursuant to the Exchange 
Act.14 The existing Securities Act registration system for larger, 
seasoned issuers is heavily dependent upon incorporation of disclosure 
from such reports into the registration statement.15 Some 
observers have suggested that, while issuers undertaking registration 
of public offerings often devote significant resources to developing 
disclosure of the quality required under the Securities Act, equivalent 
resources are not necessarily devoted to preparing disclosure in 
Exchange Act periodic reports.
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    \14\ For domestic companies, Exchange Act periodic disclosure is 
generally provided in annual reports on Form 10-K (17 CFR 249.310) 
due 90 days after the end of the fiscal year, quarterly reports on 
Form 10-Q (17 CFR 249.308a) due 45 days after the end of the fiscal 
quarter and ``material events'' reports on Form 8-K (17 CFR 249.308) 
due within a specified number of days (either 5 business days or 15 
calendar days) after the event occurs.
    \15\ See Form S-3, 17 CFR 239.13.
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    Given the importance of investor protection, both with respect to 
investors in primary offerings and investors in the secondary trading 
markets,16 the Commission solicits comment regarding whether, in 
fact, a significant difference exists in the quality of disclosure 
between Securities Act and Exchange Act documents. If such a difference 
exists, what Commission action should be taken to address this concern? 
Should enhancement of current safeguards (such as the application of 
liability provisions) or the adoption of newly devised 
safeguards,17 or both, be used to ensure that disclosure in 
Exchange Act documents is equal in quality to that in Securities Act 
documents?
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    \16\ It is estimated that the secondary trading market for 
equity securities was roughly 35 times as large (in aggregate dollar 
terms) as the amount registered for primary offerings in 1995. See 
Advisory Committee Report at p. 2.
    \17\ See, e.g., Advisory Committee Report regarding certain 
disclosure enhancements at pp. 26-28 and infra Section II.B.1.b.
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    Are there particular aspects of Exchange Act disclosure that are in 
need of improvement, and thus require specific Commission focus? Is 
there information in Securities Act disclosure that should be mandated 
in Exchange Act reports?18 To enhance disclosure quality, should 
further participation of persons independent of the issuer, such as 
independent accountants, be required in the preparation of Exchange Act 
reports?
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    \18\ See, e.g., Advisory Committee Report regarding Risk Factors 
at p. 27 and Appendix B (``App. B''), pp. 56-57.
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    If various reforms would result in disclosure less often being 
prepared specifically in connection with the offering process, or would 
allow issuers quicker, more frequent (potentially continuous) access to 
the capital markets, would any concern about existing Exchange Act 
disclosure quality be exacerbated? Are improvements needed to ensure 
that Exchange Act reports provide a more current stream of information 
to investors? For example, should consideration be given to adopting a 
requirement, similar to certain self-regulatory organizations' 
requirements, that information that could materially affect the market 
for an issuer's securities be disclosed promptly in a public filing 
with the Commission?19 Should the filing dates for Exchange Act 
reports (e.g. Form 8-K) be accelerated or should the events that 
trigger such reports be broadened?20 Should the disclosure of 
particular events be accelerated?21
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    \19\ See, e.g., New York Stock Exchange Listed Company Manual 
Sec. 202.05; American Stock Exchange Company Guide Sec. 1102; and 
National Association of Securities Dealers By-laws, Schedule D.
    \20\ See, e.g., Advisory Committee Report at p. 27 and App. B, 
pp. 55-56.
    \21\ See, e.g., Advisory Committee Report at p. 27.
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    2. Informing Investors. a. Constructive versus Physical Delivery 
The Securities Act prohibits persons from sending securities through 
interstate commerce ``for the purpose of sale or for delivery after 
sale, unless accompanied or preceded by a prospectus that meets the 
requirements'' of Securities Act Section 10(a).22 In addition, the 
Section 10(a) prospectus must be sent or given prior to or at the same 
time with any communication, such as selling

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materials or confirmations, that would otherwise fall within the broad 
definition of ``prospectus.''23 These prospectus delivery 
provisions, which were established to ensure that investors would be 
fully informed, today are fulfilled in some cases by physical delivery 
of written prospectuses and in some cases by a mixture of physical 
delivery of transaction-specific information and constructive delivery 
(through the issuer incorporating the information by reference from 
filed documents) of company information. Through the 1995 adoption of 
Rule 434, the Commission has allowed constructive delivery of some 
transaction-specific information in limited circumstances by larger 
issuers.24
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    \22\ 15 U.S.C. Sec. 77j(a). Section 5(b)(2) of the Securities 
Act, 15 U.S.C. Sec. 77e(b)(2).
    \23\ See Section 2(10)(a) of the Securities Act, 15 U.S.C. 
Sec. 77b(10)(a).
    \24\ See Securities Act Release No. 7168 (May 11, 1995) [60 FR 
26604]. For larger, seasoned issuers, Securities Act Rule 434 (17 
CFR 230.434) currently allows constructive delivery of transaction-
specific information (other than that relating to the description of 
the securities offered) and company information (other than material 
issuer developments) in firm commitment underwritten offerings for 
cash.
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    The Commission is considering whether there are circumstances under 
which constructive delivery to investors of all offering information 
(including both company and transaction-specific disclosure) would 
provide sufficient investor protection. Have advances in technology and 
communications now established a system whereby ``accessibility'' 
provides roughly the same amount of investor protection as physical 
delivery? Should reliance solely on constructive delivery be permitted 
only if access is assured not only through the Commission but also 
through other media? Is the broad dissemination of publicly available 
information regarding a company, which the ``efficient market 
hypothesis'' assumes,25 in fact a reality for most investors, and 
not just sophisticated ones, at any given time? Does it matter, under 
the ``efficient market hypothesis'' or otherwise, if just sophisticated 
investors have this information? Is it useful to require this 
information to be physically delivered if, as under the current system, 
it is not required to be delivered until days after the investment 
decision is made? On what basis are investors in the secondary markets 
making investment decisions?
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    \25\ The ``efficient market hypothesis'' generally provides that 
the price of a company's publicly traded securities fully reflects 
all available information about the company at any given time. See, 
e.g., L. Loss and J. Seligman, 1 Securities Regulation 1, 184-86, n. 
41 (1994). While there are different versions of the ``efficient 
market hypothesis,'' perhaps the most widely accepted version is the 
``semi-strong'' variant, which posits that all publicly available 
information is quickly disseminated into the marketplace and 
reflected in the price of a company's stock. See Loss and Seligman, 
supra at 185, note 41. The Commission has previously relied on such 
a version of the ``efficient market hypothesis,'' for example, when 
adopting Securities Act Rule 415 concerning shelf registration. See 
Securities Act Release No. 6499.
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    Where constructive delivery is being used, is there nevertheless a 
minimum amount of basic offering information not typically contained in 
a confirmation that the Commission should mandate be physically 
delivered, such as in a newly developed short-form profile prospectus, 
regardless of the nature of the offering or investor? If so, why?
    Comment also is solicited regarding whether the same method of 
delivery should be required for all purchasers in a single offering. 
Should issuers be permitted to choose different methods of delivery for 
different investors, without regard to the investor's level of 
sophistication? 26 If different delivery methods are appropriate, 
should the choice be dependent upon the nature of the purchaser, the 
size of the offering, the type of security offered, or a combination of 
such factors? If the nature of the purchaser is a determining factor, 
would the ``accredited investor'' test, 27 the ``qualified 
institutional buyer'' test 28 or another test serve as the best 
criterion for determining whether constructive or physical delivery is 
used? If the Commission were to require information to be delivered to 
unsophisticated investors in a more costly manner, would issuers and 
underwriters be less likely to permit such investors to participate in 
an offering? Would it depend on the type of offering? Would additional 
flexibility provided to issuers and underwriters to tailor disclosure 
documents to unsophisticated investors encourage inclusion of such 
investors by issuers and underwriters?
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    \26\ See Advisory Committee Report at pp. 18-22.
    \27\ ''Accredited investor'' is defined in Securities Act Rule 
501(a), 17 CFR 230.501(a). See Advisory Committee Report at p. 21.
    \28\ ''Qualified institutional buyer'' is defined in Securities 
Act Rule 144A(a)(1), 17 CFR 230.144A(a)(1).
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    Would constructive delivery be appropriate in every offering of a 
particular type of securities (e.g. debt), or would the appropriateness 
of constructive delivery be dependent as well on the size of the 
offering or the identity of the purchasers? 29 Would investors 
know in what manner information would be delivered if the issuer could 
employ multiple delivery options? In the view of commenters, would this 
information matter to investors?
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    \29\ See Advisory Committee Report at pp. 19-22 and App. B, p. 
16.
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    b. Timing of delivery. One key element of the full disclosure 
objective is ensuring that investors are given sufficient time to 
consider material information in making investment decisions. Under 
current rules, prospectus delivery is required prior to or at the same 
time with the confirmation in primary offerings. In practice, 
therefore, Section 10(a) prospectuses may be unlikely to be sent to 
investors in advance of the decisions to purchase. In some cases, 
preliminary prospectuses are delivered, but they generally are not 
required to be delivered if the issuer is reporting under the Exchange 
Act.30 For reporting issuers, material company information for the 
most part will have been widely available at the time of any offering, 
but information regarding the offering transaction and any information 
that reflects material developments since the last Exchange Act report 
was filed would not have been.31 Comment is requested with regard 
to whether investors in primary offerings by reporting companies 
receive transactional and material developments information in the 
traditional physical form in sufficient time to make informed 
investment decisions. If not, what Commission action would be 
appropriate to ensure that result?
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    \30\ Exchange Act Rule 15c2-8, 17 CFR 240.15c2-8.
    \31\ For non-shelf offerings today, such information may be on 
file with the Commission for some time prior to the offering, 
although the amount of time is dependent upon many factors, 
including whether the staff reviews that registration statement. To 
the extent pre-transaction staff review for repeat issuers' 
registration statements would be limited or eliminated in the 
future, that time is likely to become shorter, and could become 
materially shorter.
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    To the extent that transaction-specific information is 
constructively delivered through public filings rather than physically 
delivered to individual offerees, does such an approach delay or aid 
absorption of that information by investors in the primary offering or 
by the market? If such information is filed just prior to sale, would 
investors have more, less, or the same opportunity to make informed 
decisions under constructive delivery as they have today under the 
shelf registration system, where the transaction-specific information 
is physically delivered with the confirmation sometime after the 
investment decision is made?
    c. Limitations on written communications other than the statutory 
prospectuses. The drafters of the Securities Act intended that the

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statutory prospectus be the written selling document for securities. 
``Free writing'' outside the statutory prospectus is not generally 
permitted except in the post-effective period when the Section 10(a) 
prospectus has been delivered to investors. Comment is solicited with 
respect to whether more flexibility to inform investors by use of 
written vehicles other than the traditional prospectus should be 
permitted. For example, should simplified profile prospectuses be 
permitted or required? With respect to offerings by seasoned issuers, 
if significant ongoing information is and has been available to 
investors with respect to such issuers, is the potential for harm from 
allowing or encouraging non-prospectus information delivery minimized? 
Would investor protection be likely to improve to the extent that 
issuers are encouraged to provide written, rather than oral, 
information about the basic terms of the transaction? Alternatively, 
would more flexibility be likely to result in use of selling materials 
driven by marketing needs that (in the distributed form) significantly 
differ from the prospectus envisioned by the Securities Act? If so, 
would investors' focus shift to the marketing language instead of the 
mandated prospectus disclosure, particularly if the latter is 
constructively rather than physically delivered? What standard of 
liability should attach to such other selling materials?
    Would a system allowing incorporation by reference of the required 
prospectus disclosure from a registration statement previously filed 
with the Commission facilitate the use of simplified term sheets or 
other types of ``free writing?'' Would that system facilitate free 
writing if such selling materials had to be filed and subject to 
liability under Section 12(a)(2)? Would sufficient investor protection 
exist where Section 12(a)(2) liability is applied?
    To what extent would issuers be more inclined to provide selling 
materials under that sort of system than under the current system? 
Would the requirement to have a Section 10(a) prospectus (and the 
selling materials) on file by the time of use of the selling materials 
present any difficulty as a practical matter, even though statutory 
disclosure may be wholly incorporated by reference rather than 
delivered physically? 32
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    \32\ The Section 10(a) prospectus would be required to be on 
file subject to, if applicable, Rule 430A (17 CFR 230.430A) and Rule 
424 (17 CFR 230.424).
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    3. Timeliness of disclosure--informing the market. Under the 
current shelf system, information concerning shelf takedowns (contained 
in a prospectus supplement) is not required to be filed until the 
second business day following the earlier of: the date of determination 
of the offering price, or the date of first use in connection with the 
offering. Some have expressed concern that the current structure of the 
shelf registration system does not require timely disclosure to the 
secondary markets of all material information that is being disclosed 
to investors in the primary offering. 33
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    \33\ See, e.g., Advisory Committee Report at pp. 5-6. See also 
Securities Act Rule 424(b), 17 CFR 230.424(b).
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    Does the post-takedown filing of prospectus supplements strike an 
appropriate balance between quick access to capital and timely 
disclosure to investors in the secondary markets for such securities? 
Is this balance appropriate if the prospectus supplement is available 
earlier? Are the secondary markets having difficulty assimilating such 
information during the period before it is filed with the Commission 
because of limited access to such information? What role do wire 
services and others play in disseminating such information? If all this 
information is already fully disseminated to the secondary markets at 
the time investors make the decision to purchase in the primary 
offering, is it necessary to require any filing or mandate any specific 
form of information delivery for transactions? As procedures are 
developed permitting issuers to access the capital markets more 
quickly, what changes, if any, are likely to occur to the underwriting 
process and investor participation?
    If information that is not filed with the Commission is not being 
fully assimilated prior to the making of investment decisions, comment 
is requested with respect to whether, regardless of any other reforms, 
the shelf registration system should be amended to require the filing 
of complete offering disclosure (including the price and other terms of 
the securities) at some point prior to the takedown in order to allow 
time for the market to assimilate such information. 34 If so, how 
long does it take for such information to be assimilated by the market? 
Would the answers to these questions be dependent upon the nature of 
the securities involved in the offering, the nature of the offering, or 
the size of the issuer?
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    \34\ See, e.g., Advisory Committee Report at p. 17.
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    Does it matter if transaction-specific disclosure that does not 
amount to a material development is not assimilated until some time 
after the offering? Should a special requirement apply in cases where 
the offering involves a type of security never before sold by the 
issuer? Should there be certain events (e.g. a percentage of equity 
being offered) that will always be deemed material developments?
    In addition, comment is requested with regard to whether takedown 
information should be filed in an Exchange Act report that is 
incorporated by reference into the registration statement. Should all 
Securities Act Rule 424(b) prospectus supplements be deemed to be a 
part of the effective registration statement, as is the case with 
prospectus supplements filed in connection with Rule 430A?
    4. The role of ``gatekeepers'' in maintaining quality of 
disclosure. The civil liability provisions of the Securities Act 
registration system provide strong incentives for certain parties 
independent of the issuer (such as underwriters, accounting 
professionals, and others) to take steps to ensure the quality of 
disclosure. 35 Given the interest of issuers in quick access to 
the capital markets, some commenters and reports have argued that these 
``gatekeepers'' may not currently be given the amount of time they wish 
or need in which to perform their traditional ``due diligence'' role, 
particularly in connection with delayed shelf offerings. 36 
Comment and specific data are solicited with respect to the nature and 
prevalence of such difficulties. Comment is requested on whether there 
is tension between the traditional role of ``gatekeepers'' and the 
issuer's desire to have quick access to the capital markets.
---------------------------------------------------------------------------

    \35\ See Securities Act Section 11, 15 U.S.C. 77k. See also 
Securities Act Section 12, 15 U.S.C. Sec. 77l.
    \36\ See, e.g., Committee on Federal Regulation of Securities, 
``Report of Task Force on Sellers' Due Diligence and Similar 
Defenses Under the Federal Securities Laws,'' 48 Bus. Law. 1185 
(1993).
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    Can the independent ``gatekeepers'' role be reconfigured in order 
to facilitate the issuer's ability to access the capital markets 
quickly while maintaining or enhancing investor protection? If not, 
should reliance on such ``gatekeepers'' continue if a collateral effect 
may be to slow down access to the capital markets? Is the increasing 
ability of issuers to access the securities markets directly by 
themselves affecting the role of underwriters as ``gatekeepers,'' 
particularly in light of advances in technology and communications? Has 
there been a change in the role other parties play, such as analysts 
and rating agencies, that should be considered in evaluating the role 
of traditional ``gatekeepers?'' In what ways has the

[[Page 40049]]

``due diligence'' process changed to reflect these changes?
    Are there mechanisms that could be adopted to allow such 
``gatekeepers'' to operate effectively? Have advances in technology and 
communications and the existence, in some cases, of auditors engaging 
in interim reviews, and analysts and rating agencies made performance 
of the ``gatekeeper'' function possible on a continuous basis, or with 
little notice, due to the dissemination of information about issuers on 
a continuing basis?
    Would requiring a separate filing that is subject to Section 11 
liability (such as an Exchange Act filing incorporated by reference 
into the registration statement) focus the issuer and other parties on 
the quality of disclosure and the need to undertake due diligence? If 
so, should the timing thereof be dependent upon the type of security 
involved and the size of the offering? Should there be a different or 
supplemental mechanism (for example, a requirement that independent 
``gatekeepers'' be notified of (or engaged for, as applicable) an 
offering at least several days in advance, or a requirement that a 
certificate be filed by independent ``gatekeepers'' prior to the 
offering that they have performed due diligence)? Would these 
mechanisms be consistent with today's demands for quick access to 
capital?
    Would a ``disclosure committee'' of an issuer's board of directors 
operate as an effective ``gatekeeper?'' 37 Would such a 
``disclosure committee'' likely improve the monitoring of disclosure by 
directors or improve the accuracy of disclosure? Would it result in a 
diminished oversight role for the rest of the board? What effect would 
it have on the liability of the directors serving on the committee? 
What effect would it have on the liability of the other directors on 
the board? Would board members be willing to serve on such a committee 
if there were no Commission guidance on liability? 38 How would it 
operate differently from the audit committee?
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    \37\ See the full description of this concept at pp. 31-34 of 
the Advisory Committee Report. This concept is recommended by the 
Advisory Committee, although it is not identified as an essential 
element of company registration.
    \38\ Although the Advisory Committee Report stops short of 
recommending a particular change in the application of liability to 
``gatekeepers,'' three members of the Advisory Committee, in a 
separate statement, expressed doubt that practitioners would 
recommend, or that corporations would adopt, some of the reforms 
proposed by the Advisory Committee, and particularly the disclosure 
committee concept, unless the Commission accompanied it with a 
transition in liability rules. See ``Separate Statement of John C. 
Coffee, Jr., Edward F. Greene, and Lawrence W. Sonsini'' in the 
Advisory Committee Report at Section IV., p. 38.
---------------------------------------------------------------------------

    5. Staff review. The Advisory Committee Report states that the 
uncertainty surrounding whether there will be staff review of 
registration statement disclosure, in cases other than initial public 
offerings and major restructurings, results in delays and uncertainties 
that may not be justified in terms of public interest and investor 
protection benefits.39 The Advisory Committee Report suggests 
that, for those issuers in a company registration system, under certain 
circumstances, staff review be eliminated with respect to pre-
transaction filings in favor of enhanced reviews of Exchange Act 
filings that could provide a similar deterrent effect.
---------------------------------------------------------------------------

    \39\ See Advisory Committee Report at App. A, pp. 6-14.
---------------------------------------------------------------------------

    Only a small percentage of the Commission's current reviews of 
Securities Act registration statements focus on issuers that are 
neither making their initial public offering nor offering securities in 
connection with major restructurings.40 Many of those reviews 
involve issuers that are either financially troubled or are offering a 
new type of security to the public. Comment is requested with respect 
to whether the Commission staff should shift its review of repeat 
issuers from Securities Act registration statements to the review of 
Exchange Act reports. If so, under what circumstances? Should the 
Commission instead consider: making public its criteria used to 
determine whether to review repeat issuers' registration statements; 
limiting its review of repeat issuers' registration statements to those 
issuers that are financially troubled or are engaging in an 
extraordinary transaction; or allowing repeat issuers to request review 
of their Exchange Act reports well in advance of a public offering? 
41
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    \40\ The Commission staff does not currently review takedown 
disclosure in a shelf registration statement prior to use, although 
the staff selectively reviews shelf registration statements prior to 
their effective date and selectively reviews other registration 
statements of repeat issuers, as well as Exchange Act reports of 
repeat issuers.
    \41\ See the discussion of staff review in the Advisory 
Committee Report at App. B, pp. 21-22.
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B. Request for Comment on Aspects of Specific Approaches

    1. The Advisory Committee Report. a. Scope of the system. If the 
Commission were to ultimately adopt a version of company registration, 
should it be preceded by a temporary pilot program to test the system? 
If ultimately adopted, should it apply to issuers on a voluntary or 
mandatory basis? Should it be mandated for some issuers, and if so, 
which ones? Would it be appropriate for smaller issuers without 
significant additional investor protection mechanisms? Are the benefits 
of the company registration system that do not exist in the current 
shelf registration system likely to attract the participation of 
issuers given the different requirements of company registration, 
including the investor protection enhancements? If available only to 
larger issuers on a voluntary basis, are such issuers likely to opt in? 
The company registration system, in its recommended pilot stage, would 
not be available to all issuers currently eligible to rely on shelf 
registration for delayed offerings because, for example, it requires 
two years of reporting history as opposed to one year. The Advisory 
Committee believed that the extra ``seasoning'' from an additional year 
could help ensure the quality of the Exchange Act reporting structure. 
Is such an additional requirement appropriate?
    If a voluntary company registration system were implemented, 
eligible issuers could be operating under one of two separate 
registration systems: the Form S-3 (allocated or universal shelf or 
non-shelf) registration, or company registration (modified or full). If 
such a system were to be implemented, should issuers electing to be 
part of the system be required to rely on company registration for all 
subsequent offerings of securities if they are to receive certain other 
benefits,42 or should issuers be permitted to use a company 
registration system except when they issue unregistered securities in 
reliance upon statutory exemptions or Commission exemptive rules or 
regulations? Should any period of ineligibility to choose a company 
registration system be applied if an issuer changes its mind about 
participation in the system? Are there offerings of certain exempt 
securities and exempt transactions that an issuer should be permitted 
to make on an unregistered basis while participating in company 
registration? Should debt securities and equity securities be treated 
differently with regard to mandatory inclusion?
---------------------------------------------------------------------------

    \42\ See Advisory Committee Report at App. B, pp. 34-39. Under 
the Advisory Committee recommendations, issuers that choose full 
company registration would be entitled to rely upon a narrower 
application of the resale limitations for ``affiliates'' and a 
narrower definition of who is an ``underwriter'' with respect to 
their securities. See Advisory Committee Report at App. B, p. 34.
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    The current Securities Act regulatory framework applies different 
liability standards to registered offerings than

[[Page 40050]]

unregistered offerings.43 For example, strict liability under 
Section 11 applies to registered offerings but does not apply to 
unregistered offerings. Is this liability distinction likely to lead an 
issuer to prefer to retain the option of making unregistered exempt or 
offshore offerings? What would be the benefits to investors of a system 
in which all offerings are registered (full company registration) as 
opposed to the current system in which some offerings are registered 
and some are unregistered? What would be the negative consequences? Are 
the reasons that issuers choose unregistered private offerings (such as 
the need to keep certain information confidential, the activities of 
arbitrageurs or the identity of the purchasers) they addressed by the 
company registration model? 44
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    \43\ See Securities Act Sections 11, 12 and 17, 15 U.S.C. 
Secs. 77k, 77l, and 77q. See also Gustafson v. Alloyd Co. Inc., 115 
S. Ct. 1061 (1995).
    \44\ See Advisory Committee Report at App. A, pp. 18-19, 36-38 
and at App. B, p. 45.
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    b. Disclosure enhancements. The Advisory Committee Report suggests 
that a number of ``disclosure enhancements'' be a part of the company 
registration system, largely as methods to ensure the quality and 
currency of Exchange Act disclosure.45 Comment is requested with 
respect to the effect of each of those enhancements and whether any 
resulting benefit would justify any additional cost of complying. For 
example, would a benefit be provided by the management certification 
(which is not filed but subject to penalty) that is not currently 
provided by the signature requirements? Would management be more likely 
to read the disclosure document or would it provide the certification, 
much in the same way some management reportedly execute signature 
pages, without reading the disclosure document?
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    \45\ See Advisory Committee Report at pp. 26-28. Those 
enhancements include: a certification that is sent with the filing 
of each mandatory periodic report that two of four senior officers 
have reviewed the issuer's Exchange Act reports and that, to the 
best of their knowledge, they do not contain any material false or 
misleading information; a one-time management report to the audit 
committee or to the board of directors, if there is no audit 
committee, describing the procedures followed to ensure integrity of 
reports and to avoid insider trading (updated only if materially 
changed); an alteration of the due dates for Forms 8-K to 5 business 
days after the occurrence of the event where such reports currently 
allow 15 calendar days; an expansion of the events that require per 
se a filing of a Form 8-K; a new requirement that risk factors 
disclosure be included in the Form 10-K (amplified by a discussion 
of the benefits of ownership at the issuer's option); a review of 
interim financial information under SAS 71 by independent 
accountants at the time of filing (a voluntary enhancement); and a 
``disclosure committee'' of the board of directors (a voluntary 
enhancement).
---------------------------------------------------------------------------

    The recommended mandatory enhancements focus on internal issuer 
action to improve disclosure, rather than seeking enhancement of 
Exchange Act reports through persons independent of the issuer. Comment 
is requested with respect to the relative costs and benefits of 
focusing on internal issuer action as compared to greater participation 
of independent ``gatekeepers.'' Should any voluntary enhancement 
involving independent parties (e.g. the review of interim financial 
results under SAS 71) 46 be mandated? Should any of the mandatory 
enhancements be voluntary? Are there additional or alternative 
enhancements that would provide investor protection at reasonable cost? 
For example, should other communications from the auditors to the 
issuer be reported in the Form 8-K filings (e.g. internal control 
weaknesses)? Should sales be prohibited during the days following the 
occurrence of any event (or certain specified events) triggering a Form 
8-K before the report has been filed? As recommended by the Advisory 
Committee, should sales be prohibited until the market assimilates the 
information after such filing?
---------------------------------------------------------------------------

    \46\ See AICPA Statement on Auditing Standards No. 71 (May 
1992).
---------------------------------------------------------------------------

    Could aspects of any of the proposed enhancements be modified to 
provide greater investor protection without disproportionately 
increasing the costs? For example, are there events currently reported 
on Form 10-Q that should be subject to an accelerated reporting 
schedule on Form 8-K? 47 Would any of the enhancements operate 
instead to reduce investor protection? Would any of these enhancements 
suggest that fewer persons take responsibility for the disclosure? If 
enhancements are beneficial, should they be mandated for some or all 
issuers reporting under the Exchange Act, regardless of participation 
in company registration?
---------------------------------------------------------------------------

    \47\ See, e.g., the recommendations regarding acceleration of 
reporting of certain events in the Advisory Committee Report at p. 
27.
---------------------------------------------------------------------------

    2. Task Force Report Recommendations. The Task Force Report sets 
forth a list of recommended reforms for the regulatory system. The main 
focus of those recommendations was on revising the existing shelf 
registration system to provide more flexibility and accessibility. 
Those recommendations included:

 Allowing smaller issuers that have been reporting for a year 
to make delayed offerings (without altering the disclosure requirements 
or permitting forward incorporation by reference);
 Eliminating ``at the market'' offering restrictions;
 Allowing universal shelf registration for secondary offerings;
 Allowing issuers and majority-owned subsidiaries to be named 
as possible issuers on a shelf registration (without designating the 
issuer until takedown);
 Allowing reallocation of securities on a shelf registration 
statement by post-effective amendment;
 Allowing registration by seasoned issuers without any 
specification of the classes registered; and
 Allowing seasoned issuers to pay registration fees at the time 
of takedown.48
---------------------------------------------------------------------------

    \48\ See the Task Force Report at pp. 36-40. The Task Force also 
recommended allowing smaller issuers that are not eligible for Form 
S-3 but have been reporting for a year to deliver their Exchange Act 
reports with their prospectuses (rather than reiterating that 
information in the prospectuses). All but the first and fourth of 
these recommendations noted above are recommendations of the 
Advisory Committee. See Task Force Report at pp. 36-40 and the 
Advisory Committee Report at p. 35, n. 40 and accompanying text.

    The Commission seeks comment with respect to each of the Task 
Force's recommendations relating to reforming shelf registration. In 
addition, the Commission requests comment specifically on the following 
aspects of the Task Force's suggested reforms.
    1. Many Task Force shelf registration revisions are similar to the 
streamlining aspects of the company registration system. If a company 
registration approach is implemented, would any of the Task Force 
recommendations to revise the shelf system provide an added benefit to 
ineligible (or eligible) issuers without loss of investor protection?
    2. Would the Task Force reforms eliminate any remaining concern of 
issuers regarding market overhang effects when equity securities may be 
issued from a universal shelf?
    3. Would reform of the shelf registration process as suggested in 
the Task Force Report be appropriate only if investor protection 
enhancements also were added? If so, what enhancements would be needed? 
Would the shelf registration reforms minimize or exacerbate concerns 
about ensuring current information for the secondary markets?
    3. Liberalizing the resale of unregistered securities. One approach 
to reforming the registration system involves the expansion of Rule 
144A under the Securities Act.49 Rule 144A has facilitated the 
creation of a private, relatively liquid, limited institutional market 
made up of qualified

[[Page 40051]]

institutional buyers (``QIBs''). Suggestions have been made that easing 
the restrictions on the types of securities and buyers that may 
participate in the Rule 144A market would reduce the cost of capital 
formation without a corresponding loss of investor protection.50 
Should the Commission consider expanding the use of Rule 144A as an 
alternative to, or in combination with, aspects of company 
registration? For example, should the fungibility restriction of Rule 
144A 51 be revised and, if so, should it be eliminated or simply 
eased for a particular class of issuers or securities? Comment also is 
requested regarding whether the group of institutions eligible to be 
QIBs should be expanded and, if so, in what manner.52 Would the 
expansion of this separate institutional market lessen investor 
protection in any way or harm the public interest?
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    \49\ 17 CFR 230.144A.
    \50\ See, e.g., J. Coffee, Jr., ``Re-Engineering Corporate 
Disclosure: The Coming Debate Over Company Registration,'' 52 Wash. 
& Lee L. Rev. 1143, 1177-79 (1995).
    \51\ Under current Rule 144A, securities that are fungible when 
issued with those traded on a national securities exchange or quoted 
in a U.S. automated inter-dealer quotation system may not be sold in 
the 144A market. See Rule 144A(d)(3), 17 CFR 230.144A(d)(3).
    \52\ Under Rule 144A, securities may only be offered or sold to 
QIBs. To be eligible to be a QIB, an institution must own and invest 
on a discretionary basis at least $100 million in securities of 
unaffiliated entities, or, if a registered dealer (acting for its 
own accounts or on behalf of other QIBs), at least $10 million in 
securities of unaffiliated entities. Banks, savings associations and 
equivalent foreign institutions must also have a net worth of at 
least $25 million to be eligible.
---------------------------------------------------------------------------

    If the Commission were to expand the use of Rule 144A, revise Rule 
152,53 and address further the problematic practices under 
Regulation S,54 would enough of the complexity of the ``restricted 
versus unrestricted securities'' and ``private versus public offering'' 
dichotomies be eliminated, or would such actions move the line of 
demarcation but otherwise retain all the distinctions? 55 Would 
the complexity be eliminated if, in addition, the Commission shortened 
the holding period in Rule 144 or would this change move the line of 
demarcation? 56 Rule 144 is commonly viewed as setting the 
restrictions on resale of most unregistered securities (including sale 
of Rule 144A securities outside the QIB market). As such, would 
reducing the Rule 144 holding period have the effect of making the 
alternative of not registering securities more attractive to issuers 
and purchasers and, therefore, tend to minimize the need for further 
reform of the registration process? Would rule changes that encourage 
more offerings to be unregistered impact investor protection?
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    \53\ See infra Section II.B.6.
    \54\ Securities Act Release No. 7190 (June 27, 1995) [60 FR 
35663].
    \55\ Perceived difficulties arising from these distinctions 
include: prohibitions on combining a private offer and a public 
sale; Section 5 ``gun-jumping'' issues arising from converting a 
private offering to a public offering; and general solicitation and 
integration concerns arising when converting an offering begun after 
filing a registration statement to a private offering. See S. 
Keller, ``Basic Securities Act Concepts Revisited,'' INSIGHTS, vol. 
9 at pp.5-12 (May 1995) and Advisory Committee Report, App. A at pp. 
22-32.
    \56\ See Securities Act Release No. 7187 (June 27, 1995) [60 FR 
35645]. Rule 144 provides a safe harbor for sales under Securities 
Act Section 4(1), 15 U.S.C. 77d(1), for persons selling unregistered 
restricted securities and for affiliates of the issuer selling any 
issuer securities. The participation of brokers and dealers acting 
as intermediaries in such resales is exempt under Securities Act 
Section 4(3) or 4(4), 15 U.S.C. 77d(3) or 77d(4).
---------------------------------------------------------------------------

    4. The four-part approach. Another recently articulated approach to 
modernizing the regulatory framework governing the offering process 
consisted of: (i) focusing on the nature of purchasers as one of the 
factors considered in defining the regulation of registered offerings; 
(ii) exempting offers from registration; (iii) allowing communications 
other than the statutory prospectus during the offering period, subject 
to Section 12(a)(2) (but not Section 11) liability; and (iv) allowing 
prospectus delivery by incorporation by reference of the full 
prospectus, where appropriate, and pre-confirmation physical delivery 
of prospectuses in all other cases. 57 Some of these ideas, such 
as use of constructive delivery and allowing non-statutory prospectus 
communications, are discussed above.
---------------------------------------------------------------------------

    \57\ These suggestions were made in a 1995 speech to the 
Committee on Federal Regulation of Securities of the American Bar 
Association by Linda C. Quinn, then Director of the Division of 
Corporation Finance. See L. Quinn, ``Reforming the Securities Act of 
1933--A Conceptual Framework,'' INSIGHTS, vol. 10, pp. 25-29 (1995).
---------------------------------------------------------------------------

    Comment is solicited with respect to whether the implementation of 
these reforms would suffice to achieve full disclosure in the modern 
offering process. If not, what other actions would be needed? Would the 
deregulation of offers resolve some of the complexities resulting from 
the statutory distinction between private and public offerings?
    Would there be any loss of investor protection as a result of the 
deregulation of offers due to the fact that no document need be filed 
until the time of sales, especially with respect to issuers that do not 
file under the Exchange Act? Conversely, would there be an increase in 
information without the diminution of investor protection if the 
deregulation resulted in the freedom to provide written, profile 
disclosure not conforming to the traditional prospectus? Are there 
classes of registered offerings regarding which the capital markets 
have no need for advance notice of the issuers' intentions to offer 
securities? Should this approach be considered only for certain classes 
of issuers and, if so, which ones?
    5. ``Pink herring'' concept. Another recent suggestion is that 
offers be permitted to be made by any issuer after filing a ``pink 
herring'' registration statement consisting of limited information 
regarding the price, the type of security, the method of distribution 
and financial results. 58 An initial nominal fee would be paid 
with the pink herring filing. Thereafter, public offers and general 
solicitations could be made. Although all offers would be registered 
under this approach, whether public or private, unregistered sales to 
qualified non-retail investors could be made thereafter in compliance 
with, for example, Regulation D. 59
---------------------------------------------------------------------------

    \58\ This approach is described in more detail in the Task Force 
Report at p. 31.
    \59\ 17 CFR 230.501 through 230.508 and Preliminary Notes 
thereto.
---------------------------------------------------------------------------

    Comment is solicited with respect to whether this proposal would 
resolve much of the strain resulting from the erosion of distinctions 
between private and public offerings. Would there be a loss of investor 
protection due to the fact that only limited disclosure need be filed 
until the time of sales? Would there be increased investor protection 
from this proposal in comparison to a system where offers are not 
regulated at all and no filing is made with the Commission until the 
time of sale? Would a benefit result from the potential involvement of 
some ``gatekeepers?'' Would there be a benefit from requiring a filing 
with the Commission that could be reviewed by offerees or used by the 
Commission in the event of fraudulent offers? Should this approach be 
considered only for certain classes of issuers, such as non-reporting 
issuers, and, if so, for which ones? Should a pink herring filing 
include limited company information as well as limited transaction-
specific information?
    6. Private and public offerings--revisiting rule 152. Issuers that 
undertake a private offering may later decide to make a public offering 
instead. The safe harbor provided by Securities Act Rule 152 60 
deems the Section 4(2) exemption to continue to apply to the private 
transaction in those circumstances if the private offering has been 
terminated prior to the

[[Page 40052]]

commencement of the public offering. In the absence of the safe harbor, 
the exemption for the private offering may be in doubt, as it could be 
integrated with the public offering. The Task Force Report recommended 
that Rule 152 be revisited with a view towards permitting a company to 
switch from a private offering to a public offering without an 
intervening termination of the private offering. 61 Comment is 
solicited with respect to whether this proposal would resolve much of 
the strain resulting from the erosion of distinctions between private 
and public offerings. Would this enhance an issuer's ability to access 
the capital markets more efficiently? Would there be a loss of investor 
protection from such a change? If Rule 152 is expanded, should its 
availability be limited to offerings other than those that may give 
rise to disclosure abuses (e.g. blind pools, blank check companies or 
penny stocks)?
---------------------------------------------------------------------------

    \60\ 17 CFR 230.152.
    \61\ See Task Force Report at pp. 29-30.
---------------------------------------------------------------------------

    Similarly, should the Commission modify its view that the act of 
filing a registration statement in connection with a non-shelf offering 
is deemed to commence a public offering in all cases? Should the 
Commission create a safe harbor for private offerings that are 
undertaken while the issuer has ``quietly'' filed a registration 
statement? 62
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    \62\ An issuer ``quietly'' files a registration statement when 
the filing of such document with the Commission is not accompanied 
by a marketing effort for the securities, including the circulation 
of a preliminary prospectus.
---------------------------------------------------------------------------

    7. General solicitation. Effective June 10, 1996, the Commission 
adopted Rule 1001,63 which exempts from registration under the 
Securities Act certain small offerings that are exempt from state law 
registration under the California Corporations Code.64 The 
California law provides an exemption for offerings by California-
related issuers to ``qualified purchasers'' (which are similar to 
accredited investors as defined in Securities Act Regulation D). Under 
the California law, a general announcement with limited contents may be 
widely published and circulated, much like that under the Commission's 
Regulation A ``test the waters'' process. Comment is solicited with 
respect to whether the Commission should extend the approach in Rule 
1001 to offerings on a nationwide basis so that a general solicitation 
could precede an exempt sale to qualified purchasers.
---------------------------------------------------------------------------

    \63\ 17 CFR 230.1001 (Regulation CE).
    \64\ Securities Act Release No. 7285 (May 1, 1996) [61 FR 
21356].
---------------------------------------------------------------------------

    Comment also is requested with respect to a broader relaxation of 
general solicitation prohibitions on offerings made under Regulation D 
Rules 505 and 506.65 Is the inability to reach out broadly to find 
qualified investors for such Regulation D offerings unnecessarily 
hampering the utility of the regulation and raising costs to issuers? 
Would relaxation of such prohibition be appropriate? 66
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    \65\ 17 CFR 230.505 and 230.506.
    \66\ See the discussion and solicitation of comment contained in 
Securities Act Release No. 7185 (June 27, 1995) [60 FR 35638]. 
Comment letters have been received in response to that solicitation 
of comments and are available in the Commission's Public Reference 
Room File No. S7-15-95. Such letters will be considered in 
connection with this release and need not be resubmitted.
---------------------------------------------------------------------------

    8. Other Questions. Would modification of the existing shelf 
registration system provide the equivalent benefits to issuers and 
other participants in the markets, and investors, in both the primary 
and secondary markets, as the new company registration system may 
provide?
    Would modifications to the existing regulatory system (including 
shelf registration) provide equivalent benefits to eliminating the need 
for regulatory distinctions (such as ``private versus public,'' 
``domestic versus offshore,'' and other similar issues) as would the 
new company registration system if companies opted into full company 
registration?
    Would it be better to have a pilot program for company 
registration, while maintaining the current system, or should instead 
the current system be modified?

III. Conclusion

    The Commission is soliciting public comment on a variety of issues 
relating to the Securities Act offering process, including the effect 
of any changes in the regulatory scheme on the operation of both the 
primary and secondary markets. In addition to responding to the 
questions presented in this release, the Commission encourages 
commenters to provide any information to supplement the information and 
assumptions contained herein regarding the functioning of the capital-
raising process, the roles of market participants, the advantages and 
disadvantages of suggested reforms, the expectations of investors, and 
the other matters discussed. The Commission also invites commenters to 
provide views and data as to the costs and benefits associated with 
possible changes discussed above in comparison to the costs and 
benefits of the existing regulatory framework. The Commission also 
seeks comment concerning whether, given the passage of time and the 
evolution of the capital markets since adoption of the registration 
system, legislative reform is needed. In order for the Commission to 
assess the impact of changes to the Securities Act regulatory scheme on 
capital formation and the protection of investors, comment is solicited 
from the point of view of investors, issuers, underwriters, broker-
dealers, analysts, and other interested parties, including accountants 
and attorneys involved in the registration process.

    By the Commission.

    Dated: July 25, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19461 Filed 7-30-96; 8:45 am]
BILLING CODE 8010-01-P